Special end-of-year edition
Welcome to this special end-of-year edition of our weekly price action Bitcoin report. As always, we’ll be diving into the charts to analyze the latest market movements and uncover actionable insights for price action traders.
However, before we jump into the technical analysis, I wanted to take a moment to share some special fundamental notes that, I believe, could be particularly useful for traders. These insights address some significant market dynamics that may influence current strategies and patterns.
If you’d prefer to dive straight into the charts, feel free to skip ahead—but I encourage you to take a moment to consider these notes, as they could provide valuable context for your trading.
- Impact of institutional adoption on Bitcoin’s price dynamics:
- Asset allocation and rebalancing.
- Options trading.
- Volatility.
- What if:
- Central Banks and Treasury owning Bitcoin for its reserves.
- Price Action analysis:
- Weekly chart.
- Daily chart.
- Frameworks to profit from Bitcoin:
- The $5000 game.
- Bull trends.
Impact of Institutional Adoption on Bitcoin’s Price Dynamics
Bitcoin’s inclusion in institutional portfolios after the Bitcoin ETF approval in January, and introducing options trading late in the year, are reshaping the dynamics of its market. These developments may have significant effects on “older” strategies that have historically performed well in Bitcoin’s less structured, retail-driven market.
As institutional flows introduce new patterns driven by rebalancing cycles and risk management practices, some strategies may become less effective or even obsolete. At the same time, new opportunities are emerging, requiring traders and investors to adapt to the evolving nature of Bitcoin’s price action and market behavior.
Asset allocation and rebalancing
As asset managers begin allocating a percentage of their portfolios to Bitcoin, the cryptocurrency benefits from predictable, sustained demand. These allocations, often framed as a hedge against inflation or a diversification strategy, provide Bitcoin with a level of stability and legitimacy previously unseen.
Regular inflows from asset managers adopting Bitcoin into their portfolios create a baseline demand. This consistent buying activity, even if small relative to Bitcoin’s total market cap, exerts upward pressure over time.
During quarterly or annual rebalancing, large-scale portfolio adjustments may temporarily affect Bitcoin prices. For instance:
- If Bitcoin’s price has risen significantly, selling pressure from rebalancing might momentarily cap its upside.
- Conversely, if Bitcoin has underperformed, buying to restore allocation weights could act as a price floor.
- This cyclical activity introduces a predictable flow of capital.
Options Trading and Its Implications
The introduction of options trading for Bitcoin ETFs allows market participants to express directional views with lower capital requirements and manage risk more efficiently. This increased participation fosters liquidity, reducing bid-ask spreads and making the market more efficient.
Institutional investors use options to hedge against price volatility, stabilizing their positions and reducing downside risk. Traders use options to bet on Bitcoin’s future price, amplifying short-term price movements, especially around key expirations.
The expiration of options, typically occurring quarterly, can create localized volatility spikes, as traders adjust positions or roll over contracts. This effect, combined with institutional rebalancing cycles, introduces periodic, predictable price movements.
Volatility
Institutional participation, both through direct allocations and options trading, tends to smooth price fluctuations, as large, predictable capital flows dominate over speculative retail activity.
As Bitcoin’s volatility decreases over time, it signals a transition from an emerging, high-growth asset to a more mature one. A comparison of Bitcoin’s logarithmic chart since inception with the Dow Jones Industrial Average over the last 100 years highlights the differences in market behavior. The log scale focuses on percentage changes, which are directly tied to volatility.
As it can be observed, the Dow Jones’ long-term curve stability allows investors to anticipate eventual growth, even after extended periods of sideways action, making its future returns easier to measure. In contrast, Bitcoin’s evolving market dynamics and flattening growth curve introduce uncertainty, as its rhythm and performance are unlikely to mirror past behavior.
Despite this, Bitcoin is likely to maintain attractive risk-adjusted return metrics, although not as exceptional as in its earlier years. Its combination of decreasing draw-downs and relatively strong performance will likely outshine most other assets, continuing to attract investors seeking diversification and long-term growth potential.
As Bitcoin becomes embedded in traditional portfolios, its price movements may increasingly correlate with macroeconomic trends, such as interest rates, inflation, and equity market performance.
