The Mind of a Market – Part 1

Author: Duane M. Tilden, P.Eng.                      Date: July 2, 2018

The arrow of time points forward; past events are irreversible

Foreword:

This article, has grown and is expanding as I write. Being my own editor I have to make decisions, so that in order to expedite publishing I am breaking the material down into parts. The idea behind this article is to explore what makes the cryptocurrency market move and the psychology behind the market, a collection of minds or “hive-mind“. We will use references from the stock market and investing community, social sciences, finance, engineering and other realms of thought and application.

I would like to postulate that collectively CC markets are populated by a type of person who has a basic understanding of the fundamentals of Bitcoin, blockchain and smart contracts, online interaction and the use of app’s, purchasing and trading, banking, stock markets, economics and other needed basics to make the ecosystem have value and meaning to the user.

Or perhaps, the user is in the process of learning these fundamentals, as such having desire and ability to learn new concepts and be able to employ them digitally is necessary for success. There are learning curves to be surmounted; patience, persistence and diligence are required. In any event I invite seasoned pro, novice or the curious to follow my explorations into the world of crypto.

Image result for whale

Photo #1: National Geographic – Migrating Whales

What is the Cryptocurrency Market?

The cryptocurrency market is dominated by a few major assets, most notably Bitcoin which has a current dominance factor of 42.6%. Reviewing listed CC assets listed on the website coinmarketcap.com we find the use of charts and graphs useful in understanding how values and prices fluctuate over time in these markets. I have used these charts in previous articles, listed below is the current Total Market Cap of $257 Bn, which has recently increased by $21 Bn since Friday, June 29th.

Total Crypto Market Cap Jun 24 to Jul 1 2018 #1

Figure 1: CryptoCurrency Total Market Cap Chart – June 24 to July 1, 2018

For the sake of simplicity, my analyses is generalized in nature. Individual traded assets have their own utility and value based on a multiplicity of factors, some of which may be intangible. When deciding which assets to choose for holding and trading there are many of those factors which become important when considering risking investment over time. We will delve into this issue in another post, all part of the due diligence process.

Over the past decade, blockchain technology has captured the imagination of technologists around the world, and in the past year Initial Coin Offerings (ICOs) of cryptocurrency tokens have exploded in popularity. In just the first four months of 2018, ICOs raised $6.3 billion USD in funding, 18% more than in all of 2017. (1)

As we can see from the excerpt taken from the CPA Ontario website ICO’s raised $6.3 Bn in funding for the first quarter of 2018. For argument’s sake we can extrapolate a value of $30 Bn for the year, or even more to $50 Bn if we assume more issues later in the year. However, considering the total trading values in active markets we can by inspection see that the ICO market is small compared to values traded on exchanges. Total Market Cap can increase by over $20 Bn or more in a day (2), and daily volumes also can vary in the same range of about $10 to $20 Bn over 24 hour periods.

As a final note, not all transactions in cryptocurrency need to be done through an exchange, and private transactions are not included in TMC analysis, although it is fair to assume that trade values of these transactions will be made close to current market prices. When trading on exchanges one must always be aware of the market depth compared to order size, which can cause significant run up in price when a large transaction is made on the market. One reason why experienced traders generally make smaller incremental buys or sales to limit market distortion and costs as well as profit from large trade orders which run up the market temporarily.

Modeling Generalizations

For the sake of most of my market reviews there are certain generalizations which I make, first is I exclude ICO’s as a minor influence on the market as a whole. Those who intend to issue ICO’s would be wise to incorporate market analysis and timing as part of their marketing strategy. Starting an ICO in a soft market will be more difficult when money is tight for investors, as an example.

The second generalization I make is to limit reviews generally to the top 25 listed CC’s by market capitalization. From past analysis I have found that over 80% of capital is contained in the top 25 while the remaining 1500+ listed account for the remaining 20% Total Market Cap. Movements of these coins may be important to the individual trader, however as factors that may move the whole market their sphere of influence is generally limited.

Thus, as we can see, the above reductions will simplify future modeling of cryptocurrency markets by eliminating ICO’s and examining global movements of the top 25 listed cryptocurrencies, of which Bitcoin currently dominates with a MC of $108 Bn USD, followed by Tether, Ethereum, EOS, Bitcoin Cash, Litecoin, etc.

Who are the Players in the CryptoCurrency Markets?

First there are the digital assets or cryptocurrencies, which we already discussed in general and of which there are many. However, we have reduced this population down to a usable quantity for analytical and discussion purposes by reducing the market to the top 25 and ignoring the effects of ICO’s on the market. Next to be discussed is the user base, which is a generalization for investors, holders, developers, traders, speculators and the consumer marketplaces. Some of these markets are more developed than others as more people learn the benefits of cryptocurrency, the blockchain and distributed ledger technology.

