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Research Paper
INEFFICIENCIES IN CRYPTO TRADING
– THE “BART SIMPSON” PATTERN 1 November 2018
Authors: Dr Lewin Boehnke (Head of Research) and Maximilian Boelstler (Research Assistant)
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Inefficiencies in Crypto Trading taking Bitcoin as an Example
– The Bart Simpson Pattern
How has Bart Simpson managed to weasel his way into cryptocurrency analysis? What possibly could
the connection between cryptocurrency pricing and a fictional yellow character from the American
TV series The Simpsons be? Talking with the trading experts at Crypto Broker AG, who analyse
bitcoin charts, and with our further research in the area of trading patterns and trend analysis, we
suggest a different significance behind this price chart pattern – all jokes aside.
Thanks to a little ingenuity and some inspiration from highly reliable, albeit satirical media sources, a
recognisable chart pattern, known as the Bart Simpson Pattern, can be used to explain the recent
inefficiencies in cryptocurrency trading.
So, what is happening?
The Bart Simpson Pattern occurs when an unexpected spike (or a drop) in prices is followed by a
sideways movement, and subsequently by a sudden drop (or a spike) in prices. The chart pattern takes
on the shape of Bart Simpson’s head.
Figure 1: Bart Simpson Pattern on a price chart from tradingview.com (Sept 7-13, 2018)
And why is it worth taking a closer look at the Bart Simpson chart pattern?
One enticing thought is that even though the cryptocurrency markets are becoming more
professionalised, the possibility of price and market influences still exist. They manifest in the Bart
Simpson Pattern. Inexperienced market participants are causing a great deal of these inefficiencies,
which could easily be mitigated, e.g. by the use of appropriate brokerage services.
Allow me to explain by going more in depth.
The Bitfinex chart above (Fig.1) shows a BTC/USD price development. Several common market
fluctuations are visible without any apparent abnormalities. Generally, a massive green (or red) candle
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will introduce the typical (or inverse) Bart Simpson Pattern. Upon closer inspection, at least two Bart
Simpson Patterns can be made out in Fig.1: an inverse Bart starts on September 8th, with the end of
the formation already beginning to form the second Bart Pattern. Images of Bart Simpson’s head have
been inserted into the corresponding periods.
Ever since the beginning of 2018, both the variety and frequency of Bart Patterns have increased.
When asked about price patterns in general, American financial market analyst John J. Murphy
explained: “Price patterns are pictures or formations, which appear on price charts of stocks or
commodities, that can be classified into different categories, and that have a predictive value”.
Despite the fact that cryptocurrencies and crypto assets came after his time, it also goes without saying
that this research paper in no way constitutes financial investment advice nor will it offer any predictive
value.
Returning now to Murphy’s definition, research has shown that the Bart Pattern may vary in its
volatility, duration, and frequency. The formation usually occurs over a period of a few hours, apparent
on intraday charts with a scale of 15-minute intervals. In Fig.2, which shows a close-up of the same
two patterns depicted in Fig.1, the inverse Bart Pattern is visible in the significant increase in trading
volume and significant decrease in price. In total, the price drops here for a period of approximately
two hours. Subsequently, there is a kind of consolidation phase characterised by prices moving very
little over a 15 hour period (the so-called accumulation area), after which an unexpected price increase
takes place. The typical Bart Pattern that follows after that could be described in the reverse.
Figure 2: Zoom-In1 Bart Simpson Pattern
As shown in Fig.2, a price cycle will generally contain the following phases: accumulation, markup,
distribution, and markdown. However, a common price cycle is not characterised by an extremely
steep markup and markdown curve as seen in a Bart Pattern. Moreover, a complete price cycle may
1 Figure 2 includes the price development charts of Coinbase (red) and Binance (orange). It clearly shows that not only one
exchange is faced with a considerable price drop and spike.
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last for a few hours, days, or months. A theoretical price cycle according to renowned stock market
authority Richard Wyckoff is depicted in Fig.3.