The integration of Bitcoin into institutional portfolios and the advent of options trading are reshaping its price dynamics in ways that price action traders may note. Quarterly and annual rebalances, along with the structured flows from options trading, bring new patterns and behaviors that could alter the previous or some of the previous ones.
What if
Central Banks and treasury owning Bitcoin for its reserves
For central banks and countries, reserves refer to assets held on their balance sheets to support their currency, manage economic stability, and provide liquidity during financial crises. Reserves are critical for maintaining trust in a country’s monetary system and ensuring economic resilience.
Reserves are essential for central banks to maintain economic stability and manage monetary policy. While traditionally composed of bonds, foreign currencies, mortgages or gold, the evolving financial landscape is prompting discussions about incorporating Bitcoin.
President-elect Donald Trump has nominated Scott Bessent, a prominent hedge fund manager known for his pro-crypto stance, to serve as the next U.S. Treasury Secretary. Bessent’s appointment signals a potential shift in U.S. financial policy, aligning with Trump’s vision to position the United States as a global leader in cryptocurrency adoption. Bessent’s nomination requires Senate confirmation. Until then, any policy shifts remain speculative. Nonetheless, his selection indicates a possible move towards embracing digital assets at the federal level.
In line with this vision, the Trump administration is considering the establishment of a Strategic Bitcoin Reserve. This initiative would involve the U.S. Treasury purchasing substantial amounts of Bitcoin, aiming to address the national debt and enhance economic stability. The proposal suggests that holding a significant Bitcoin reserve could provide the U.S. with greater financial leverage and potentially stabilize the economy.
Beyond the U.S., there is a growing discourse on the role of Bitcoin in central bank reserves globally. Advocates argue that Bitcoin’s decentralized nature, fixed supply, and increasing institutional adoption makes it a compelling asset for central banks seeking to diversify reserves and hedge against economic uncertainties.
Price Action
This week, you may notice some green bars on the charts. These are part of a custom indicator used to visually identify moments of buying strength relative to the broader context. When these bars appear, they often signal that the bulls are in control, and the market inertia tends to follow in their favor.
When trading Bitcoin on 1-hour timeframes or above, it’s worth noting that bearish strategies are challenging to systematize effectively. Bitcoin, as an asset with a long-term upward trend, naturally makes it harder to consistently execute profitable bearish strategies. Expert discretionary traders excel by mastering the art of filtering entries and exits, so they can make bearish strategies work.
Bitcoin
The Weekly chart of Bitcoin
On the weekly chart, Bitcoin has etched an Inside-Outside-Inside (IOI) setup, a breakout mode pattern. This formation holds particular significance, as it presents opportunities for trading in either direction, contingent on the resolution of the breakout.
The preceding context bolsters the potential of this setup. Bitcoin recently executed a decisive bull breakout from an eight-month trading range, signaling robust momentum. Historically, breakout mode patterns such as II, OO, or IOI that follow significant breakouts offer compelling opportunities for traders to capitalize on either trend continuation or a reversal scenario.
Detailed strategies for trading these patterns can be found in videos 15 and 16 of the Brooks Trading Course Bonus section.
The surge to the $100,000 mark can be interpreted as a buy climax, with Bitcoin’s inability to breach this pivotal resistance fortifying the bearish narrative. Bears are targeting a return to the $50,000–$70,000 range, a zone of prior consolidation and support.
Conversely, bulls aim for continued momentum. They may capitalize on a failed bear IOI setup or the activation of the IOI’s bullish side. Their aspirational target lies at $120,000, a measured move derived from the depth of the 2021–2022 major drawdown.
The IOI setup generally offers a 50% probability of success with a 2:1 reward-to-risk ratio, rendering it a great opportunity under the trader’s equation.
While a pullback toward $80,000, or even the breakout point around $75,000, is plausible, buyers are anticipated to scale in at $85,000 and lower levels. This scaled buying approach could generate sufficient upward pressure to stabilize the price.
From a tactical perspective, purchasing around $80,000 presents a superior reward-to-risk profile compared to initiating longs at the IOI breakout activation point near $100,000, where strong resistance persists.
Institutional rebalancing now plays a prominent role in Bitcoin’s price behavior. Following its substantial rally through 2024, institutions may pare down their Bitcoin holdings at year-end or early 2025 to align with predefined allocation targets. This rebalancing activity introduces potential selling pressure that traders may factor.
