One of my trading mentors Ted Warren taught me a very simple trading principle. Quiet sideways markets are under accumulation. Wide-swinging high-volume markets are in distribution. . Nowadays we call it volatility and have all kinds of fancy mechanisms to measure it.

This principle applies to bitcoin and is a powerful tool for analysis in combination with other tools.

Here we will do a cursory study of volatility, price, and backwardation.

I define volatility as the price action relative to the price. There are many ways to calculate volatility, but it is the principle rather than details that is important here. This is what separates analysis from analysis. Ted Warren not only recognized volatility but learned to successfully apply it visually through charts and simple arithmetic calculations.

Looking at a notional bitcoin chart the principle of volatility is readily seen by the wide swings at market tops compared to much more narrow swings at bottoms. The red arrows indicate bitcoin market tops and the green arrows represent bitcoin market bottoms on a monthly scale followed by the same monthly chart on a logarithmic scale. Volatility can not be readily seen in bitcoin on a logarithmic chart.

Yet notional charts are hardly a perfect way to see and understand volatility. This is because as the price rises volatility of bitcoin can actually go down when measured against the prevailing price even though the swings are notionally much wider.

The third chart is the Bitmex Tradingview Volatility Index chart on a monthly scale with the red arrows indicating the Bitcoin tops and green arrows indicating the Bitcoin bottoms. This index was created beginning in January 2017. In December 2022 the Volatility Index hit an all-time low.

A missing chart is one reflecting the BASIS or difference between the spot market and futures. I watch it mentally so don’t need a chart and could not find one I could make work on Tradingview. So we will move on without it. But a visual can be obtained here.

We start in 2013 with the Cypress bank account haircut top at $266 in April followed by a July bottom at $65. I bought my first bitcoin in August 2012 at just under $100. This was followed by a Nov/Dec top at $1,240.

We then entered a one-year bear market that bottomed in January 2015 at $166.00. Note the Volatilty Index was not operable then. However, the Bitfinex hack created a double bottom. The bitcoin market did not have futures at this so BASIS, or backwardation and contango, did not exist.

However, that changed in 2016 with the introduction of Chinese markets. By the fall and winter some of these markets offered futures (Bitmex did not) and bitcoin futures market were in deep backwardation in late 2016 and January 0f 2017 as the prevalent mood was bearish. This led me to establish a large leveraged position in Dec/Jan 2017 in the $700 area. Note: The Volatility Index was on the low end.

This was the year I finished in the Top Ten Notional Traders on Bitmex. At the Dec 2017 top Bitcoin futures were trading at a $2,000-$3.000 contango over the spot market. Note: The Volatility Index was at the high end.

The next bottom was made in Dec/Jan period 2018-2019. Note volatility shot up once again because bitcoin dropped 50% from $6,500 to just above $3,000. At the same time, backwardation appeared. I remember it well because this was the same time as the first Tone Vays Unonfiscatable Conference. My good friend Tone did not want me to be on a panel because I was bullish and the consensus was bitcoin was going to break $3,000. I was extremely bullish and predicted it would not break $3,000 due to the backwardation. This analysis proved correct.

This market topped in June 2019 and as volatility increased a huge contango emerged in the market which inspired me to write Contango Is A Godsend to Miners and A Curse to Speculators which got lots of attention.

The next bottom was the Covid and hedge fund blowout in March 2020. It should be noted that while the market crashed and went into a 20% or $1,000+ backwardation, volatility went into an all-time peak. It was through this crash I was able to establish a futures position of 8 BTC with $5,000 and turned it into $1.7 million for all my Members to see in real-time.

Applying Equity Trading

In late 2019 UOG Member Victor Villicaña wanted to hone his programming skills and chart my equity swings and his own equity swings. I suggested he also add a sequential indicator pioneered by Larry Williams and further developed by Tom DeMark and Tone Vays.

Below is the equity chart of UOG published trades on a weekly scale from February 4, 2019, through December 10, 2020, on a weekly scale that started with 2 BTC showing open, high, low, close of equity, net position, percent of long/shorts and a sequential indicator.

