Bitcoin by Ross #4: The Big Picture

By Ross Ulbricht

In case it isn’t abundantly clear yet, the overall trend in the price of bitcoins is up. Bitcoin started its rise from about $0.06 in late 2010 and peaked a couple of years ago at ~$20,000. Bitcoin is special in that we have its complete price history. We have a measure of its value as it went from nothing to something on its way to something big.

This fact is particularly helpful as we apply Elliot Wave analysis to this market. We have an absolute point of origin followed by a clear upward trend, so there is no question of context. What we see is not part of some unseen bigger picture. We have access to 100% of the price information (except future prices of course).

Fig. 1

What we see is a classic five-wave subdivision which I have labeled ①, ②, ③, ④ and ⑤ in Fig. 1. The circled numbers are Elliot Wave notation for primary degree waves. The labeling and naming is arbitrary, but this is the labeling typically used for waves of this duration in classic Elliot Wave analysis, so I have used it here. You will also notice an uppercase roman numeral “I” in Fig. 1. This is a label for the first wave of cycle degree (one above primary). It and wave ⑤ have questions marks next to them because we are unsure if where we placed the label is correct. (See here for a brief explanation of Elliot Wave, here for an explanation of our price charts, and here for context.)

Wave ①, the first primary wave up, has a clear five-wave subdivision, which is what we would expect from an impulse wave moving in the direction of the larger trend. These five “intermediate” waves are labeled in Fig. 2 as (1), (2), (3), (4) and (5).

Fig. 2

Wave ② is corrective (against the larger trend). Its intermediate subwaves are not clear (as is often the case with corrections), but overall it is a strong correction, erasing over 90% of the gains from wave ①.

Wave ③ does not have as clear a substructure as wave ①, but is definitely an impulse, taking the price from low single digits to over $1,000. Its impulsive subwaves also have the thrusting, exponential look of impulse waves. The tricky part here is determining exactly where one intermediate subwave ends and another begins. The way we have it labeled in Fig. 2, we have what’s called an “extended 3rd,” which is not uncommon as the 3rd wave is often the most powerful wave in an impulse. This makes intermediate waves (1) and (2) of ③ look small, compared to wave (3). Some of waves (3)’s “minor” subdivisions (1, 2, 3, 4 and 5 in Fig. 2) are even bigger than waves (1) and (2). That’s ok. First and second waves are often this way because, as they unfold, the transition to an impulse has not been recognized, and there is still latent pessimism from the previous correction suppressing prices.

Finally, let’s look at wave ④. This is a classic “zig-zag” correction with a three-wave subdivision labeled (A), (B), (C) in Fig. 2.

Waves ① through ④ are complete, so the challenge we are faced with now is analyzing wave ⑤ when we are unsure if it has finished unfolding. Counting waves in hindsight is fairly straightforward. Counting them as they develop is much more challenging, but much more rewarding. A correct count before a wave is finished puts you in a position to predict future prices.

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