Here, the accumulation area is characterised by a sideways movement with the price moving relatively
slowly. This phase is also referred to as market consolidation. During the late stages of a bear market,
in particular, many investors try to trade during the accumulation phase in order to catch the bottom
of the trend. Nevertheless, it is also possible for the bears to win, and a further downward trend will
follow. Once the resistance level of the accumulation phase is exceeded, the markup phase will then
begin. In this context, new highs will be set, or in the case of the Bart Pattern, an exceptional new high
will be set in a relatively short period of time. Usually, the markup will last longer than the accumulation
phase. At this point, investors of all kinds are attracted to invest, in the hopes of making profits during
the upward trend.
As soon as there is resistance and the market
faces a correction or pullback, the
distribution area will start. As in the
accumulation phase, the bulls and bears will
battle against the upcoming movement. This
means that the distribution area does not
necessarily allude to a price drop. If selling
volumes increase regardless and buying
volumes decrease, it is only a question of
time before the resistance level is exceeded
and the price will drop in the markdown
phase until the next accumulation phase is
reached.
Richard Wyckoff, who founded The Magazine of Wall Street, was a pioneer in technical stock market
analysis. He based his trading strategy on three laws, with the intent of identifying the best markets to
trade and the potential future directional bias for prices. According to his “Three Wyckoff Laws”, the
price chart can be affected by:
Supply and demand
Trading volume and the corresponding price change
Duration of accumulation and distribution period
Is There a Reason for a Bart Simpson Chart Pattern in Crypto Markets?
Research has shown that the conditions under which the Bart Simpson Pattern seems to appear is if
price movements were not apparent before the formation started, although trade volumes increased.
This assumption may be in line with one of Richard Wyckoff’s trading theory laws. Talking with the
trading experts at Crypto Broker AG, analysing bitcoin charts, and conducting further research in the
area of trading patterns and trend analysis, I concluded that the Bart Pattern is due mainly to liquidity
issues.
Figure 3: Wyckoff Price Cycle
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To create an overview of the relationship between market liquidity and the corresponding price
developments, I attempted an historical reappraisal of an inverse Bart Pattern (cf. Appendix A). It is
possible to divide its development into the following six steps:
1. Trade Initiation (Sell Order)
Firstly, a larger2 selling (market) order needs to be issued to initiate a corresponding and
considerable price movement. For instance, the bitcoin price may already have moved by 2%
with a market order of 500 bitcoin on a smaller exchange. Due to the possibility of initiating a
relatively large selling (market) order for bitcoin – for whatever reason – the market may be
faced with a liquidity problem.
From an economical point of view, the market supply of bitcoin exceeds the current demand
and consequently the supply has exerted downward pressure on the bitcoin price due to the
surplus.
2. Trade Execution
If the market (𝑆0) does not have enough supply or liquidity and one relatively large order is
placed that cannot be easily satisfied by the corresponding exchange platform, the order
books will be completely stripped out. When an exchange is faced with an oversized price
shift, every single buy position below the current trading price will be accepted without any
restrictions, particularly with a market order.
As a result, the trading price is pushed down instantly until the trade is fully executed (𝑆1). The
left side of an inverse Bart Pattern is now visible. When the bottom is reached, the market
starts to consolidate and so the sideways movement begins.
3. Accumulation Phase
Now, we enter the accumulation phase. Here, the market has reached its new equilibrium,
meaning that the open orders were satisfied and the market will consolidate until 𝑆1 = 𝐷0.
There is now also a new price (𝑃1).
4. Trade Initiation (Buy Order)
As soon as a larger buy order is issued, leading to a breach of a higher resistance level, the
probability increases that the bitcoin whales3 will re-enter the market. By using their relatively
large trading volume – in this case to execute a long position – the whales’ direct impact is
reflected in the chart in an unexpected spike; and the second part of Bart’s head begins to
appear. However, there is no shift in supply, only an unusual shift in demand (𝐷0 → 𝐷1).
5. Trade Execution
Because of the resulting demand surplus, the price is pushed even higher because there are
not sufficient bitcoins available for the price offered. Similar to the previous trade executions
for sell orders, every single sell position above the current trading price will be accepted
without restrictions. Thus, the trading price is pushed even higher until the trade is fully
executed (𝐷1).