Here are the weekly high, low close real-time published UOG trades on Bitmex from February 4, 2019, through December 10, 2020, showing open, high, low, close of equity, net position, percent of longs, and Sequential Indicator.

The concept of The Equity App is simple. It measures your equity high, low, and close based on whatever time scale you use, weekly, daily, 12-hour, 4-hour, and 1-hour.

But Victor Villicaña did not stop there. He went on to develop other features on The Equity App that are eye-opening.

Below is a scatter study feature that reveals the number of trades, % of winners, longest and shortest trades, worst draw-down, worst missed profits, total fees, % of fees in PNL, and % market maker.

Here is a scatter study feature that reveals the number of trades, % of winners, longest and shortest trades, worst draw-down, worst missed profits, total fees, % of fees in PNL, and % market maker.

A complete analysis of this study is available in my most recent book Equity Trading.

Moving on.

I missed the entire move from 25k to 70k in 2021–2022 and the double top at $70k. Correspondingly while Bitcoin futures did trade most of the time in contango, it was not a huge percentage over the market except for occasional spikes. Backwardation also appeared briefly in spike sell-offs. There is nothing remarkable happening in the time frame.

In November bitcoin went into solid backwardation while twice spiking below $16,000 and backwardation has been a prevailing phenomenon for the past two months.

This is one of the longest prolonged backwardations in Bitcoin’s history matched only in late 2016. However, it is by no means near the record Covid backwardation in March 2020 which existed for less than a day that went an astonishing 20% or $1,000+ under the spot market.

So what does all this mean for Bitcoin in 2023?

Well, one thing is for sure the Plan B model has been put to bed. A model is only a model and works only until it doesn’t.

A much more relevant and I believe accurate perspective is provided by Matthew Mezinkis @crypto_voices on Twitter. According to Matthew Mezinkis bitcoin should be at $40,000, not under $17,000. 

Another great fundamental analyst is Willy Woo @woonomic on Twitter who comes to the same conclusion for different reasons. All of which I agree with and are sound.  

Questions remain: Will we get one more crash down? Will we reverse quickly? Or will we continue with low volatility and a grinding bear market?

No one knows. That is why I trade Equity and not charts.

My personal view is that the bottom is in and there is great potential for an explosive move that is already underway and that begins gradually and develops into an explosive move. This does not preclude a liquidy event in the future that I believe is a fundamental hanging over the market. But this will likely happen from a much higher price.

The reasons are outlined by 2021 Bitcoin Standard Bearer Cory Klippsten @SwanBitcoin on Twitter. Ethereum is doomed and is the next train wreck waiting to happen.

In September 2021 I warned that the fundamental weakness in Bitcoin is that exchanges are acting as banks, the creation shitcoins pretending printing money is real wealth creation, as well as legacy participation. What everyone else deem to be bullish I considered quite the opposite.

I repeated this same message last January.’

In 2023 the fundamental weakness will likely be Ethereum. Or better said, Ethereum will likely reveal the fundamental case for Bitcoin. Should this happen it could cause a secondary dip much like the Covid selloff in March 2020.

The best thing for bitcoin will be a continuation of a slow-grinding bear market. But that is likely wishful thinking by those caught up in the latest exchange/banking debacle.

Further, the combination of record low volatility on the back of bitcoin’s most prolonged backwardation makes such a scenario unlikely.

2023 promises to be a very bullish year for bitcoin. $40,000 bitcoin may well be an overnight phenomenon that most miss. This is supported by the dearth of open interest and volume and the most reliable time-tested derivative exchange Bitmex. So little volume and small open interest means that low participation can drive the price highers quickly.

Just as miners had the wonderful opportunity to hedge their operations with a contango at 40k to 70k in 20222, hodlers now have the wonderful opportunity to hedge their future purchases through September 2023 which I outlined in my last article.

Conclusion

In my last article, I also outlined that while backwardation is bullish it is a lousy timing mechanism. This study on volatility confirms this premise. However, using a record-long backwardation in conjunction with record-low volatility provides a likely explosive upside move in bitcoin in 2023 that has already started, will proceed gradually, and then explode suddenly.

Hope this helps.