Bitcoin’s Moving Average Price, Prospect Theory Reference Points, and 'Sandpile Collapse'

We interpret bitcoin’s 200-day moving average (MA) price as a prospect theory (PT) reference point. PT says that risk preferences “toggle” around the reference point. Above the reference point, investors are risk averse. Below the reference point, investors are risk seeking. Degrees of risk aversion and risk seeking determine the investor’s sensitivity to changes in risk. As asset price appreciation pulls the investor just above the reference point, there is a period of strong sensitivity to perceived or actual changes in risk. If prices continue to rise, the price will eventually enter a period of stability as risk aversion “flattens out”. However, a change in risk conditions just above the reference point or a price decline that pulls the investor back towards the reference point can precipitate a “sandpile collapse”. This provides a piece of theoretical infrastructure to support the technical analysis that is favoured among bitcoin traders. The logic reported herein applies to all reference points and traders are free to use these ideas to analyse many different situations