Long Term Crypto - Market Analysis for May 27th, 2019

[Article I posted on FA Trader]

Before I start this article let me state plainly that I question crypto as a long term hold. This is not because I don’t believe crypto is here to stay. Blockchain, in my view, is one of the most striking advances in both finance and the internet, to come our way in decades. And, this is not because I see existential threats to true decentralized cryptocurrency by the likes of centralized blockchains like JPM coin, the mysterious Facebook blockchain project, or the laughable idea of the Amazon Coin. Those that consider these threats, don’t understand how crypto functions, and why many users have adopted decentralized blockchain.

I simply consider crypto too volatile to hold through bear markets, which so far have brought not just Bitcoin but every other crypto through 60% or deeper corrections en masse. Further, the technological progression of blockchain projects has become so rapid that obsolescence is given. While I can say most of my long term targets in the crypto space remain intact despite our voracious recent bear, I have seen at least a dozen or more long term charts absolutely fail.

For that reason, after experiencing two bear markets in Bitcoin, and the last one quite exposed, I will will no longer hold my crypto through a bear. I sold 25% of my crypto holdings in December 2017, knowing through the Elliott Wave theory that we were at a turning point. It was thankfully 45 times the principle put in the market in 2017. But emotionally, looking through the rear view mirror, 25% just wasn’t sufficient. Not again.

That said, some may not take this view, instead wanting to hold something for the long term. Further, not all are as comfortable with their own nimble trading skills as I have grown to be since starting membership at EWT in 2015. If you are of the less nimble, this article is for you. I want to address some framework of values to look for in forming a long term crypto portfolio.

Long Term Elliott Wave Structure

This is my most important consideration in my view. There is no well accepted theory for valuing cryptos. This has made analyzing the crypto market a pure affair in sentiment analysis. And in return, we see the most pure Elliott Wave patterns in crypto. Further, as high frequency trading is not well utilized in crypto trading, we see much less distortion of Elliott Wave patterns on smaller scales.

No matter how intriguing a project is and no matter how interesting all other assessment of a project and coin is, I would never enter a project with a poor Elliott Wave price structure. For one, the price structure offers me nothing to manage risk, and take profit without a discernible Elliott Wave Pattern. And, without at least the nascent suggestion of a bullish struture there is little indication that the ‘market’ is starting to move into a place that supports my own thesis on a project with upward moving prices.

Liquidity

Liquidity is important in that it signals some market acceptance. For, one, liquidity is necessary to get a good price upon entry. However, it becomes all important in large market shifts, from bull and bear trends. When euphoric tops come into play taking an exit may be hard as market players begin to run for the doors. Ensure you are engaging in a liquid trade, and check liquidity periodically for warning signs.

There are two ways to do this:

Go to coinmarketcap.com. You can choose 24H volume to sort the list of coins. These are likely to be the most liquid coins. But if you see a less well known coin pop up on that list, watch it for a couple days before finalizing your assessment.

Also, take a look charts on the most liquid exchanges (Binance, Bittrex, and Coinbase). Candles should be full and without gaps, since cryptos trade 24/7.

Clearly Bitcoin is the most liquid crypto. But you’ll find very solid liquidity in coins like EOS, Ether, Ripple, Linecoin, and many of the top 15 market caps coins. But note also that many of the most liquid pairs are XXXBTC, so you might need to exit to BTC before exiting to dollars or other fiat.

Institutional Acceptance

Institutional Acceptance is important for giving staying power. First, institutional funds bring liquidity to a market which tends to build on itself. And, as liquidity brings demand for hedging derivatives, more liquidity enters the market, as in a chain reaction. The problem with this criteria is it hard to nail down exactly what coins institutions are buying. We can look at the circumstantial evidence availed by which derivatives exist in the market. This singles out Bitcoin as #1 and Ethereum as #2.

Further, I follow those in this business, including funds,  marketmakers for the OTC market, and liquidity outfits. Based on comments it is crystal clear that Bitcoin is the cornerstone of any institutional portfolio. Other coins that seem to heard hints of institutional interest in are Ripple and EOS.

I don’t mean to say that every coin you have in your portfolio should have institutional interest, but you should consider having a large portion of your long term holdings in this camp.

Transaction Rates

High transaction rates are important because low transaction rates put a coin at risk. First, it signals low market interest. A coin with low market interest may result in loss of support by miners (proof of work) and stakers (proof of stake), who are verifying the blockchain. This makes the blockchain vulnerable to attack, especially for proof of work coins.

Eventually, coins with very low liquidity, coupled with low transaction rates may be delisted by key exchanges and eventually you’ll find it very hard to exit a position at a market top.

Coinfaivalue.com is one site that allows you to sort coins by transaction rates over the last 24H. As with trading volume, I suggest watching these rates over time to assess whether you are seeing one time anomalies.

DAPP usage

DAPPs or Decentralized Applications are web applications built on blockchains with smart contract capabilities.  From gaming, to internet gambling, to business applications, and decentralized exchanges, this is where we see cryptos in use on the webs for secure transactions.

Watching user data, transactions and transaction volumes, is one way to see if a coin is gaining user acceptance. While I don’t have a site for every smart contract enabled coin, dappradar.com is one site highlighting DAPPS running on Ether (ETH), EOS, Tron (TRX), and IOST.

Note that this data does not represent a comprehensive view of usage. For example enterprise use of blockchains are to going to show up in this data.

Development

If you are considering holding a coin long term you are not going to see earnings announcements and annual reports to to understand the latest developments. However, I suggests following means to track projects, particularly to detect red flags.

1. Read the whitepaper and roadmap on the project websites.

2. Follow the social media channels, particularly Twitter and Telegram.

3. Go to cryptomiso.com and analyze Github commits. These are software updates. If development actively grinds to a halt this is a big red flag.

In conclusion, I believe holding any one long term is going to prove a bit hazardous simply due to market volatility, but also because the space is changing rapidly and coins move to obsolescences fairly quickly.

From that perspective, I currently believe that Bitcoin has solid staying power. While it is one of the less advanced coins, it far outweighs the others in liquidity and market acceptance, including that of institutions. Beyond that, you may have a lot of work to do. If you need technical analysis, and entry levels, all of these coins are covered, and more on Elliott Wave Trader, from the daily chart, down to the hourly.