VYSYN Ventures Weekly Insights #40
Technical levels are a key part of many analyst’s toolkits when it comes to the business of forecasting price trends in the Bitcoin and cryptocurrency markets. The natural tendency for humankind to pay special attention to certain number levels has developed into a key indicator in behavioral finance. Bitcoin recently crossed the $50,000 price level, a key psychological level. This has triggered a lot of interest in the market, giving rise to several expectations and price predictions.
Despite being abstract entities, markets are closely tied to human psychology. Some investors and traders, rather than relying on news, anticipate the mindset and behaviour of other market participants at certain points in the market.
In this VYSYN Ventures release, we will be considering several technical levels in the Bitcoin market and how market participants may respond to them. We will analyze how these levels have affected the market trend historically in an attempt to forecast future price action.
How Amateur Traders are Influencing the Bitcoin Market
There is undoubtedly a significant number of professional speculators who are vastly outperforming the cryptocurrency market. But outperforming the markets is no easy feat. Expert traders in the industry are few and far between.
Amateur traders represent the vast majority of speculators. These are people with little or ‘below average’ knowledge of what it means to outperform in the cryptocurrency market. This does not stop them from making some reasonable profit in bullish market conditions but anybody could do that.
Analyzing support levels, resistance levels, and trendlines is one analysis method that is used by both professional and amateur traders alike. Considering these levels can help speculators identify accumulations of orders, along with pockets of buyer and seller liquidity.
How Technical Levels are Formed
Technical levels are formed as a result of the behavioral patterns of humans trading in the markets. The mental expectations of traders result in certain behaviors that influence how prices respond. This phenomenon determines the formation of support and resistance regions as far as prices are concerned. Here are some of the specific factors that influence the formation of these technical levels:
- Behavioral Biases
There is a natural tendency for humans to round up to the nearest round number. In trading, round number areas become mental targets and can oftentimes be areas of support and resistance.
- Aspiration Levels
Most investors in the Bitcoin market have expectations even before investing their capital. Expectations can be based on different factors which include news, chart analysis, social predictions, and others. Based on these aspirations, limits others are established, oftentimes close to aspirational targets. This explains why price reversals often occur just before price reaches a popularly anticipated support or resistance. In such cases, several orders may have been placed within safe areas due to the Fear Of Missing Out (FOMO) of profit-taking opportunities.
- Institutional Incentives
It is generally safe to assume that price may not always respond to technical levels as they are commonly expected to. Oftentimes, price will go slightly beyond a resistance level before crashing. Similarly, price will drop slightly below a support level before rising. A likely driver behind such market movements is the incentives of institutional players in the market. As with any power law, institutions represent a small number of the total market participants but account for the majority of the total capital in the market. This gives them a disproportionate impact on market movements. Combine this with their incentives to profit from the positions of smaller traders and you have an explanation for why support and resistance levels cannot always be trusted. In exuberant market conditions, like the contemporary movements, amateur traders will oftentimes take on highly leveraged positions. When the market moves in their favour, this is an extremely profitable strategy. However, when the market moves against them, their entire position can be liquidated, depending on how much margin they hold in the position. This was demonstrated on the 15th of a February when a 6% BTC price pullback catalyzed $1.5 billion in market liquidations. Institutions are extremely aware of the behavior of smaller traders. They analyze metrics such as funding rates to gauge the level of leverage in the markets. They will oftentimes use their disproportionate share of market capital to push the market against the position of smaller traders. If they anticipate amateur traders are highly leveraged and anticipate prices to go beyond a certain level, they may dump on the market to catalyze short liquidations, and enter in at a more attractive price following the liquidation.
Psychological Levels Are Having an Exponential Effect on Bitcoin Price
Round figures like 10s, 100s, 1,000s, and so on come into play when dealing with price targets. This is reflected in the exponential progression that Bitcoin price has experienced so far in its lifetime.
In the life of Bitcoin, the price has progressed in units, 10s, 100s, and 1,000s. Perhaps, based on the predictions that we are seeing nowadays, we could be entering the zone of the 10,000s. Of course, Bitcoin prices will not continue to increase indefinitely. However, until we achieve a plateau, psychological levels will continue to influence price action.
Periodic plateaus have been a characteristic of Bitcoin price. These are times when Bitcoin price oscillates within a horizontal channel. These channels are often a result of the formation of supports and resistances that are established by psychological levels.
Technical Levels to Play Greater Role in Coming Months
Expectedly, market predictions and forecasts are becoming more popular after the recent milestones achieved by Bitcoin. The breaking of major psychological resistances, plus the entrance of institutional participants are having a significant effect on the Bitcoin price.
As more people enter the market, the demand for Bitcoin tends to increase, giving rise to increasing prices. As mentioned above, since the majority of the new entrants consist of non-expert traders, we would expect to see the effect of technical levels becoming even more pronounced in the coming months. However, don’t be surprised if volatile price movements are also observed as there will be a significant incentive for institutional traders to capitalize on the expectations of these amateur traders.