Crypto TA - Unqualified Opinions

crypto technical analyses are (almost all) garbage


  • Double feature today below the fold! Whiffed on the early send yesterday morning while running out to vote (yes, I’m virtue signaling as an excuse for the scheduling snafu).

  • Above the fold, a pro-TA piece from our recovering quant trader, Qiao. Technical analysis and its proponents within crypto lead to many an F-word from our founders, but Qiao says it’s not all bad. What do you think?

Crypto TA

“TA is for people who don't understand statistical significance or their own cognitive biases, and want to spend their life drawing lines on charts, guessing what TradingView indicators the other suckers are using, and very likely getting financially rekt in the process (but telling themselves otherwise). It represents the worst aspects of crypto and of humanity generally.”

-Dan McArdle, Messari co-founder

I literally laughed out loud when Dan sent me this. While I don’t fully agree with him, there are a few important truths in his sentiment towards technical analysis in crypto.

As a former quantitative trader, I know for a fact that TA can be profitable. But TA people who make money in the real world do not remotely resemble TA people on crypto Twitter/Telegram/Reddit.

The former understand three things that the latter don’t:

First, almost every successful trading strategy has a relatively small edge. TA is no exception. The best traders in the world generally have a win rate of less than 55%. Yet TA people in crypto seem to have 100% conviction in the predictions they make with their drawings. Overconfidence is the greatest recipe for financial ruin.

Second, every successful trading strategy is based on thorough analysis of history. Before the computerization of finance, successful traders spent years refining their strategies through a combination of live trading and post-trade analysis. With computerization, successful traders backtest their strategy over thousands or even millions of data points.

TA people in crypto don’t get that. They think spending a dozen hours studying classic price patterns or writing a blog post on a new metric make them trading experts.

Finally, price forecast is only half of any trading strategy. The other half is putting your money where your mouth is. How do you size your order? When do your close your position? Once again, the loudest TA people in crypto generally don’t do that. They make a price forecast, and never put real skin in the game.

Ironically, making real trades is the only way to learn the two hard lessons described above - overconfidence and statistical significance.

With those caveats, I do want to emphasize that TA can work in crypto, i.e., past prices could have predictive power on future prices. That’s because price actions (particularly in a retail / amateur driven-markets like crypto) can capture a lot of predictable mass psychology. Namely, market prices tend to trend over long time horizons.

If price recently rose over a horizon of a few months, then it is more likely than not to rise even more over the next few months. It’s a pattern we have observed for decades across nearly all asset classes. Warren Buffett explained the phenomenon by observing what happens when “people see neighbors dumber than they are getting rich.” They FOMO, panic-buy, and push prices even higher.

On the other hand, when a long position falls in value, we are reluctant to cut losses. Selling at a loss is an admission of failure, yet those who aren’t willing to sell can get crushed by those who sell fast. Yet at some point, there is almost always a capitulation of the most emotional and weakest hands, who panic sell, and push prices to a floor.

I’m not encouraging you to study TA. I don’t think you should unless you are willing to put blood, sweat, and tears [TBI note: mostly blood and tears] into studying TA for years. Achieving a win rate of 55% is exceptional, and nearly impossible to replicate.

But it is worth highlighting that TA isn’t all bad. Think about fundamental reasons behind certain price patterns. Why do all bubbles look so similar? Why do bubbles happen? These questions are more intellectually stimulating and could reveal insights into mass psychology that, yes, could prove lucrative.

But you’re not likely to find those insights on someone else’s TradingView tweet.


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News & Analyses

Messari Compression Algorithm

Content and thoughts from around the web as summarized by the Messari team.

❌ [Analysis] Crypto should not be dismissed as a scam – Benedict Evans

Benedict Evans argues that dismissing crypto as a useless scam is much like dismissing the internet based on failed Dotcom companies. It mistakes applications for the enabling layer. Crypto is still a nascent technology and should not be dismissed for its low adoption rate. Most of the use cases have yet to be invented. (Messari | Source)

⬆️ [Analysis] Coinbase orchestrates parallel banking network corridors – Diar

Coinbase's latest dollar pegged cryptocurrency, moves the firm towards its 'Open Financial System' goals, akin to a suite of banking products. Given its securing multiple licenses through M&As, Coinbase seems to be planning a second-layer banking infrastructure with on-chain channels. Additionally, many Coinbase alumni are starting prominent fintech startups in the space and are often funded by the firm. (Messari | Source)

🗺 [Analysis] Mapping out bitcoin's supply chain – Steven Zheng

At the start of the bitcoin supply chain is the bitcoin ($BTC) network. Miners earn bitcoin by solving cryptographic puzzles. Then, the miners sell the minted coins via exchanges or OTC platforms which then circulate the coins to users and investors via ATMs, investment-product providers, and P2P exchanges. Users and investors have three options: saving, trading, or using. Thus, merchants are at the end of the supply chain. (Messari | Source)

Quick Bits (Don't read that, I read it for you)

Choke Points (Exchange News)

  • 🤝 Former Cboe head of equity options Kapil Rathi joined AlphaPoint as the global head of trading markets and will be in charge of the company's trading and exchange business. Alphapoint raised $15 million over the summer from Galaxy Digital and launched DCEX, a decentralized exchange that uses XRP as its main currency. (Messari | Source)

  • 🏦 Deltec Bank & Trust Ltd. refused to comment on whether it has a relationship with Tether, a day after Tether announced it had $1.8 billion stored in the Bahamas-based bank. (Messari | Source)

