Bitcoin Bulls, Beware Of Fractal Dimension! (1208 Gmt) 06-Jan-216 Jan 2021 13:58
Bullish on Bitcoin? Can't blame you – the world's biggest cryptocurrency just crossed $35,000 on Wednesday, which already puts it up 20% in the first week of the year.
But at least one indicator is flashing a warning sign, suggesting the blistering rally may be on its last legs. Oh, and it has an intriguing name: fractal dimension.
Eyes glazing over? Not to worry. Fractal dimension is simply an indicator that attempts to capture trend reversals.
"What it tries to measure is when the investment horizon of short-term traders and long-term traders pretty much coincide – when they start to have exactly the same views," says Mathieu Savary, global macro strategist at BCA Research.
Savary explains that fractal dimension is essentially a ratio of short-term volatility of an asset price annualized versus a longer-term measure of volatility of returns.
When the ratio reaches a point when long-term shocks and short-term shocks are almost equal mathematically, it indicates that both the short-term traders and the more long-term investors are taking the same position.
This "increases the risk that you get a market trend reversal, because essentially everybody is just positioned in the same direction and there is no more market," Savary says.
BCA notes that with a reading near 1.25, the indicator is "signalling prevalent groupthink behaviour, which trends to lead to a trend reversal." Bitcoin bulls beware!