The cryptocurrency market trades globally 24 hours a day. Anyone who has been watching the price of Bitcoin understands the price moves very fast. Realize that people are always driving the price changes, and people are not always rational, not always emotional, but are rarely random. Since people are driving the price, the price patterns are not random and as with all markets, the psychology of the Bitcoin market matters.
Does the Brain Influence Bitcoin Price?
People prefer round numbers. Although Bitcoin can be traded in fractions, many new people buying cryptocurrency for the first time still seek to own at least one Bitcoin. Why is that? It is because the human mind, although highly skilled at math, stores information in definitive chunks. For example, we have separate memory systems for people’s faces because that information is important enough to get its own mental database. When we think about time, we think about it in hours or days, even though time is continuous and never stops. When we think about weather, we think about it as rainy, or cloudy, or hot or cold, even though rainfall and temperature are both measured in decimals. Bitcoin price is no different and because this market is highly influenced by speculation and speculation is based on perceptions, the psychology of price influences the Bitcoin market. That hypothesis is aligned with some recent analysis I conducted. As a quick reminder, my professional training is in understanding people, not markets, but in this case, I have blended the two.
Bitcoin is not Random
Although the price moves often, Bitcoin prices also tend to sit in some locations and rest. The question is, where does the price rest most often? To answer this, I first conducted complex statistical normality testing including the Kolmogorov-Smirnov and the Shapiro-Wilk tests, and Bitcoin failed those tests. That told me that price data is not normally distributed. What does that mean? It means the price patterns are not random. Theoretically, all large randomly distributed data is normally distributed. So when a set of data is large enough to justify a normality test, and the data fails those tests, it tells the researcher the data is not random. To make my analysis more user-friendly, I turned that analysis into probability statements for you, the reader, which I discuss below.
The Probability of Stability
Using daily average Bitcoin price for the timeframe of July 2017 to July 2018, I was able to calculate how often Bitcoin’s price sits within plus or minus 10% of the $1,000 spot. If psychology was not a factor, and Bitcoin’s price was random (which you now know it is not random) the amount of time Bitcoin spends in that location would have been 20% (2 out 10). But Bitcoin does not sit within the $900 to $1,100 zone 20% of the time as random chance would predict. In fact, the amount of time Bitcoin spends in that location is actually 17.6% of the time (and random chance would have predicted 20%). So what does that mean? That means, the price movements are not random but have a pattern. So the question you should be asking yourself now is where does the price sit most often? The answer is, the price is most likely to sit in the $300 to $400 spot (e.g., $7320 is more likely than $7420 for more days of the year). How much more likely is it that the Bitcoin price will be between the $300 and $400 spot on any given day? It is about 50% more likely to be found in that range than any of the other ten spots (e.g., $7370 is more likely than $7170 or $7800). To be clear, that does not mean Bitcoin sits between the $300 and $400 lines 50% of the time (it’s actually only there 14.6% of the time). Rather, out of the ten possible spots, Bitcoin is most likely to be found between $300 and $400 than any other range. To make this a little more concrete, during the past year, Bitcoin sat in the $300 to $400 spot 53 days. The next highest spot was held 46 days, then 41 days, with the average, of course, being 36 days (365/10 = 36.5 days). Thus, in context, anything above 36 days is considered ‘above average,’ and the $300 to $400 spot is way above average!
The next question you should be asking yourself is where is the price least likely to sit? That is a really interesting finding. As it turns out, Bitcoin is about 40% less likely to sit in the $400 to $500 range than any of the other spots (e.g., $8415 is much less likely than $8710). Bitcoin held the $400 to $500 spot for just 23 days out of the past year (again, anything below 36 is below average). Bitcoin held the $400 to $500 spot just 6.3% of the past year, and that is way below average!
If you are following along, the $300 to $400 price range happens most often, and the $400 to $500 range happens least often. I am not a typical analyst. In my profession, I take hard numbers and turn them into meaningful patterns that help my clients understand the people around them. Turning these hard numbers into meaningful patterns for you, here is what I see:
In general, Bitcoin’s price seems to sit most often between $100 to $400 and $600 to $800 (the price is 45% more likely to sit in these spots on any given day).
How People Influence Bitcoin’s Price
So what does all this mean? What these patterns tell me is that when the price gets near the $500 and $1,000 spots, people probably pay closer attention because Bitcoin’s perceived value is closing in on a new milestone. As more people pay attention, they place more buy and sell orders and the price movements likely accelerate. Both the numerical price data and the way the mind works seem to agree when it comes to understanding Bitcoin price. If there is one lesson here, it is that people drive prices and psychology matters!
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