Bitcoin Bust?

Let the panic begin…

The Dow Jones index fell 666 points on Friday. Which seems like a massive fall if you’ve been around for a while. But with the Dow coming off all-time highs over 26,000 points, it doesn’t represent the crash that it would have a few years ago.

Still, a 2.5% one day fall is pretty decent. The Dow is now 4.2% off its high from last week. Which is nothing really, but given the next biggest decline was a 6% fall between April and June way back in 2016, then it’s going to get some headlines.

This correction has been brewing for a while. All it needed was a catalyst. And that came on Friday in the form of better than expected employment and wage growth numbers in the US.

The market thinks the Fed will now raise interest rates faster than expected. This is leading to a sell-off in the bond market…which is leading to a sell-off in the equity market.

It’s all pretty standard, I might add. US stocks went up a lot over the past few years. They ‘should’ now come back a bit. How much?

At the end of last year, I told subscribers of my advisory service, Crisis & Opportunity, that a correction of up to 20% should not come as a surprise in 2018.

Whether that will happen or not is another issue. What the market ‘should’ do and what it actually does are two different things.

All I can say is that if a decent correction plays out over the next month or so, it will be healthy for the market. But if the correction is short and sharp, and stocks rally to new highs on even greater optimism, then I would be more concerned about a destabilising ‘crash’ scenario unfolding later in the year.

The pace of recent gains has just been too quick. It’s unsustainable. Unfortunately, such quick and easy gains give many investors an unrealistic view of how markets work. This is what changes the psychology of markets and sees money pour into stocks, pushing them higher. 

Easy come, easy go

This is exactly what happened in crypto markets at the end of last year. Quick and easy gains saw an influx of money hoping for more quick and easy gains.

This is how bubbles form. Bubbles are a result of belief. Busts are a result of disbelief.

In that case, Bitcoin is going through a disbelief phase. The recent price action has been decidedly bearish. It’s down 60% from the highs and plunged through the 200-day moving average (the red line in the chart below) last week.

Bitcoin / USD - XBTUSD (FX) Daily Chart | 05-02-2018

Source: Optuma
[Click to enlarge]

This just goes to show why it’s so difficult to make money in a bubble.

To get in early, you must be a believer. In this case, you must believe that Bitcoin and the technology that underpins it make it a worthy digital currency and that it will become the future of money.

When the price rises and confirms the views of the early believers, they have this belief reinforced. They are so invested, both financially and emotionally, they don’t see the blow off phase for what is it.

That is, a greed-based price surge. It’s not a result of thousands of people agreeing with the early believers. It’s the result of thousands of people trying to get rich quick, and not giving a hoot about the reasons why.

Because the early believers are so committed, they can’t sell. They don’t want to. Which is fair enough. But they no longer control the price. Once the price turns, the whole psychology of the market turns. The late-coming speculator panics. They got in too late and are now underwater. They just want out.

And the early believers see their fiat currency based gains evaporate. (Which, by the way, apparently doesn’t matter when it comes to bitcoin — although I’m not convinced about that.)

This is how you get to the other side of a bubble. It deflates just as fast as it inflated. Which means in the next six months, bitcoin will probably head back towards US$1,000.

Then, if it remains stable for a prolonged period of time, it may have a chance of becoming what its supporters hope for — a digital currency that will give inferior fiat currencies a run for their money.

A good currency is a stable currency. With bitcoin soaring, and now plunging, on a daily basis, it doesn’t fit the requirements of a ‘good’ currency.

But hopefully now, with the euphoria phase over, it’s on the path to becoming one…

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia