Getting Technical
Can You Afford to Bet on Bitcoin?
By Michael Kahn
I didn’t want to address the parabolic rise in the price of Bitcoin, as it’s very difficult to apply reasonable technical analysis to something moving this quickly. Because of that, I can’t come to a conclusion on where this market might move next. But in either direction, the cryptocurrency seems to offer huge rewards, but with risks not seen in a long, long time.
Pundits now use the “B word”—bubble—to describe a market that gained nearly 1,000% this year. The problem with a bubble is that we really can’t know when we are in it. It’s easy to assess the situation after the fact, but we’ve already seen the word used to describe Bitcoin this year when it traded at $2,400, $4,200, and $5,700.
Pundits now use the “B word”—bubble—to describe a market that gained nearly 1,000% this year. The problem with a bubble is that we really can’t know when we are in it. It’s easy to assess the situation after the fact, but we’ve already seen the word used to describe Bitcoin this year when it traded at $2,400, $4,200, and $5,700.
I even wrote about it in 2013, when Bitcoin traded at $1,242, with the obligatory comparison to the Dutch tulip bubble of 1637.
Considering it topped $11,000—albeit temporarily—in Wednesday’s trading, clearly the bubble callers were wrong.
So is it a bubble now at last? Maybe.
Does it matter? Perhaps for the fast and furious money playing it. But for the average investor, the chart shows incredible danger for both bulls and bears alike (see chart).
We can all agree that trends do exist in all markets, and once they get going it takes real news from within or even without the market to change them. But there are trends and there are trends.
Long-lasting trends move higher at reasonable rates. Of course, the definition of reasonable is subjective. But the trend in a market that doubled from December to May, doubled again from May to August, and again from August to November cannot be sustainable.
The chart shows an ever-increasing slope, even on a semilogarithmic scale.
But as I wrote in 2013, “Perhaps Bitcoin…is indeed the future of money.… But the dangers of buying into a bubble are the same as attempting to sell it short. It could double from here just as easily as it could fall by half. Timing must be perfect with these levels of volatility and risk.”
That suggests that individual investors watch from the sidelines. Or, if they must be involved, keep it to a very small portion of their portfolio. After all, Bitcoin is really only a concept, yet it has a market capitalization larger than half of the component stocks in the Dow Jones Industrial Average.
I’ve observed before that when Wall Street or LaSalle Street in Chicago introduce new products to capture the demand for the hottest financial craze, it often marks the end of the current move. It takes time for the financial wizards to recognize the trend, develop the products, pass the regulators, and then bring them to market. By then, sentiment is usually very bullish, so much so that it becomes a contrarian bearish signal.
In the coming months, at least three Bitcoin futures markets may open for business. We already see ads for self-directed individual retirement accounts to let people “get in on the action.” Remember, IRAs are for safely building for retirement, not speculating.
All of this is tangential evidence that the end is near for the current Bitcoin rally, but as we’ve seen this week alone, that could still mean double-digit or even triple-digit percentage gains before the bears take over.
If and when they do, the descent back down is likely to be a mirror image of the rally. And as I have seen many times in many markets, the giveback can be 100% of the accelerated rally. That could mean a drop back to the top of the a long-trading range at the $1,200 level.
Sound impossible? Bitcoin actually did it before.
When I looked at Bitcoin in 2013, as it traded at $1,242, the parabolic rally had begun months earlier with a breakout above $250. The market worked its way back down to that area over the following year for an 80% decline.
I am not arguing about the future of cryptocurrencies, but rather warning that the current action is far too stomach-churning for the average investor. It feels great to ride this rocket on the way up, but not so much when even a reasonable correction finally arrives.
Considering it topped $11,000—albeit temporarily—in Wednesday’s trading, clearly the bubble callers were wrong.
So is it a bubble now at last? Maybe.
Does it matter? Perhaps for the fast and furious money playing it. But for the average investor, the chart shows incredible danger for both bulls and bears alike (see chart).
We can all agree that trends do exist in all markets, and once they get going it takes real news from within or even without the market to change them. But there are trends and there are trends.
Long-lasting trends move higher at reasonable rates. Of course, the definition of reasonable is subjective. But the trend in a market that doubled from December to May, doubled again from May to August, and again from August to November cannot be sustainable.
The chart shows an ever-increasing slope, even on a semilogarithmic scale.
But as I wrote in 2013, “Perhaps Bitcoin…is indeed the future of money.… But the dangers of buying into a bubble are the same as attempting to sell it short. It could double from here just as easily as it could fall by half. Timing must be perfect with these levels of volatility and risk.”
That suggests that individual investors watch from the sidelines. Or, if they must be involved, keep it to a very small portion of their portfolio. After all, Bitcoin is really only a concept, yet it has a market capitalization larger than half of the component stocks in the Dow Jones Industrial Average.
I’ve observed before that when Wall Street or LaSalle Street in Chicago introduce new products to capture the demand for the hottest financial craze, it often marks the end of the current move. It takes time for the financial wizards to recognize the trend, develop the products, pass the regulators, and then bring them to market. By then, sentiment is usually very bullish, so much so that it becomes a contrarian bearish signal.
In the coming months, at least three Bitcoin futures markets may open for business. We already see ads for self-directed individual retirement accounts to let people “get in on the action.” Remember, IRAs are for safely building for retirement, not speculating.
All of this is tangential evidence that the end is near for the current Bitcoin rally, but as we’ve seen this week alone, that could still mean double-digit or even triple-digit percentage gains before the bears take over.
If and when they do, the descent back down is likely to be a mirror image of the rally. And as I have seen many times in many markets, the giveback can be 100% of the accelerated rally. That could mean a drop back to the top of the a long-trading range at the $1,200 level.
Sound impossible? Bitcoin actually did it before.
When I looked at Bitcoin in 2013, as it traded at $1,242, the parabolic rally had begun months earlier with a breakout above $250. The market worked its way back down to that area over the following year for an 80% decline.
I am not arguing about the future of cryptocurrencies, but rather warning that the current action is far too stomach-churning for the average investor. It feels great to ride this rocket on the way up, but not so much when even a reasonable correction finally arrives.
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