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Analysis

On Speculative Bubbles, Strategies, FOMO, and Early Exits

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In the 16 years that I have spent observing and trading the markets, there were several incredible events that changed how I look at investments. The bull market in stocks that is fuelled by free money, the Lehman-Crash, and the Dot-Com bubble were among them. To be clear, the current cycle in cryptocurrencies is not one of those, even as some of the coins routinely double daily.

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Why is that? Because the dynamics behind the moves are familiar; precious metals in 2011, the Chinese stock market a couple of times in the past 10 years, oil in 2008, the Dot-Com bubble, and so on. All of these trends had an eerily similar dynamic, although the exact path of price movements and the volatility of the moves differed substantially.

“History doesn’t Repeat itself but often Rhymes”

Allegedly Mark Twain observed that, and I couldn’t agree more. As a certain topic goes through boom-bust cycles with spectacular gains and higher and higher bottoms, it naturally draws in new investors that are standing on the sidelines waiting for confirmation of some sorts.

After a while, as publicity rises, the success stories go mainstream, and the number of participating investors multiplies, the market reaches an inflection point where the influx of capital won’t be enough to hold the marginal selling by the already invested public. To be precise, this inflection “point” is sometimes a longer period of grinding gains, one blow-off advance, or another topping pattern such as a double top for instance.

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Tha Nasdaq Bubble and the Aftermath

Here is the catch though; in advance, you never know when this point arrives, as the pool of potential investors, the willingness of the previously entered investors to hold, and several other factors are unknown. That said, as the market matures, it will be harder and harder to sustain the gains that drove the valuations far from reality already, and the market will be more and more similar to an old-fashioned pyramid scheme, where the last entrants lose almost everything.There were several potential tops along the way, just as it has been the case with BTC, and the majority of the most successful long-term investors sold very early, in line with their tested strategies.

The Crypto-Boom is Legit, But…

As I stated in one of my articles before, I don’t doubt the validity of the crypto-boom for a second, and I believe that blockchain applications are one of the next big things. Having said that, the validity of a story, at the end of the day, can’t justify the insane gains that we are experiencing currently, just as the validity of the dot-com story didn’t justify the lofty valuations of basically non-existent business during the late phase of the tech-bubble.

Are We There Yet?

Back in July, when already a lot of people were calling the top mind you, I wrote that:

“(…) the attention given by the investing public to coin offerings is nowhere near the levels of the .com bubble and the major players participating in the field are few and far between. That could mean that the top of the current bull market is far away, as there is a huge potential of additional buyers left that could fuel the rally.”

I also said that the conditions didn’t feel like the end of a speculative bubble, rather the end of a cycle within. Both were true, but the real question is not about the past, rather about the future… And now the situation is different, on Bloomberg, CNBC, and other major news outlets, Bitcoin has been the headliner for weeks, every second Google and is an ICO or a trade-signal provider, people are quitting their jobs to trade crypto, the market is at $500, oh wait $600… no $650 billion…

The Total Value of the Crypto-Segment Since June

So yes, now it feels like the end of a speculative episode that could end in a multi-month or even multi-year bear market. But where will be the exact top? Honestly, I don’t know, but by now, you should be sitting on healthy profits and waiting for the current cycle to end.

Why am I Out of this Market?

Those only reading my daily analysis, and following my advice, might see this as a mea culpa, as they are likely looking at the market without major positions—but it is not, I would trade and analyze such trends similarly all over again. I firmly believe that this is the time to fight the FOMO, even as we might see further stellar rallies, and keeping your “gunpowder“ dry – holding cash or fiat – will pay off greatly in the coming weeks and months.

Trading these markets (using our recommendations for example) is, of course, different, you can still jump in an out for quick gains, riding the volatile waves. But while doing that, remember the basic rules of trading (stop-losses, position sizing), and how it is fundamentally different from investing.

I admit that this cycle has been different from the others and we missed a whole lot of the profits in several coins. But again in July, we had a similar experience, and in hindsight, selling Ethereum at $330 or $400 is not that big of a deal, as the token fell all the way to $130 during the correction. I fully expect corrections in that dimension in the segment, so if you are not ready to endure such draw-downs, please keep your portfolio conservative.

To fight the Fear Of Missing Out remember Baron Rothschild’s answer to the question on how he became one of the richest investors ever:

“I always sold too early…”

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 276 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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13 Comments

13 Comments

  1. MinerMatt17

    December 19, 2017 at 4:39 pm

    What are your thoughts on the regular correction that bitcoin and other crypto have undergone regularly. Wouldn’t the market, being younger and faster growing just experience growth, correction, and consolidation on a much more compressed timeline. Also, we may be hearing about bitcoin and crypto all the time, but look at the number of people in the US, Europe, Asia, that have wallets or own bitcoin. It’s absurdly small compared to the number of people that are invested in stock markets around the globe.

    • Mate Cser

      December 19, 2017 at 5:45 pm

      Hi MinerMatt,

      thanks for the great comment, I agree that the market is getting more mature and corrections will be different over time, but for now the boom-bust cycle is still intact in my opinion, just look at the percentage gains recently. The futures contracts and the more diverse pool of investors will “smoothen” price action on the long-run – and for a lot of use cases that will be more than welcome – but I believe that this cycle will have a similarly spectacular ending than before. The exact timing and the trigger are not known yet. My guess is a regulatory “bomb”.

      The number of users will definitely grow over time, but I believe that the current valuations are way ahead of the underlying growth. Of course, I can be wrong, but at the least market cycles will continue to exist, even if they are hard to exactly “catch”.

      • MinerMatt17

        December 19, 2017 at 6:59 pm

        This assumes zero value given to bitcoin and other fixed supply cryptos as digital stores of wealth? Or am I missing something with you evaluation?

        Thanks!

        • Mate Cser

          December 20, 2017 at 12:55 am

          No, of course, there is (a not small) value of those functions, although I would say that at this point most of the new capital is in for the speculative gains. The store of wealth function will be more important once volatility will be lower. I believe that the current market dynamics are not driven by the real and undoubtedly great properties of the coins.

  2. Mister.Ticot

    December 19, 2017 at 5:36 pm

    Very interesting.
    Thank you!

  3. Montebrond

    December 19, 2017 at 6:09 pm

    Hi Mate,
    I’m new to hacked.com, but your analysis really resonate with me. Assuming you’re not recommending using tether as an efficient way of getting in/out of trades (?), what’s your view on the best way to be set up to do short-term trades and move profits from crypto into a more stable asset?
    – i’m Looking for whether there’s a better way than having to move profits to eth/btc, to then having to transfer it to a funding platform such as coinbase to convert to cash. This can be slow / costly / time-consuming.

    • Mate Cser

      December 20, 2017 at 12:39 am

      Hi Montebrond,
      Tether is a valid alternative, also shorting USD pairs on an exchange in the amount of your holdings. I will write an article about the topic, thanks for the question.

      • Montebrond

        December 20, 2017 at 11:50 am

        Thanks Mate, looking forward to it.
        Interested in more details on how you view tether – it’s obviously a very practical trading tool, while many view it as a Ponzi scheme potentially without the 1:1 backing of real fiat. Certainly cause for some concern how quickly the amount of tether in circulation has been increasing over the last couple of months.
        Another valid concern is for how long US regulators is going to allow a fiat crypto to be left untouched.

  4. vlm4life

    December 19, 2017 at 7:06 pm

    “the market reaches an inflection point where the influx of capital won’t be enough to hold the marginal selling by the already invested public.” What about the notion of literally Billions in NEW capital injection into the asset? In other words, Main Street were early adopters in the Crypto Boom #1, whereas Wall Street (and hundreds of Billions) are just getting started in this asset space in crypto Boom#2. There’s a “turning of the guard”, and new “whales” in this space. Can u opine on this? Thx!

