Cardano VS Bitcoin: where might we go based on relative strength
A fundamental rule of cryptocurrency is that when bitcoin moves, the whole market moves with it. This is called a correlated market. We see this in stocks, with large companies like Apple or Amazon moving in tandom with index funds like the S&P and NASDAQ. There is a whole host of reasons for this, but within Cryptocurrency there are two primary drivers (along with a million others!):
1: Most market participants use bitcoin as an onboarding asset, first buying bitcoin then using this to buy any service/asset within the space.
2: Within an extremely high risk market, bitcoin arguably has the least amount of risk attached to it. If bitcoin is signalling market weakness and so high risk of losing capital invested in the space, market participants are much less likely to leapfrog bitcoin and jump into a significantly higher risk space like altcoins.
Whatever the reason behind why this happens, this simple correlation tells us a few things:
A) If bitcoin is strong, and an altcoin is weak, money is flowing into bitcoin but not into that altcoin.
B) If bitcoin is strong and an altcoin is strong, money is flowing into bitcoin AND the altcoin.
C) If bitcoin is weak, and an altcoin is strong, EVEN THOUGH capital is flowing out of the safetest crypto, capital is still flowing into the altcoin.
With this, we can begin to paint a picture of strength that an altcoin might have, and so where it might go in the future.
In trading, the chart represents the total knowledge of all market participants. For every one person buying bitcoin because of XXX reason, there is often someone who is selling while thinking XXXX. Charts represent this tug and pull between all market participants and so is a visualised representation of this process over time. Importantly, it gives us insight into how the majority of market participants, and crucially market makers, are acting WITHOUT requiring us to know why, and so we can gain probabilities of certain outcomes based on these footprints in the sand. If we apply the above A/B/C understanding, we can being to paint a picture of where money is flowing and so add to our statistical probability of being on the right side of a trade.
This chart shows Bitcoin (as an orange line) vs Cardano and looks at gaining that knowledge from the behaviour of market participants while considering relative strength between the two. I have noted each major point with a correlating number on the chart, so let's dive into this:
1: At the start of 2021 until May 2021, bitcoin was strong and ADA was strong, so not only was the market interested in cryptocurrency as a whole, but also interested in whatever cardano had to offer. We don't need to know what fundamentals were driving market participants we just need to note how cardano acted while capital was flowing into the space. In fact, at the end of this period cardano even attempted to break higher while bitcoin was in the process of starting a correction.
This was a sign of strength as it showed:
A) market participants were interested in buying the alt when there was interest in the entire cryptocurrency space,
B) even when the primary asset was correcting (at least until bitcoin broke some major supports), market participants wanted cardano.
Noting the above, it was reasonable to have added Cardano to your portfolio during the May correction as it had demonstrated strength.
2: Often times, market makers follow strict internal procedure that dictates allocation of capital given to each asset held within a portfolio. This means that unlike the herd (or dumb money) who's primary driving force is greed, market makers (or smart money) take profit readily as part of their trading habits. We don't need to know why exactly, but often one of these areas where we can see a footprint of this smart money/market makers operating is between the 61% and 78% Fibonacci levels measured from an assets swing low relative to its high.
Putting this together with the above knowledge, we see that in September bitcoin reached this interesting area of 61-78% fib and corrected, whereas cardano reached this area and did not. Instead cardano broke through the area where market makers traditionally profit take and pushed to all-time highs. Again, this gives us little clues as to what market participants are thinking and allows us to understand the context we are trading in. Here, by breaking to all-time highs cardano told us:
A) More money is flowing into cardano than bitcoin
B) Market markers / smart money profit taking was overcome by buy side pressure.
This tells us that Cardano was very strong.
Expressed in a more technical way, while the primary asset was ranging (oscillating between two price areas, with bitcoin this was 65k and 30k), cardano seemed to be trending bullish. This means probability favours bullish price action and so there is more of a chance that a bullish trade will be profitable than not in the future.
