The End of a Fad(e)

Is Bitcoin dead and buried or ready to RIP?

For much of 2018 we have talked about markets being at a major inflection point. And it seems many realize that we are approaching, a critical juncture in the almost unprecedented combination of an aggressive stock uptrend, dollar downtrend and rising yields and commodities. As we have only seen this before at the end of the 1920s and 1980s stock bubbles, the eventual prognosis is both ominous and exciting. Indeed one market has potentially led the way: Bitcoin. But there is a significant difference. With stocks, bonds, dollar and commodities there is an underlying reality of which we can be certain. There is a fundamental need for these instruments, even if their fundamental values may fluctuate significantly over time. Whereas with cryptocurrencies, despite some of the potent arguments why they are here to stay, that is not guaranteed. That is the Bitcoin debate and one that history shows will rage but probably fade over time.

Only one thing can surpass the rise of Bitcoin in the 2010s. And that is the number of articles written about it. The astronomic rise and subsequent collapse of cryptocurrencies in the last year has produced many headlines. And it has led many either to pronounce their death of Bitcoin or produce a rush into what may be another great buying opportunity. The reality is probably something in between.

Bitcoin (BTCUSD) and cryptocurrencies are struggling to recover from the 2018 lows. After a few brief moments of excitement as Bitcoin threatened to break $10k, the renewed drift has been met with a realization this might be the new normal, and the good old bubble days are well behind us. Interest is dwindling alongside price.

This will be particularly painful for the new investors tempted in near the top, but comes as no great surprise to investors familiar with boom and bust cycles. This is what many markets do, and each phase has been studied and is well known as the classic Rodrigue chart.

History is littered with boom and bust markets, and they can provide useful guides, but not all are alike. Bubbles in individual stocks often fail to recover after the price collapse as this reflects a significant deterioration in the company’s fundamentals.. And begs an unanswerable question about Bitcoin’s fundamentals and its ability to recover. A quick look at the chart of Chesapeake Energy (CHK) explains why (and there are much more extreme examples).

Companies in trouble usually have to issue more shares at low prices to stay solvent. With so many extra shares outstanding, it is difficult to ever reach the bubble highs again. However stocks such as Microsoft (MSFT) prove it can be done (great earnings obviously help), and burst bubbles do occasionally recover. Again it is a fundamental question. Index bubbles generally do recover as they represent the economy of a country and real sustained value.

One of the most famous examples of an index bubble burst is the Japanese Nikkei. Even though deflation since the early 1990s has hampered the recovery in stock prices—certainly compared to many other global indices—the recovery has nevertheless reflected a continued fundamental improvement in the Japanese economy. And one that has interesting possible implications for Bitcoin (as it is similar to the Gold comparison).

You could also say Bitcoin has been in several bubbles before and has always recovered.

We would argue these may have been bubbles in price, but lacked the media attention, the greed (and the Lamborghinis!), and the delusion of the 2017 bubble.

Even still, Bitcoin could well recover. We can compare it another well known alternative currency and store of wealth which is also prone to bubbles: Gold.

As many will know, gold made a parabolic rally in the late 1970s only to burst and trade sideways until the 1990s. But then another bubble formed.

The same happened with the Nasdaq Tech 100 (NDX/QQQ), which is also structurally comparable to Bitcoin.

Both comparisons project the same kind of sideways range for the rest of the year, eventually making a brief new low which likely leads to the “despair” phase of the bust and set up a recovery.

Trying to anticipate a catalyst for this rally is difficult, but clearly cryptocurrencies, and blockchain technology have huge potential. The Nasdaq bubble did not burst because the internet was a useless fad.

Cryptocurrencies will be improved and used more and more. That said, Bitcoin itself has flaws. There is an endless debate as to whether Bitcoin is worth $0 or $1m, and while an interesting topic, it does little to further our trading accounts. Perhaps the next rally in cryptocurrencies will come in alternative coins and Bitcoin will only briefly make a new high

Our primary concern is how to trade BTCUSD profitably, and with a reliable map we can look to navigate this tricky sideways sequence with a view for a longer term buy when the coast is clear and the last Bitcoin bull has given up hope. Will the same be said for the last stock bull? We believe it will and that will be the time to buy.. because, unlike Bitcoin, stocks have a clear underlying fundamental and reality.

Good luck and good trading, and here’s to making the very best.

Ed Matts & Andrew McElroy

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