Market Timing in Crypto

Market timing has a bad rap.

You probably know what they say: “Time in the market beats timing the market.”

This is a saying coined in the heyday of stock trading. Back then it was still reasonable to assume the markets will just keep going up. One no longer feels this is a rational expectation nowadays.

Luckily, it is certainly possible to tell whether it is time for daring or time for caution.

That’s what timing tools are for.

Market Timing Approach

Market timing is not a dubious thing based on intuition.

Timing is simply a method to learn about the bigger picture. In case of crypto that is the strength of all crypto markets, rather than just the one you trade on.

Focusing on a single market only is a mistake, but it is easy to do if you only rely on plain technical analysis.

Only going by TA on a single market makes it easy to miss critical information.

For instance: If you only watch BTCUSD, you can miss the information about money leaving crypto altogether. BTCUSD is the strongest market of the industry; the outflow of money will take the longest time to show on the BTCUSD market.

Market Timing in Crypto

These days, cryptocurrency market are as diverse as the stock markets.

Fundamental value of various cryptoassets is starting to differentiate, and now with DeFi and other shitcoins we even have the perfect equivalent of penny stocks.

Crypto indexes have been around since 2017, in other words, since the first mainstream boom of crypto. They are not as complex as indexes for the legacy markets, but they are already good to be used for market timing.

Technical Market Timing Tools

Crypto Indexes (Baskets of Cryptoassets)

Basket indexes for crypto markets were modelled after legacy basket indexes.

Some adjustments were necessary, since the cryptocurrency markets are still in their infancy and most of the cumulative USD value of the crypto industry comes from a single coin.

Still, we now have both market cap weighted indexes (like S&P 500 or NASDAQ) and price weighted indexes (like the Japanese Nikkei).

Market cap weighted cryptocurrency indexes

CCI30 - cci30.com is a basket of top 30 coins by market cap (excluding stablecoins). The constituents are automatically updated on the first calendar day of a quarter. This index is the best choice for statistics and as a crypto market timing tool.
Crypto20 - crypto20.com is a tokenized index that can be traded on some altcoin exchanges. This index now caps every asset at 10%, which makes it less suitable for broad market timing analysis - it does not represent the realities of the markets well.

Price weighted cryptocurrency indexes

CryptoCompare - cryptocompare.com This product aggregates price data for each cryptocurrency and returns volume-weighted average price for every market.

If you want to use this index as a market timing tool, you will need to make a price-weighted basket out of this (very accurate price) data yourself in a spreadsheet.

The formula of price-weighted basket index is super simple though: For an index of 30 constituents just take the top 30 most expensive cryptos and calculate the simple average of that set.

Price-Weighted Index Formula = (Sum of constituent prices in index) / (Number of constituents)

How to use crypto indices?

The easiest way that requires minimal skills to plot the price action of the basket index together with the price action of a single cryptocurrency, and see how they compare.

This is a simple way to understand how money moves through the cryptocurrency markets.

Tools that let you compare a basket index with a single crypto are readily available too:

Plotting multiple charts and even custom data is possible with TradingView PRO plans.
To check whether your market or the index moves at faster pace, use even very basic technical indicators:
- ROC (Rate of Change).
- RSI (Relative Strength Index)
- Advance/Decline Line
- Intraday Intensity Index

The Advance/Decline Line is an indicator worth learning about to use with basket indices. There is an easy to spot “divergence” signal for ends of market cycles.

The ADL topping signal is found when the price of the constituent assets is not declining yet, but the ADL already is.
The ADL bottoming signal is found when the price of the constituent assets is not rising yet, but the ADL already is.

The Intraday Intensity Index is more useful for looking into money flows within a single cryptocurrency market.

BASIC EXAMPLE

Let’s say you are plotting BTCUSD over CCI30. You want to understand how money moves through the crypto industry and whether the markets are in good shape. That’s easy to do, no complicated statistics or strategy necessary.

First let’s make a mental note of what you are looking at: BTCUSD is the strongest asset of the industry, CCI30 is a basket of any altcoins that happen to have large market cap at the moment.