As both sides of the markets have grown we will examine the effect of exchanges and how this third component enables the other two components to interact much like how a third leg is necessary to the utility and stability of a stool. These virtual cryptocurrency exchanges have many similarities to the stock market as both represent an asset the basis of which are distinct and separable, frequently representing commodities or utility previously considered intangible.

Demographics of the User

Is it possible to identify the “average” or “normal” user, and thus be able to establish some trends or behaviours that can be predicted? Let us explore this concept further.

One Bloomberg News article found online mentions a survey which found 5% of 5700 adults surveyed owned Bitcoin.

Nearly 60 percent of Americans have heard or read about the world’s largest cryptocurrency, according to a joint SurveyMonkey and Global Blockchain Business Council poll of more than 5,700 adults conducted in January. But only 5 percent of people actually own the digital coin.

Those few Bitcoin investors are of a fairly consistent demographic. An overwhelming 71 percent of them are male. The majority — 58 percent — are young, between the ages of 18 and 34 years old. And unlike the broader U.S. population, nearly half of them are minorities. (3)

Another survey is more thorough providing demographics on users interviewed in their surveys. It also provides interesting feedback as to the nature of existing resistance to adoption as seen below in Figure 2. Something which should be paid particular interest.

Finder

Figure 2. Table of Reasons – Resistance to CryptoCurrency Adoption

Other interesting demographic information can be examined such as age groups, gender, income level and ethnicity of those surveyed may provide useful information. For example who are those most likely to invest in Bitcoin or other Cryptocurrencies? This survey compares Millennials, Gen X and Babyboomer generations.

Millennials and Generation X

A similarity between the results of the Finder survey and the survey by LENDEDU is that Millennials are the largest group invested in cryptocurrency followed by Generation X.

The survey by Finder found that among those who purchased cryptocurrency there are:

  • 17.21 percent of Millennials surveyed,

  • 8.75 percent of Generation X surveyed.

Finder

Figure 3. Table of Crypto Investors by Age Group (4)

 

Summary Comments – Part 1

In order to make sense of our examination of the cryptocurrency market we have used scientific methods of reduction to group together data in meaningful ways and thereby reducing workloads. The generalizations, rules or assumptions are that the market is fairly well represented by the movements of the top 25 listed cryptocurrencies, and that ICO’s are a separate market which has little effect on the main market.

The current model is a spreadsheet analysis of price and total market capitalization of the top 25 cryptocurrencies as listed on Coinmarketcap.com for a particular time period. Cycles in capitalization may be uncovered through data analysis. Also opportunities in markets and penetration. Current surveys indicate populations which require more attention and information for wider adoption which are useful for marketing campaigns.

 

Part 2 (To be Continued)

  • Trading Exchanges and Price Movements
  • Whales and Institutions
  • Trading Levels, Trust and the Nash Equilibrium
  • Time Frames, Cycles and Risk
  • Geographical and Geopolitical Factors

 

References:

  1. navigating-the-brave-new-world-of-cryptocurrency-and-icos
  2. weekly-market-cap-surges-50-billion-cryptocurrency-prices-continue-to-rise/
  3. a-look-at-who-owns-bitcoin-young-men-and-why-lack-of-trust
  4. how-many-americans-really-own-crypto-skewed-results-of-polls-and-surveys

 

 

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Market Sentiment Analysis of Candlestick Charts

Author: Duane M. Tilden, P.Eng.                       Date: June 23, 2018

To become a successful trader in markets, such as cryptocurrency trading, one has to develop strategies which will give them the greatest probability of success, or for most, a profit.

How much risk and reward is up to every trader, as well as the selection of digital assets held and quantity. There are short, medium and long term goals and various methods of achieving each one of these objectives.

One tool that is very useful for developing short term trading strategies which can return a profit to the trader, is understanding Candlestick charts.

Figure 1: Anatomy of a Candlestick (1)

Anatomy of a candlestick

For reading and developing trading strategies, understanding the mechanics of a candlestick chart can lead to opportunities in trading assets to maximize ROI (return on investment), or to determine when to buy and sell assets.

How to Read a Single Candlestick (2)

Each candlestick represents one day’s worth of price data about a stock through four pieces of information: the opening price, the closing price, the high price, and the low price. The color of the central rectangle (called the real body) tells investors whether the opening price or the closing price was higher. A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure. The lines at both ends of a candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow shows the stock’s highest price for the day and the lower shadow shows the lowest price for the day.