  • ⚡ Crypto exchange Bitstamp is getting a new matching engine developed by Cinnober, a global provider of exchange and clearing technology. The new system will drastically increase the exchange's capacity to match orders. (Messari | Source)

  • 🆕 Bancor officially launched BancorX on Monday. The liquidity network allows for automated token conversions between ethereum and EOS tokens without users having to deposit funds on an exchange and without having to find a matching order from a buyer or seller. (Messari | Source )

Startup Signals (ICOs, Cryptos, and Startups)

  • 💰 Israeli startups raised $600 million through ICOs in 2018: according to a report from crypto research firm One Alpha, its survey counted 140 active blockchain-related companies in Israel, which, when combined with other forms of investment, have received $1.3 billion worth of investments. "More than 60% of the companies and 88% of the funds are ICO-related," the report noted. (Messari | Source)

  • 📱 Ten kin-enabled apps are already out, and more will become available as the Google Play and iOS stores move to approve them. Kin is the cryptocurrency created and launched by messaging app Kik. More than thirty apps are expected to debut in the coming weeks. (Messari | Source)

  • 💔 The distributed cloud storage blockchain network Sia has successfully completed its hard fork, which prevents some specialized hardware—especially from Bitmain and Innosilicon—from mining on the network. The fork was initially planned for the previous day but was stuck due to an increase in the mining difficulty. (Messari | Source)

  • 📈  Hedge funds, venture capital firms, and a smattering of private equity houses have helped the overall number of cryptocurrency funds increase by more than 11 percent in 2018 alone, Morgan Stanley estimates. The value of assets managed at these crypto funds has soared to $7.1 billion, from only $675 million at the beginning of January 2017—marking a $6.4 billion increase in under two years. (Messari | Source)

  • 💰 Two major events for Ethereum this week: U.S. bank JP Morgan Chase revealed that it had created an enterprise version of the Ethereum blockchain. In other news, Ethereum cofounder Vitalik Buterin outlined the path to Ethereum 2.0, called Serenity, which is designed to solve Ethereum's scalability issues. (Messari | Source)

  • 📚 A new study claiming to have completed the first independent benchmark testing of the EOS software stated that the EOS blockchain can handle only 250 transactions a second, even under unrealistic conditions of no latency. Previous EOS blockchain explorers have stated the network can handle more than 1,200 transactions a second. (Messari | Source)

  • ✔️ The chairman of Deltec Bank & Trust says a letter published Nov. 1 about Tether's ($USDT) account at the Bahamas-based bank is "authentic.” The letter stated that Tether’s account's balance as of Oct. 31 was over $1.8 billion, enough to back all the USDT tokens in circulation 1-for-1. (Messari | Source)

The Powers That Be (Legal/Reg/Policy)

  • 🚓 An annual report by the Securities and Exchange Commission (SEC) reveals how digital currency scams are now among the agency’s top enforcement priorities. The SEC is focused in particular on initial coin offerings (ICOs). (Messari | Source)

  • 🙅🏻‍♀️ The People's Bank of China (PBoC), the country's central bank, is looking to clamp down on airdrops — free distributions of crypto tokens. In its financial stability report for 2018, released on Friday, the PBoC said that "disguised" initial coin offerings (ICOs) including airdrops continue to grow in number, despite its previous efforts at cracking down on sales of tokens. (Messari | Source)

  • 🔥 Charlie Shrem called a lawsuit by Tyler and Cameron Winklevoss’s Winklevoss Capital Fund a "scandalous and fantastical story," and urged a U.S. judge to throw it out. The Winklevosses sued Charles Shrem for fraud, alleging that he had used part of their 2012 investment of $750,000 in BitInstant to buy 5,000 bitcoins ($BTC) for himself. The bitcoins would be worth $32 million today. (Messari | Source)

  • 🏛 The U.S. Securities and Exchange Commission (SEC) plans to clarify when and how cryptocurrencies may be classified as securities, its director of Corporation Finance said Monday. SEC director William Hinman said the regulatory agency intends to release "plain English" guidance for developers to refer to when planning token offerings but has yet to say when. (Messari | Source)

  • 🇨🇭Switzerland's Financial Market Supervisory Authority (FINMA) reportedly released a letter advising banks and securities dealers to assign a "flat risk weight of 800% to cover market and credit risks" against crypto assets. This flat risk weight is on the high end of the range and on the level of hedge funds, according to the report, meaning FINMA considers crypto assets to be volatile. (Messari | Source)

Did I miss something?

Send me the link, your twitter handle and your best imitation compression algorithm write up. If I like it, I’ll include your bit next issue (with attribution).

Podcast Recap

🎧 ICYMI last week, Katherine was at DevCon in Prague and chats with Erik Vorhees (Founder & CEO, Shapeshift) about the 10th anniversary of the publication of the Bitcoin whitepaper. Later, Ari Paul (CIO, Blocktower Capital) shares what he is excited about and what he wants to learn more about in the crypto space. (8 minutes long for your evening commute.)

Listen and subscribe— on Apple Podcasts here, Spotify here, and Google play here.

Some other great episodes are #11 (Samson Mow on sidechains), #10 (Spencer Bogart on fund performance and tokenization), #9 (Tony Sheng on his writing process), #6 (Jake Chervinsky’s primer on federal & state crypto regulators), #4 (Nic Carter on data integrity in crypto), and #8 (Conversations on the ground at CryptoSprings).

Find our podcast series on Apple here, Google Play here, and Spotify here.

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