When you plot these two, you will see one of the following scenarios:

1. Both BTCUSD and CCI30 goes up, but the price of BTC is growing at a faster pace.

This says that money is leaving altcoins and gets into BTC.

It can mean simply the end of alt season, or even just and end of a speculative trend. Let’s say, people could be losing interest in DeFi. It could also mean that overall bull market is over though, but as BTCUSD is the strongest asset, the BTCUSD price action doesn’t reflect the end of the bull yet.

The same situation, just with higher intensity is taking place when there’s a divergence: BTCUSD is advancing, CCI30 declining.

2. Both BTCUSD and CCI30 goes up, but the price of CCI30 is growing at a faster pace.

This says that money is flowing into altcoins.

The direction of the money points either at the increased interest in speculation, or at a real fundamental change at the market. Maybe there is actually a viable DeFi application, maybe there is a new altcoin to dethrone BTC.

The same situation, just with higher intensity is taking place when there’s a divergence: CCI30 is advancing, BTCUDS declining.

There are literally no other options.

Now, you see each of these situation generates a number of claims about the state of the crypto markets.

In order to see whether it’s time to buy more or a time to look for exit, you will need to determine which one of the claims has the best odds.

To verify the odds of any of these claims, look into technical analysis as well as the non-technical market timing tools listed below.

Non-Technical Market Timing Tools

Fundamental Metrics & Market Psychology

Legacy market timing makes use of things like unemployment rates, treasury yield curves, weekly and seasonal cycles and developments in industries that are most sensitive to changes in general psychology (such as entertainment or health industries).

Crypto is of course not immune to changes in public psychology. A lot can be read using the same ways legacy markets analysts use: The money flowing into markets are the same, it is just the preference of the instrument that differs (crypto or stocks).

As for the systemic metrics, cryptocurrencies have their own market metrics that we can easily draw conclusions from.

1. High non-speculative transaction rates are a signal of strong market:

Fundamental metrics such as transaction rates.
The percentage of transaction activity coming from exchanges vs from native applications or p2p value transfer (depends on the focus of the cryptocurrency).
For payment-focused cryptos, there are additional fundamentals such as the growth in ATM count, merchant adoption or p2p markets growth.

2. Popularity of new applications can be either good or bad.

Popularity of cryptokitties may get more people into cryptocurrencies, but it may also have adverse effect on the cost of transaction. At the same time, dApp games did decline along with the approach of the bear market through 2018.

3. The signs of irrational exuberance and the same in legacy and crypto market as well.

Your grandma buying crypto at the Christmas dinner and attempts to buy bitcoins on credit.

Some data for you to play with

We will test the powers Advance-Decline ratio.

To get the basket of cryptos we are using the CCI30 index.

If you work with TradingView PRO, all the data and indicators are there.
Alternatively, you can get Advance-Decline Line calculated in a spreadsheet by adding each day’s contribution to the sum of previous contributions. Historical daily closing prices of each altcoin constituent of CCI30 can be taken from Coinmarketcap.

The limitation of work with crypto indexes is that you will only get good data about the broad state of the market. The CCI30 constituents change multiple times a quarter!

This is still good enough to determine whether the market is nearing the top or whether it’s still healthy.

The Advance-Decline of a Basket Index: Finding the Top

The early ADL topping signal is found when the price of the constituent assets is not declining yet, but the ADL already is.

Below we’re adding a dataset of February to April 2018. This signal was found in that time span on the BTCUSD market. Price-wise, this coincided with bitcoin’s bounce to 12k USD after the fall from 2017 ATH. The ADL signal correctly determined that bounce as unsustainable.

Data:

Daily closes of the 30 constituents as CSVs

Sloppy but functional script to calculate the Advance-Decline Line

Source for the charts from the PDF above

CCI30 full OHLC history (daily data as provided at cci30.com) and also the history of its constituents

Three months of daily close prices for the Q2 2018 constituents of CCI30 (pulled from coinmarketcap)