Making sense of the BitCoin price fluctuations with Bollinger Bands

BitCoin price fluctuations with Bollinger Bands


A massive rise in the worth of BitCoin was observed recently. During its meteoric rise BitCoin’s value was increased from $9,000 to $20,000 in just a few days. But that’s not it. It was also followed by a rapid decline to 16,000$. Such massive fluctuations happened over a span of just a few days.

In financial jargon – we call it a very volatile financial instrument.

BitCoin is actually a cryptocurrency which came into existence in the year 2009. From there on, its worth is continuously increasing. BitCoin is not backed by any gold standard or supported by any government which makes it a pretty volatile currency. Its price depends solely upon the market exchange behavior consisting of merchants and traders.

BitCoin has specific benefits like anonymity, ease of transference and management. Therefore, it is used by a lot of people over the internet. Most transactions happen because of the ease of transaction as mentioned above. A lot of other people use it because of its promise of anonymity. But there is no denying a significant portion of BitCoin transactions for buying of illegal goods.

A key “feature” or restriction of the BitCoin infrastructure is that the designers of this cryptocurrency have put a hard limit on the number of BitCoins which can be “mined” or produced globally. That number is only 21 million. Once 21 million BitCoins are in existence – it will be impossible to mine more of them. So the effect of this limit is that there be only a tangible number of BitCoins available for all of humanity to own. Similar to the land, gold or other limited resources – this scarcity causes a massive increase in the perceived value of the commodity. In anticipation of this growth, the value of BitCoin is already continually increasing. As a result of this, people have started using BitCoin not just as a currency but also as a potential investment.



So in a sense, BitCoin is similar to any precious metal like gold. At the same time, BitCoin significantly differs from the usual fiat currencies not being backed by any government or organization etc. Its worth, like gold, depends upon the supply and demand for it in the market. Therefore, there are massive fluctuations and volatility issues arise with it.
BitCoin, despite its randomness, can still be subjected to technological analysis. Bollinger bands, developed by John Bollinger, are volatility bands place above and below a moving average. They can be employed to observe changes in the worth of BitCoin. These bands depend upon the standard deviations of the underlying price or value of the financial instrument. As moth Math enthusiasts know – standard deviation rises when there are huge fluctuations in the data values and falls when the values or more or less similar or stagnant. Thus these Bollinger bands widen with increasing volatility and contract into very tight channels when volatility decreases.

Bollinger bands consist of three bands namely upper band, lower band and middle band. The middle band is the simple moving average of closing prices of last 15-20 days. The upper band is the sum of SMA and a standard deviation value. A factor controls this standard deviation value (or parameter) called the SD multiplier. Financial analysts generally use an SD multiplier of 2. On the other hand, in case of the lower band this term of standard deviation is subtracted from SMA.

These Bollinger bands are designed to engulf 80-90 % of the price range. The price line of most commodities and securities in the world exists within their respective ranges of lower and upper Bollinger bands. The behavior of price change within the boundary of Bollinger bands is studied by the path it takes. However, the significant event to observe is when this path crosses upper or lower band. Understanding of these factors helps us in predicting the behavior of price in coming future.

Here is a graph which plots the recent price activity in BitCoin along with two sets of Bollinger bands.

BitCoin price fluctuations

  • Here the black line represents the path of BitCoin.• Here the black line represents the path of BitCoin.
  • The red dotted line represents the simple moving average line.• The orange line represents upper and lower bands with S.D multiplier of factor 2.
  • The red line represents upper and lower bands with S.D multiplier of factor 3.

You can see clearly the astounding fluctuations in price and that the worth of BitCoin rose from just about $900 to $20,000 in a short period of a year. The path taken by BitCoin price during this journey is not a smooth line. It was full of ups and downs. The places where it rose up and even crossed the upper orange line were spots where it was overbought. Conversely, the areas where it fell and touched or crossed below the lower orange line were spots where it was oversold. You can see when these events occur – shortly after that – the price is kicked back in the opposite direction to a more normalized price range (before continuing on with the overall uptrend). We call this phenomenon mean reversion.

Whether BitCoin (or any other commodity or security) is oversold or overbought doesn’t predict anything about the immediate future. However, by acute observations and right timing – we can keep track of some unique patterns. And use these events as signals to increase our chances to stay on the right side of the price action. Some of these price patterns have some obvious names like W-bottoms, M-tops. And others are more obscure like support, resistance and continuous behavior of path are important signals in this case.

M-tops signals a decline in price after a sharp increase as is happening right now these days and can be seen in the graph.

– It started with a base price of about $10,000
– and rose to $17,000
– and then dropped to $15000
– and then rose to $20,000
– and then dropped $12,000$.

Thus the price action moved in a pattern resembling the letter M. This M-top pattern is a sign of a reversal of trend. In the case of BitCoin, however, it is enjoying in an overall uptrend for a long time. If that trend is to continue, then these M-tops can be used as suitable signals for investment. When the price of BitCoin decreases – one can potentially benefit from them.

Before you go out there and invest your last penny based on these signals – you really need to study these patterns carefully and make your assessments. Investing in volatile instruments like BitCoin can be very unpredictable and can affect your bank account and net worth in a negative way. That was my statutory disclaimer.

The long-term trend is the most important consideration while making a decision about investing in a commodity or security. Once you are convinced of the long-term trend – then you can fine-tune your investments and trading decisions based on these signals or patterns.

If a value is crossing below the lower band time after time or stays below the lower Bollinger band – that may be an excellent opportunity to buy or invest more. Because from experience, we know prices do not remain below the lower Bollinger bands for long.

However, if the price stays above the SMA strong and steady and rarely meet the lower Bollinger band, the chances are pretty high that it will continue to rise. In the case of BitCoin, it can be observed the price range surged up, kissed to the upper band time after time in recent months, before retreating a bit to the middle SMA level.

During this period, it did cross below the lower band on occasion, but those occurrences are rarer when compared to the price crossing up through upper Bollinger bands. The dotted line of SMA behaved as the support most of the time. These all are clear signs of a long-term upward trend.

Another critical signal to consider is the W-bottom. In fact, we may be witnessing this pattern right now. W-bottom is characterized by two reaction lows, before continuing higher within a long-term uptrend. This signal generally gives a perfect time to invest. The lows within this W-bottom are price points where the price is oversold, and as a result, the inherent value compared to the market price is pretty high and offers a chance of good investment.

The safety in any investment can never be estimated with certainty. However, BitCoin has been defying the odds for a long time now. This behavior of BitCoin price action may be different than most other financial instruments out there. This cryptocurrency is entirely different from most of the other instruments out there like stocks, bonds, options, etc. BitCoin is a global phenomenon and has gotten a lot of attention lately. This price action only has a snowball affect on its price. That said – these maniacal price increases often end in overinflated bubbles. The financial crash of 2008 is fresh in most people’s minds. Let’s make sure we do not get sucked into yet another bubble in 2018.

What are your views about BitCoin and other cryptocurrencies? Please comment (and like and share).

One thought on “Making sense of the BitCoin price fluctuations with Bollinger Bands”

  1. Pingback: Amit Tandan

Leave a Reply

Your email address will not be published. Required fields are marked *