2 Measured relative to the common trading volume during the last 24 hours 3 Bitcoin whales – holders of large amounts of bitcoin
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6. Distribution Phase
Subsequently, the distribution phase starts. As described in the accumulation phase, the
market has reached its new equilibrium. The difference now, however, is that the balance is
found at 𝑆1 = 𝐷1 with the new price (𝑃2). This price could even be the price 𝑃0 from the
beginning of the Bart Pattern.
The description above would be the same for a (non-inverse) Bart Simpson Pattern if steps one
through three were to be changed to four through six, and vice versa.
Market Liquidity plays an Integral Role in the Markets
As a general rule, if there is sufficient market liquidity, most goods and services can be traded without
there being any unexpected impact on their prices. Conversely, this implies that a lack of market
liquidity could affect the prices of the traded goods, as shown in the example of the (inverse) Bart
Simpson Pattern.
Both the upward and the downward move could be caused by a lack of liquidity. For the downward
move, the lack of liquidity stems from too large of a supply that cannot be absorbed by the market.
For the upward move, the lack of liquidity can be due to an increase in demand that also cannot be
met by the market.
In the bitcoin market, two parties could be bitcoin whales and therefore capable of entering a relatively
large order. On the one hand, there are institutional investors with the financial means to take
influence on the market. On the other hand, there are many retail (private) investors who have an
unusually large amount of cryptocurrencies, e.g. due to early participation in the crypto markets. In
either case, one of them may represent a whale and thus be able to initiate such a trading pattern
from the buy or sell side.
What is the intent of such an order beyond it simply being large and inadvertently burning money?
There are two explanations: either this is a retail investor without the necessary trading knowledge to
execute a smart and smooth trading order; or the trade has been submitted intentionally by someone
with a professional background. Speaking rationally, however, a large market order is completely
inefficient because of the resulting financial loss. Both situations are therefore unusual in liquid
traditional markets.
There is no proof that liquidity problems are entirely responsible for any Bart Simpson Pattern. There
are, of course, examples where a Bart-like downward move was followed by a second downward move,
forming a stair rather than a Bart Pattern. Yet, the great majority of Bart Patterns may be caused, and
moreover explained, by liquidity issues.
Do Bart Simpson Patterns Also Appear in Traditional Markets?
Yes and no. Since the beginning of 2018, the cryptocurrency market has faced a downward slide. In
January 2018, its market capitalisation exhibited an all-time peak at approximately USD 800 billion.
Through the following months, a steady decline in the market capitalisation became apparent. On
October 23, 2018, 54% of the market capitalisation of approximately USD 209 billion was attributed
to bitcoin. This is comparable to the market capitalisation of a single larger listed company such as
McDonalds, IBM, or SAP. In short, it is difficult to compare a traditional market to the cryptocurrency
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market currently – not only because of its market capitalisation, but due to the market participants
and emerging regulation.
A market that enables its participants to initiate relatively large orders also provides the greater
possibility of prices being influenced. In the case of bitcoin, retail investors can enter these orders in
the absence of regulation (be that through brokers or on exchanges). Whales are not just a factor in
the bitcoin market. They also dominate the equity market, but there they are more likely to be
institutional whales in a regulated environment. Thresholds to entry and related infrastructure in
cryptocurrency markets vary significantly when compared to traditional markets. The execution of
trades are carried out in an appropriate and more rational manner in traditional markets. Also, in
traditional markets, so-called circuit breakers and other security mechanisms are implemented, as is
apparent in the S&P 500 Index. As soon as a market or a single stock drops a predefined percentage
within a predefined timeframe, a circuit breaker temporarily stops all trading on that exchange.
Crypto Finance AG, through its subsidiary Crypto Broker AG, is a financial intermediary available to
qualified and institutional investors. This team of experienced investment bank traders draws on the
liquidity of the world’s top exchanges to offer optimised order execution, without affecting prices, thus
avoiding Bart Simpson Patterns.
To read more about Crypto Broker AG, please visit:
https://www.cryptofinance.ch/en/brokerage/
For research inquiries, please contact:
Crypto Finance AG | Research Department
research@cryptofinance.ch
Tel: +41 41 545 88 23
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Appendix A
Note:
This graphical representation serves illustration purposes only, i.e. the movements of the price-quantity-diagramme are not
based on any calculations and their corresponding elasticities.