A Bitcoin Price Oscillator¶
A price oscillator combining upside percentile rankings with maximum drawdown provides a bounded cyclical indicator for Bitcoin and other asset classes. Published in 2022, this research presents a methodology for objectively identifying long-term market cycles on a scale of -100% to +100%. Applied across multiple assets, the oscillator reveals that Bitcoin's price cycles correlate most closely with equities and least with gold, undermining the argument that Bitcoin serves as a digital commodity that offsets macroeconomic risk.
Oscillators and Cyclical Indicators¶
An oscillator is a technical analysis tool that constructs high and low bands between two extreme values, then builds a trend indicator that fluctuates within those bounds. When the oscillator approaches the upper extreme, an asset is considered overbought; near the lower extreme, oversold. The literature on market cycles is extensive, with Robert Shiller's research on multiple asset markets being among the most well-known.
The difficulty lies in presenting objective metrics of peaks, valleys, and cycle duration. This oscillator offers one possible method by combining two individual components: an upside component ranging from 0 to 100% and a downside component ranging from 0 to -100%.
Methodology¶
Every oscillator begins with a trendline. This methodology uses a trendline drawn from the low end of the price range rather than approximating a centerline trend. The longest possible price series is essential, using nominal daily values.
Upside component: The trendline price at time t is calculated using the regression of lowest forward prices against the square root of time. The deviation of actual price from this trendline is then expressed as a percentile ranking across the full series, producing a value from 0% (at the trendline) to 100% (at the maximum historical deviation above trend).
Downside component: The drawdown from the most recent all-time high, ranging from 0% (at a new high) to -100% (complete loss). The combination of upside percentile and maximum drawdown on a single chart permits visualization of complete market cycles.
Bitcoin's Oscillator¶
When applied to Bitcoin, the oscillator reveals clear cyclical patterns. The upside component corresponds to the Price-to-Adoption Curve Estimate ratio published regularly, while the downside component captures the severity of corrections from peak. The oscillator identified mid-2022 as a potential cycle low based solely on historical performance patterns.
Cross-Asset Comparison¶
The same methodology applied to the S&P 500 (data from 1927), gold (from 1968), oil (from 1986), and U.S. home prices (from 1965) allows direct comparison of cyclical behavior across asset classes.
Correlations of oscillator values since 2011 show that Bitcoin has behaved most like equity (39% correlation) and least like gold (3%). Home prices and equities are moderately correlated (75%), while gold serves as a strong diversifier with low or negative correlations to most assets. Bitcoin's correlation profile strengthens the view that investors have treated it as a speculative technological innovation rather than as a digital commodity or electronic money.
Cycle Tops and Manipulation¶
There is compelling evidence that Bitcoin's cycle tops were the result of price manipulation, not macroeconomic factors. This casts serious doubt on the theory that Bitcoin cycles are driven by halving events and helps explain why supply-driven models that rely on halvings for valuation have failed.
Limitations¶
Several important caveats apply:
- Data requirements: A useful oscillator requires extremely long time series, preferably decades. Bitcoin's history is likely too short for meaningful prediction. The 10-20 year period around the Great Depression comprised a single down-market macro cycle for equities; Bitcoin's entire history may similarly represent a single up-market cycle.
- Endpoint bias: Because the upside component uses percentile rankings, new all-time highs rescale the entire historical chart retroactively.
- Manipulation distortion: The oscillator is not indicative of market-driven behavior when price has been deliberately manipulated, as has occurred with Bitcoin, silver, and other assets.
- Controlled prices: The metric is not meaningful when prices are controlled or fixed, as was the case for gold prior to 1970 and oil prior to 1986.
- Not a timing tool: This cyclical indicator is not suitable for market timing. Its utility lies in setting long-term performance expectations and informing portfolio construction.