How To Spot The Crypto Bottom Using A Century-Old Method

How To Spot The Crypto Bottom Using A Century-Old Method
Jonathan Hobbs, CFA

over 1 year ago4 mins

  • A lot of factors influence whether investments rise or fall. But according to the century-old Wyckoff theory, it’s the way the big money trades that really moves prices.

  • Wyckoff’s theory lends itself well to crypto. It’s a small market, and, in keeping with the theory, bigger players need time to gradually buy or sell.

  • Understanding whether bitcoin (or any other digital asset) is in accumulation or distribution will give you an edge in predicting the next major price move.

A lot of factors influence whether investments rise or fall. But according to the century-old Wyckoff theory, it’s the way the big money trades that really moves prices.

Wyckoff’s theory lends itself well to crypto. It’s a small market, and, in keeping with the theory, bigger players need time to gradually buy or sell.

Understanding whether bitcoin (or any other digital asset) is in accumulation or distribution will give you an edge in predicting the next major price move.

Way before crypto was a thing, investor Richard Wyckoff came up with a theory about what drives market prices – that big-money investors repeatedly fleece smaller retail investors by moving the market for their own benefit. This century-old theory describes crypto to a tee. See, it’s the large players who move crypto, and you can use the Wyckoff method to understand where they plan to take prices next.

What is the Wyckoff method?

Wyckoff explained his theory by describing an imaginary entity that sits behind the scenes manipulating the market. It can reward you if you understand its game, and clean you out if you don’t.

The market, he explained, moves in four stages. First, there’s accumulation, where big investors build up their holdings in the most stealthy way possible. Unlike small fish investors, large whales can’t buy up everything they want at one time because there wouldn’t be enough sellers to sell to them. So they must buy gradually, chunk by chunk, keeping the price low until they’ve got what they want for what comes next.

That’s when the markup stage starts. Once the big money has bought up all the supply, there aren’t many sellers left, only buyers, so prices move up quickly as a result. This entices smaller investors (even those who just sold their positions to the whales) to buy back in, driving the price higher still.

Once the big money has profited from the markup, they’ve then got to realize those profits by selling out. And so begins the distribution phase, where they sell out bit by bit, and quietly, to keep the price at higher levels until they’re done unloading. Keep in mind too that big investors can also build up short positions here before they knock the price lower in the markdown phase.

The Wyckoff price cycle. Source: stockcharts.com.
The Wyckoff price cycle. Source: stockcharts.com.

How can the Wyckoff method help you understand crypto market turnarounds?

These stages play out all the time for bitcoin and other digital assets. Crypto is a tiny market compared to the stock market, after all, and it can take months for the big money to accumulate or distribute their positions. That’s why you often see bitcoin bottoms take so long to form, with “V-shaped” recoveries being rare compared to stocks. In 2018 (gray line), bitcoin took four months to find a bear market low. And in 2015 (blue line), it took 10 months for bigger investors to get their buy orders in before the next bull run.

Bitcoin accumulation in 2015 bear market (top) and 2018-19 bear market (bottom). Chart drawn with TradingView.
Bitcoin accumulation in 2015 bear market (top) and 2018-19 bear market (bottom). Chart drawn with TradingView.

If you zoom in on what's gone on with Bitcoin over the past two years, you can see several examples of Wyckoff stages playing out. Keep in mind that in reality, you can have two or more accumulations and markups in a row, or two or more distributions and markdowns in a row – that much is clear from the chart below.

Bitcoin price following Wyckoff cycles in 2021-22. Chart drawn with TradingView.
Bitcoin price following Wyckoff cycles in 2021-22. Chart drawn with TradingView.

So can you use the method to tell if the price is more likely to go up or down?

When bitcoin or any other digital asset is trading in a boring sideways price range for a while, that’s when it’s time to pay attention. It’s likely when the big players are building their positions, and getting ready for the next volatile move. As it turns out, that’s exactly what bitcoin has been doing since June, ranging from around $18,000 a coin to just under $25,000.

And while there’s no way to know for sure if the current range is one of accumulation or distribution, there are technical clues that can help you tell the difference. If it’s accumulation, you’ll want to notice how the price behaves at the bottom of the range. If it keeps getting bought up each time it dips slightly below it, that’s usually a sign that big investors are buying in. See, when the price temporarily dips below the bottom of the range, many traders often take that as a sign to sell. Since the big money needs a lot of sellers to buy in, they use those temporary dips to load up on more coins.

With that in mind, here’s a hypothetical example of what that might look like based on bitcoin’s current price (red and green bars), and over the coming months (black line). If the price were to suddenly drop below the range, then get bought back up quickly over the next few days, and then trade above the last high price (horizontal line at around $20,600), that could be a good sign that the big money is accumulating. That’s what Wyckoff called a “spring”, and you’d want to gradually start buying, according to the method.

Hypothetical example of bitcoin in an accumulation pattern over the coming months. Chart drawn with TradingView.
Hypothetical example of bitcoin in an accumulation pattern over the coming months. Chart drawn with TradingView.

Another clue that big money has finished accumulating (rather than distributing), would simply be for bitcoin to get above the top of the range – and hold that level for a while – to show that they have no more intention of selling.

Markets tend to have certain patterns. And they generally revolve around incentives, fear, and greed, no matter what year it is. That’s why Wyckoff’s method, now a century old, can still be a useful tool in a market he never envisioned.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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