Considering the discussed elements, the current outlook leans toward sideways to down price action in the short to medium term.
The Daily chart of Bitcoin
On the daily chart, Bitcoin has traced a two-leg sideways-to-down pattern following the formation of a wedge top. This second leg has culminated in what could become a lower high, leading to the emergence of a Head and Shoulders Top (HST) pattern.
Bears have already met their initial target post-wedge top: the low of the third leg, which marked the last buy climax before the reversal. Given the preceding strong bull trend, the market is more likely to transition into a trading range than a sustained bear trend, provided the upward momentum halts.
Sustained bearish scenarios remain improbable, though a test of support around $74,000 could materialize as a climatic move.
Bulls are strategically positioning to buy on declines, starting at $85,000 and scaling in at lower levels. This approach aligns with the broader bullish context and the expectation of buying interest emerging at key levels.
While some bulls perceive the current level as a potential bottom and are initiating purchases, it is generally precarious to buy within a topping pattern.
For bears, re-engaging short positions near this week’s high is unlikely, especially if the price ascends directly from a double bottom with this week’s low. However, they may opt to place limit sell orders around $105,000, with stops positioned above $110,000 or just beyond the December 17th high.
The current price structure suggests the path of least resistance leans sideways to down in the near term. However, significant buying pressure is expected below $85,000.
Strategic Approaches to Trading Bitcoin
In this final section, we explore a couple of strategic approaches for profiting from Bitcoin. Each approach is adaptable.
The $5,000 game
This strategy embraces a one-sided trading philosophy: only buying. It operates on the premise that, regardless of the depth of a drawdown, Bitcoin has historically recovered and tested new highs. The trader visually plots all $5,000 multiple levels on the chart, adjusting these levels as volatility evolves.
- Entry Criteria:
- Buy at a $5,000 multiple, but only if the price has declined by at least $5,000 from the level above.
- Avoid buying in the following scenarios:
- A potential topping pattern, such as a double top or wedge top, is evident.
- The price is at a significant resistance, like a previous major higher high, major lower high, all-time high or a major round number (e.g., the $100,000 level).
- There is no medium-term support or structure on the left side of the price.
- Scaling and Position Management:
- Scale in up to three or four times, but only when all entry conditions are met.
- Trade with a small position size to manage risk effectively.
- Ensure the maximum drawdown on an aggressive account remain less than 15-20%. For example, if Bitcoin could experience a 80% drawdown and the trader allows for a 20% account drawdown, they must trade with less than 25% of the account per full position.
This approach is designed for alternative income rather than a day-to-day trading strategy. Options income traders may leverage this framework.
Bull Trends
Bitcoin’s historical bull trends make it an ideal candidate for straightforward trend-following strategies. These methods capitalize on Bitcoin’s tendency to form extended uptrends, offering simplicity and effectiveness. Tested on 60-minute charts and higher timeframes, this approach has consistently demonstrated effectiveness.
- Examples include
- Long above a previous higher high or if there is a bull breakout.
- Close if the price falls below a major higher low, or if it closes below a medium-term EMA.
These trend-following strategies typically exhibit a 35-45% probability of success, paired with 2:1 to 3:1 reward-to-risk ratios when applied systematically. Experienced discretionary traders can improve these metrics by refining entry points and dynamically managing exits.
Both the $5,000 Game and trend-following strategies reflect Bitcoin’s unique price action tendencies, offering traders structured ways to engage with the market. The $5,000 Game emphasizes disciplined buying and careful risk management, while trend-following strategies capitalize on Bitcoin’s bullish momentum. These approaches are not only effective but also adaptable, allowing traders to refine and personalize them based on experience and market conditions. As with any strategy, success lies in disciplined execution and a clear understanding of risk.
Happy new year!
As we approach the end of the year, we want to take a moment to thank you for being part of this journey. Your dedication to improving as traders and your engagement with our community mean the world to us. May the coming year bring you success, growth, and happiness in all aspects of life, both in and out of the markets.
Please have no hesitation to share your thoughts, insights, and experiences in the comment section below. If you found this report helpful, consider sharing it with fellow traders so we can continue to grow together.
Wishing you and your loved ones a joyful and prosperous New Year filled with hope and opportunity. Here’s to another year of learning, trading, and thriving together!
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