Context and Motivation

I first entered the crypto market in late 2020, driven by a fascination with this nascent asset class and its corresponding opportunities, bringing a new incremental technology that Blokchains represent. Unlike established markets, cryptoassets present a unique combination of innovation, unpredictability and volatility, reflecting the characteristics of an emerging market. These include high volatility, rapid technological evolution, and an ecosystem often influenced by sentiment-driven behavior, and the other way around.

One of the most striking observations I made early on was the cyclical nature of Bitcoin’s price movements. While historical cycles exhibit similarities, such as periods of extreme euphoria followed by sharp corrections, they also show distinct characteristics as the market evolves. Within this apparent complexity lies a fascinating simplicity: a form of seasonality where fear and greed seem to drive prices to extremes. From this, a compelling hypothesis emerged—longing during extreme fear and shorting during extreme greed could serve as a highly effective trading strategy.

As I delved deeper, it became clear that the cryptomarket is rife with potential weak-form inefficiencies, a hallmark of an emerging market where participants are often swayed by emotion rather than rational analysis. These inefficiencies create fertile ground for exploring technical analysis and behavioral patterns that might not hold as strongly in more mature financial ecosystems. Motivated by this insight, I set out to design an indicator that captures these emotional extremes and reliably predicts Bitcoin’s tops and bottoms.

Before continuing, I highly recommend for newcomers this 2024 cryptomarket introduction guide I’ve published and my following report for curious: Era of interoperability: no matter what, but when? (2023).