3: And it was with this tasty conclusion in my back pocket, I looked to buy ADA. Yet what happened next? A trend is nothing more than a majority of market participants being interested in buying an asset than those selling it. While buyers and sellers may tug and pull price so it oscillates up and down, generally it heads more up than down in a bullish trend. With this in mind, in a trending asset it's often that pullbacks rarely exceed 21-38% (and in some extreme cases 50%) measured using the Fibonacci tool. The depth of these pullbacks tells us how strong the trend is - shallow pullbacks = less people interested in selling and more people willing to buy the asset at a higher price, while deep pullbacks often indicate sellers are strong. Both of these scenarios shift probability of continued trending price action and so we can say that a deeper pullback suggests that further trending behaviour is less likely OR will be less extended. Crucially with a trend, we assume the trend will continue UNTIL the chart proves that wrong - who knew that the major stock markets would trend bullish to such high levels after covid? No one knows when a trends will end so stick with it as "the trend is your friend".
4: Knowing what we know from point 3, and applying our relative strength understanding with bitcoin we can see an early warning sign emerged that cardano may not have been as bullish as September price action suggested. Not only did it pull off its highs much harsher than bitcoin (meaning the pullback was deeper and so sellers more active), but when bitcoin rallied hard going into October, cardano failed to follow, instead just holding onto a key resistance level and not reactivating its bullish trend. This told us that market participants were simply not interested in buying cardano EVEN WHEN the whole crypto space was celebrating bitcoin breaking new all-time highs and so any correction in bitcoin would likely be felt harder by cardano. Had cardano still had the interest by market participants that it had in September, it should have followed the grey path indicated at (4a).
5: This early warning sign began to paint the picture of what COULD have come after. While there are always exceptions to the rule (sometimes alts that don't do anything while bitcoin is chugging higher explode upwards after a while) a profitable trader only acts in probability. Over the course of their life, if they can ensure they are 51% profitable in trades, they are guaranteed to make money. The professional trader does not care for moon shots or lottery tickets, only about putting the odds in their favour. And so with the shift in relative strength showing us that cardano was acting weak against bitcoin, probability began shifting in favour of more bearish action in the future. Going back to the rating system at the start of this post, cardano went from being a (B) If bitcoin is strong and an altcoin is strong, money is flowing into bitcoin AND the altcoin to a A) If bitcoin is strong, and an altcoin is weak, money is flowing into bitcoin but not into that altcoin. As such, when bitcoin decided to correct and money flowed out of the market, cardano was significantly affected by this, breaking a key support and pulling back well beyond what is expected in a bullish trend.
So what now?
Market favour has shifted away from cardano. Not only has it shown us that it is weak even when people are interested in crypto and bitcoin is going up, it also showed us that we are most likely not trending bullish as the pullback has been extremely deep and we have failed to reactivate bullish since. With this we can understand the context and probability of what each future potential path (bullish or bearish) might hold in the future.
Will Cardano break all-time highs and skyrocket to a trillion? This is less likely to happen.
Will Cardano break its all-time highs? It has demonstrated a lot of interest in the past so there is still a relatively high probability of this happening as buyer have been interested in the asset BUT we can't ignore what cardano has recently done (been very weak)
Will Cardano break the $1 key support? Probability says this is likely IF bitcoin continues lower.
Conclusion = While evidence showed cardano to be a strong asset prior to coming off its September highs compared to bitcoin, recent price action suggests that the market is not interested in the asset anymore and has begun putting capital elsewhere. We can use this information to paint in the background to any trades we want to take and to demonstrate just how important it is to WAIT for moves to finish before jumping in (I see you people that fomo into coins)- E.G:
With no understanding of context: "I am buying Cardano because it will go to $10!!!!!" = X wrong - the probability of this happening based on past price action is extremely unlikely.
With an understanding of context: "I am buying Cardano but know that it has been weak and so 1: my stoploss takes this weakness into account; if it breaks $1 I will exit because I can see that realistically it is becoming weak so probability favours it becoming weaker in the future and so a break of a key support increases the likely hood of further downside. 2: my expectations of profits are reasonable and low so I won't be greedy. While it might break to an all-time high at some point in the future, this is not highly probable and so I will take profits at lower levels.
