When new money enters the Crypto ecosystem what happens a week later?
Updated: 11/11/2020

Market trend analysis (Nov 4th 4:00UTC – Nov 11th, 4:00UTC)
Asset: TFI – BTC & ETH

Total Crypto Market Cap Increase (7 day period): 52.60bUDS (13.5%)
Source: TradingView (CryptoCap)

Difficulty:
Easy / Moderate
IT 2/5, Finance 3/5
Written for people with a moderate understanding of both IT and Finance

 

As we all know, the price of Bitcoin (BTC) generally moves relative to the Total Market Cap (TMC). As new money (fiat) enters the crypto ecosystem, it is (more often than not) first purchased as Bitcoin (having a 64% market dominance at time of writing).

What I did: I bought into (or exposed myself) to the market as I noticed more investor interest on Nov 4th.

One thing we should be looking at as traders is movement in the price of Ethereum (ETH) and other ALT coins (represented as a percentage) away from BTC as time progresses and the TMC progressively increases. This gives us a rough indication of where people are directing their money once they’ve bought BTC, and.. Needless to say, where we should put ours…

Let’s take a look at the charts for a better understanding:

Bull run analysis - Nov 4th - Where does the new money go... (Part 1)

On November 4th, 4:00UTC we started to see more money (fiat) enter the Crypto asset class (Blue Area chart).

Over the next 12hrs, the price of ETH increased by 6.4% while BTC increased in value relatively parallel with the Total Market Cap (TMC) at 3.6%.

 

Why the divergence?

This movement could have happened for a number of reasons, such as diversification for risk management (ETH being a comparatively safe investment), demand for ETH, bullish price movement indicators, etc.…

After 1 day (24hrs) the increase in price of ETH and BTC were almost identical at 6.95%.

Bull run analysis - Nov 4th - Where does the new money go... (Part 1)

 

Then as more money entered the market (30.2bUSD 7.4%) over the next 24hrs, BTC and ETH were up around 8.1% to 8.5% – still quite relative.

Bull run analysis - Nov 4th - Where does the new money go... (Part 1)

 

24hrs later however, we saw the price of ETH break away from the pattern in movement of TMC/BTC to increase another 4.6%. Before returning to a similar price movement pattern of the market for the next 4 days of our sample dates.

Bull run analysis - Nov 4th - Where does the new money go... (Part 1)

 

What happened, what’s the point?

The focus in 2020 is the quickest growing and most lucrative sector of Decentralised Finance (DeFi). The COVID19 pandemic has really put a lot of pressure on exisiting global financial systems and as the tech savvy youth age, they’ll start looking more and more into these investment vehicles.

It’s not only the tech savvy average consumer who’s driving up the TMC of ‘Bitcoin and friends’; it’s also major investment firms adding them to their managed fund and ETF packages.

Also, with really high ROI it’s an industry that isn’t going anywhere anytime soon.

 

Back to the trading strategy:

We’re going to take a look at an asset called the YEarn Finance Token (YFI), a blockchain running on the Ethereum platform in the trending sector of DeFi Yield Farming.

During the time period where ETH broke away from the BTC/TMC pattern with an increase of 4.6% (Nov 6 – Nov 7), YFI saw an price increase of 53%!

Throughout the entire duration of our sample dates YFI brought back a return of over 100%…

That’s doubling your investment in 1 week!!

So how did I pick it?
What was I looking at?
Was I trading on technical data alone?

We need to understand the flow of capital into different Crypto assets is very different than stocks, forex, commodities, etc.…

Please note: The following is highly simplified for the average investor to not get confused in the IT jargon. And the average IT tech not to get confused in the financial jargon.

Bull run analysis - Nov 4th - Where does the new money go... (Part 1)

First the investor buys BTC (sometimes ETH or another ALT coin but the spread is always smaller on Bitcoins because of higher liquidity).

Yes, new investors can buy a stable coin (like USDT or DAI) with fiat currencies to enter the market but the vast majority won’t hold a stable coin because it’s profitless.

Profitless = Pointless!

Ok, there are exceptions in the world of DeFi but this article is about trading sensibly for a profit.

 

So when we see a sudden increase in TMC (measured as a percentage) we’ll always see almost an identical increase in the price of BTC (also as a percentage).

When the BTC is in the market it either gets held as a long-term investment (Bitcoin geeks call it HODLing) or moved to a centralised exchange or decentralised exchange to trade for a promising ALT coin.

Many ALT coins are ‘blockchain tokens’ running on the Ethereum (ETH) platform and require the (ETH) token to pay for fees relating to their particular function. In the case of DeFi which is offering yields that far surpass anything traditional banking can offer, most of these ‘decentralised online banks’ are really attractive for commercial investors.

This makes Ethereum an essential asset for the entire industry of Decentralised Finance!

Back to the charts, this time we’re looking at price as an absolute for asset YFI:
Represented as 2hr candlesticks with the same data.

Bull run analysis - Nov 4th - Where does the new money go... (Part 1)

Anyone with a rudimentary understanding of trading on technicals will naturally be able to identify the relationship between price movements and draw their own support and resistance lines.

To be continued!…

 

Important takeaway notes:

  • Most technical indicators hold even less relevance in the Crypto market to predict price movements.
  • Check the amplitudes of candles and set your stop loss limits accordingly. It’s an entirely unregulated market so ‘Pump n Dumps’ happen often.
  • DON’T TRADE ON A MARGIN, until you have years of experience and mountains of money to risk.
  • Of the 7000+ blockchains out there, only a few of them will be worth anything in a few years time.