Bearish and Bullish Candlesticks

A candlestick represents the price activity of an asset during a specified timeframe through the use of four main components: the open, close, high and low.

The “open” of a candlestick represents the price of an asset when the trading period begins whereas the “close” represents the price when the period has concluded. The “high” and the “low” represent the highest and lowest prices achieved during the same trading session.

There is much more to reading and understanding candlestick charts than is covered here. This brief has informational links to where more information on patterns and indicators, and advice on how to use these patterns to make decisions in trading.

Bottom Line (2):

Investors should use candlestick charts like any other technical analysis tool (i.e., to study the psychology of market participants in the context of stock trading). They provide an extra layer of analysis on top of the fundamental analysis that forms the basis for trading decisions. We looked at five of the more popular candlestick chart patterns that signal buying opportunities. They can help identify a change in trader sentiment where buyer pressure overcomes seller pressure. Such a downtrend reversal can be accompanied by a potential for long gains. That said, the patterns themselves do not guarantee that the trend will reverse. Investors should always confirm reversal by the subsequent price action before initiating a trade. (Read more in Candlestick Charting: Perfecting The Art)

References:

  1. crypto-trading-101-beginners-guide-candlesticks/
  2. using-bullish-candlestick-patterns-buy-stocks

Microgrids and the Blockchain – Transforming the Energy Supply

Author: Duane M. Tilden, P.Eng.           Date: June 10, 2018

In the transition from the centralized utility is the development of the Micro-grid.  The Micro-grid offers many benefits to society, including; (a) use of renewable energy sources that reduce or eliminate the production of GHG’s, (b) increases in energy efficiency of energy transmission due to shortening of transmission distances and infrastructure, (c) improved municipal resilience against disaster and power reductions, and finally, (d) promotion of economic activity that improves universal standard of living. (1)

The Brooklyn Microgrid Experiment

A Network of Energy Cells (2)

In order to be successful, blockchain platforms and microgrids require a regulatory framework. In New York State, such a framework is provided by “Reforming the Energy Vision” (REV). The platform’s objectives are to minimize the vulnerability of the power supply system that became visible during Hurricane Sandy, to use more sources of renewable energy, and to reduce costs.

The Brooklyn Microgrid is a good test case for these objectives. “A microgrid is a nucleus that sets the stage for an energy future consisting of networks of energy cells,” says Stefan Jessenberger from Siemens’ Energy Management Division. “Blockchain also supports this process, because it makes it much easier to conduct energy trading within cells.”

Siemens Digital Grid, next47, and LO3 Energy all believe in the potential of blockchain-based microgrids, because this technology can be used wherever there are decentralized energy sources. “Our experiences with the Brooklyn Microgrid will certainly flow into future projects,” says Kessler.

 
Image #1: A Canal in Brooklyn, New York (5)

The Future is Now

But something else is happening to the grid as energy generation changes – the rise of microgrids. These smaller grid systems are linked to localised power sources, often referred to as “distributed generation” sources. For example, a handful of buildings in a city with their own solar panels might be connected to nearby residences.

In fact, that is exactly the model that LO3 Energy has experimented with in its Brooklyn Microgrid project. Customers signed up to it can choose to power their homes via a range of local renewable energy sources. People with their own solar panels can sell surplus electricity to their neighbours, for example. It’s a peer-to-peer network for electricity.

To ensure that accurate records of these transactions are kept, LO3 has opted to use blockchain distributed ledger technology. This means the microgrid’s accounting is decentralised and shared by everyone on the network.

“It’s virtually unhackable,” says founder and chief executive Lawrence Orsini, explaining that tampering with these records is almost impossible because of the fact that everyone has their own, regularly updated copy of the ledger.

LO3 is now rapidly expanding with a series of other projects around the world. One is based in South Australia, where Orsini explains there is already a lot of distributed generation going on – and plenty of grid stability issues. Users can now experiment with LO3 to get access to electricity from solar-fuelled batteries nearby when needed. (3)

Physical and Virtual Microgrids

Challenging the traditional electrical supply model are microgrids. The “microgrid” term normally refers to a localised grid that can disconnect from the main grid and operate autonomously. It uses local sources of energy to serve local users, integrating the supply of energy from various producers, including local power generators and providers of renewable energy such as solar power. Consumers with their own energy production capabilities (wind turbines or solar energy systems) can sell their surplus energy production back to peers in the microgrid, on a pay-per-use basis (becoming ‘prosumers’).