Thank you for your time,
P.
1: Most market participants use bitcoin as an onboarding asset, first buying bitcoin then using this to buy any service/asset within the space.
2: Within an extremely high risk market, bitcoin arguably has the least amount of risk attached to it. If bitcoin is signalling market weakness and so high risk of losing capital invested in the space, market participants are much less likely to leapfrog bitcoin and jump into a significantly higher risk space like altcoins.
Whatever the reason behind why this happens, this simple correlation tells us a few things:
A) If bitcoin is strong, and an altcoin is weak, money is flowing into bitcoin but not into that altcoin.
B) If bitcoin is strong and an altcoin is strong, money is flowing into bitcoin AND the altcoin.
C) If bitcoin is weak, and an altcoin is strong, EVEN THOUGH capital is flowing out of the safetest crypto, capital is still flowing into the altcoin.
With this, we can begin to paint a picture of strength that an altcoin might have, and so where it might go in the future.
In trading, the chart represents the total knowledge of all market participants. For every one person buying bitcoin because of XXX reason, there is often someone who is selling while thinking XXXX. Charts represent this tug and pull between all market participants and so is a visualised representation of this process over time. Importantly, it gives us insight into how the majority of market participants, and crucially market makers, are acting WITHOUT requiring us to know why, and so we can gain probabilities of certain outcomes based on these footprints in the sand. If we apply the above A/B/C understanding, we can being to paint a picture of where money is flowing and so add to our statistical probability of being on the right side of a trade.
This chart shows Bitcoin (as an orange line) vs Cardano and looks at gaining that knowledge from the behaviour of market participants while considering relative strength between the two. I have noted each major point with a correlating number on the chart, so let's dive into this:
1: At the start of 2021 until May 2021, bitcoin was strong and ADA was strong, so not only was the market interested in cryptocurrency as a whole, but also interested in whatever cardano had to offer. We don't need to know what fundamentals were driving market participants we just need to note how cardano acted while capital was flowing into the space. In fact, at the end of this period cardano even attempted to break higher while bitcoin was in the process of starting a correction.
This was a sign of strength as it showed:
A) market participants were interested in buying the alt when there was interest in the entire cryptocurrency space,
B) even when the primary asset was correcting (at least until bitcoin broke some major supports), market participants wanted cardano.
Noting the above, it was reasonable to have added Cardano to your portfolio during the May correction as it had demonstrated strength.
2: Often times, market makers follow strict internal procedure that dictates allocation of capital given to each asset held within a portfolio. This means that unlike the herd (or dumb money) who's primary driving force is greed, market makers (or smart money) take profit readily as part of their trading habits. We don't need to know why exactly, but often one of these areas where we can see a footprint of this smart money/market makers operating is between the 61% and 78% Fibonacci levels measured from an assets swing low relative to its high.
Putting this together with the above knowledge, we see that in September bitcoin reached this interesting area of 61-78% fib and corrected, whereas cardano reached this area and did not. Instead cardano broke through the area where market makers traditionally profit take and pushed to all-time highs. Again, this gives us little clues as to what market participants are thinking and allows us to understand the context we are trading in. Here, by breaking to all-time highs cardano told us:
A) More money is flowing into cardano than bitcoin
B) Market markers / smart money profit taking was overcome by buy side pressure.
This tells us that Cardano was very strong.
Expressed in a more technical way, while the primary asset was ranging (oscillating between two price areas, with bitcoin this was 65k and 30k), cardano seemed to be trending bullish. This means probability favours bullish price action and so there is more of a chance that a bullish trade will be profitable than not in the future.
3: And it was with this tasty conclusion in my back pocket, I looked to buy ADA. Yet what happened next? A trend is nothing more than a majority of market participants being interested in buying an asset than those selling it. While buyers and sellers may tug and pull price so it oscillates up and down, generally it heads more up than down in a bullish trend. With this in mind, in a trending asset it's often that pullbacks rarely exceed 21-38% (and in some extreme cases 50%) measured using the Fibonacci tool. The depth of these pullbacks tells us how strong the trend is - shallow pullbacks = less people interested in selling and more people willing to buy the asset at a higher price, while deep pullbacks often indicate sellers are strong. Both of these scenarios shift probability of continued trending price action and so we can say that a deeper pullback suggests that further trending behaviour is less likely OR will be less extended. Crucially with a trend, we assume the trend will continue UNTIL the chart proves that wrong - who knew that the major stock markets would trend bullish to such high levels after covid? No one knows when a trends will end so stick with it as "the trend is your friend".
4: Knowing what we know from point 3, and applying our relative strength understanding with bitcoin we can see an early warning sign emerged that cardano may not have been as bullish as September price action suggested. Not only did it pull off its highs much harsher than bitcoin (meaning the pullback was deeper and so sellers more active), but when bitcoin rallied hard going into October, cardano failed to follow, instead just holding onto a key resistance level and not reactivating its bullish trend. This told us that market participants were simply not interested in buying cardano EVEN WHEN the whole crypto space was celebrating bitcoin breaking new all-time highs and so any correction in bitcoin would likely be felt harder by cardano. Had cardano still had the interest by market participants that it had in September, it should have followed the grey path indicated at (4a).
5: This early warning sign began to paint the picture of what COULD have come after. While there are always exceptions to the rule (sometimes alts that don't do anything while bitcoin is chugging higher explode upwards after a while) a profitable trader only acts in probability. Over the course of their life, if they can ensure they are 51% profitable in trades, they are guaranteed to make money. The professional trader does not care for moon shots or lottery tickets, only about putting the odds in their favour. And so with the shift in relative strength showing us that cardano was acting weak against bitcoin, probability began shifting in favour of more bearish action in the future. Going back to the rating system at the start of this post, cardano went from being a (B) If bitcoin is strong and an altcoin is strong, money is flowing into bitcoin AND the altcoin to a A) If bitcoin is strong, and an altcoin is weak, money is flowing into bitcoin but not into that altcoin. As such, when bitcoin decided to correct and money flowed out of the market, cardano was significantly affected by this, breaking a key support and pulling back well beyond what is expected in a bullish trend.
So what now?
Market favour has shifted away from cardano. Not only has it shown us that it is weak even when people are interested in crypto and bitcoin is going up, it also showed us that we are most likely not trending bullish as the pullback has been extremely deep and we have failed to reactivate bullish since. With this we can understand the context and probability of what each future potential path (bullish or bearish) might hold in the future.
Will Cardano break all-time highs and skyrocket to a trillion? This is less likely to happen.
Will Cardano break its all-time highs? It has demonstrated a lot of interest in the past so there is still a relatively high probability of this happening as buyer have been interested in the asset BUT we can't ignore what cardano has recently done (been very weak)
Will Cardano break the $1 key support? Probability says this is likely IF bitcoin continues lower.
Conclusion = While evidence showed cardano to be a strong asset prior to coming off its September highs compared to bitcoin, recent price action suggests that the market is not interested in the asset anymore and has begun putting capital elsewhere. We can use this information to paint in the background to any trades we want to take and to demonstrate just how important it is to WAIT for moves to finish before jumping in (I see you people that fomo into coins)- E.G:
With no understanding of context: "I am buying Cardano because it will go to $10!!!!!" = X wrong - the probability of this happening based on past price action is extremely unlikely.
With an understanding of context: "I am buying Cardano but know that it has been weak and so 1: my stoploss takes this weakness into account; if it breaks $1 I will exit because I can see that realistically it is becoming weak so probability favours it becoming weaker in the future and so a break of a key support increases the likely hood of further downside. 2: my expectations of profits are reasonable and low so I won't be greedy. While it might break to an all-time high at some point in the future, this is not highly probable and so I will take profits at lower levels.
Thank you for your time,
P.