While physical microgrids are still rare, we do observe the development of virtual microgrids using peer-to-peer energy trading. Blockchain is just one element in the transformation of electricity supply, providing Distributed Ledger Technology (DLT) to members of a peer-to-peer energy network, or microgrid. It offers [or ‘provides’] a reliable, lower-cost digital platform for making, validating, recording and settling energy transactions in real time across a localised and decentralised energy system.

With increasing demand for more flexible energy supplies we expect a continued increase in the number of virtual microgrids and a gradual movement towards true, physical microgrids along 4 stages […] (4)

“This project…, is the first version of a new kind of energy market, operated by consumers, which will change the way we generate and consume electricity.”
New Scientist (5)

References:  

  1. microgrid-as-a-service-maas-and-the-blockchain/
  2. smart-grids-and-energy-storage-microgrid-in-brooklyn
  3. http://www.wired.co.uk/article/microgrids-wired-energy
  4. energy-and-resources/articles/will-microgrids-transform-the-marke.html
  5. http://brooklynmicrogrid.com/

Game Theory and Markets: Schelling Points and The Nash Equilibrium

Author: Duane M. Tilden, P.Eng.        Date: June 10, 2018

Prologue:  It’s been a few weeks since my last blog post as I have been quite involved in other matters. As part of my work involves research and learning I would like to organize some of my discoveries and thoughts and relate them further by curation and publication on my blog.

Some things that I have been aware of it seems to me, intuitively, are rules which have been previously codified by others. Two now under examination are named after their discoverer’s respectively; Schelling Points and The Nash Equilibrium.  These ideas have profound implications in various forms of trade, microeconomics, macroeconomics, and cryptoeconomics.

Schelling or “Focal” Points

In the study of crowds or markets as an example we will find that there will be a tendency of people to gravitate towards the familiar in the absence of information. Such information is useful in the study of how people tend to behave. This information can also used to make optimal choices between two or more people in games of strategy whether between strangers where the others’ choice is unknown, or between friends or groups who may be more predictable in behaviour.

Image result for grand central station new yorkImage 1:  Grand Central Terminal turned 100 years old in 2013. Photo: Buck Ennis

In my own study of markets and their behaviour it is noticeable that one can postulate certain cycles based on common patterns where conflicts for disposable income can affect the movement of capital in and out of the market. I find that this is very similar to what has been found by Thomas Schelling and is also known as “focal points”.

Image result for thomas schellingImage 2: Thomas Schelling received his Ph.D. from Harvard in 1946 and joined the Harvard faculty in 1958. Photo by Martha Stewart

Thomas Schelling, the Nobel-winning game theorist … found in an informal survey that many of his students tended toward the same answer when posed this question about New York City: they would wait under the clock in Grand Central Station at 12 noon, hoping their partners had the same idea.

He introduced this concept in his 1960 book The Strategy of Conflict as a “focal point” – a solution to a coordination problem that somehow stands out as the natural answer even if the participants don’t have a chance to arrange it beforehand. Schelling argued that people’s apparent ability to coordinate without communicating was key to understanding how real-life strategic games are solved.

As game theory has developed in the decades since, Schelling’s ideas about focal points have been rarely studied, partly because the existence of focal points was perceived more as a mysterious, sociological phenomenon rather than an economic one amenable to analysis.

Schelling argued that people’s apparent ability to coordinate without communicating was key to understanding how real-life strategic games are solved.

Schelling himself said trying to determine the focal point of a game analytically is like trying to use a computer to understand whether a joke will be funny – it depends on cultural context and the relationship of the people trying to coordinate. Even the classic Schelling focal point of Grand Central might not apply if you asked different groups of New Yorkers who lived in different parts of the city or never took the trains that pass through the station.

The Nash Equilibrium

The Nash Equilibrium is a basic solution set which can be identified in every day life through some observation. One of the better examples it the driver matrix on a two-way street, where the optimal solution is for both drivers to drive on the left hand or right hand side of the road. If not, then a collision will likely result as both cars will be moving in opposing directions head-on.

Generally speaking one can view this equilibrium as an expectation that in various scenario’s where a choice is required, the person will behave in their own best interests. Understanding this concept is essential to how incentives work in an economy and how such incentives can be used to modify a person’s behavior, whether in a game, company, group, or a market.

Nash Equilibrium is a term used in game theory to describe an equilibrium where each player’s strategy is optimal given the strategies of all other players. A Nash Equilibrium exists when there is no unilateral profitable deviation from any of the players involved. In other words, no player in the game would take a different action as long as every other player remains the same. Nash Equilibria are self-enforcing; when players are at a Nash Equilibrium they have no desire to move because they will be worse off.