    • Mate Cser

      December 20, 2017 at 1:07 am

      Sure, but the investment scope of the early adopters, who obviously understand the underlying tech better than the public and Wall Street, is likely much longer. I think that the influx of the speculative capital will quickly dwindle when the trend changes. The mathematic background of these events is pretty robust; now you have 6 times as big of a pool of potential sellers that has to be satisfied by buyers. FOMO turns into “get me out at any price” rather abruptly, especially in leveraged markets (forced liquidations).

      • johnnyquid

        December 20, 2017 at 3:30 pm

        Just chiming in. The futures are already set for more then $20,000. Bitcoin is already showing all the signs of regular crypto cycle downtrend. It just made a double bottom at 15,800 respectively and has failed to reach previous highs. Now I know “flash crash” but a lot of that is FOMO and I wanna get rich on the Bitcoin Cash pump. My point is this, what is wall street and big money going to think of this “new experiment” when the first futures contracts fail to hold? That the men responsible for selling those to their companies or investors have to engage in shorting to make back the amount? Or worse settle the contracts? I love crypto. This year has been stupid amazing, but way to good to be true. We all need to backup, count are assets and get ready for the Bears. Plus you can do really well in a bear market if your the one buying at the bottom boys. My two satoshis

  5. felix

    December 20, 2017 at 11:37 am

    Great article, thanks

  6. Tarik

    December 21, 2017 at 1:55 am

    Another of your great articles, Mate!

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Analysis

Crypto Update: Coins Consolidate Above Support but Downtrend Still Intact

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It has been a very quiet weekend for the major cryptocurrencies so far, as the predominantly bearish week ended with range trading and a collapse in volumes across the board. Most of the top coins failed to gain back the ground they lost during the steep selloff, with only Binance Coin and VeChain showing meaningful bullish momentum.

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The relatively strong Ethereum, EOS, and Ripple remained stable, with ETH hovering around the $500 level, EOS trading north of the key $10 support despite the network’s technical issues, and Ripple being stuck in a narrow range just below the widely-watched $0.54 resistance level. The total capitalization of the market has been virtually unchanged at $280 billion, as both Bitcoin and Ethereum flatlined.

BTC/USD, 4-Hour Chart Analysis

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Bitcoin is trading right at the short-term support level near $6500, holding up just above the April low, with the crucial long-term support zone near $5850 that is vital for the whole segment. The coin is clearly in a short-term downtrend, while also being relatively weak on all time frames. The oversold short-term momentum readings are now cleared and that could point to a test of the lows in the coming days.

 

ETH/USD, 4-Hour Chart Analysis

Ethereum also cleared the short-term oversold readings, but it failed to leave the vicinity of the $500 support/resistance level. Despite the coin’s undoubted relative strength, and the still bullish long-term setup, the short-term trend signal remains a sell, and the declining trend is intact. Traders should still not enter new positions here, while investors could add to their holdings on the short-term selloffs. Strong resistance is ahead between $555 and $575, while further support is found at $450, $400, and $380.

Divide Widens between Leaders and Laggards

LTC/USD, 4-Hour Chart Analysis

Although short-term correlations skyrocketed during last week’s decline, the divergence between the relatively strong and weak coins got even more pronounced, with the likes of Litecoin, Dash, and Monero severely lagging the broader market. Litecoin got stuck below the $100 level after the breakdown last week, and it is below the long-term base pattern, as it failed to show relative strength during the weekend. Immediate support is found at $90, but new lows are likely in the coming days, as the short-term downtrend remains dominant. 

BNB/USDT, 4-Hour Chart Analysis

As a positive outlier, Binance Coin remained bullish amid the broad decline, holding on to the relative strength that it has been showing for several weeks. The coin’s stability is encouraging, and it’s nearing its rally highs with today’s surge, while having a good chance of resuming its uptrend, even as another segment-wide selloff could cause a jump in volatility again.

For now, the market is torn between bullish and bearish forces, and investors should focus on the technicals of BTC and ETH, while also keeping an eye on the leaders of the rally for signs of sutained strenght.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 276 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Long-Term Cryptocurrency Analysis: Bull Market in Jeopardy

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As the crucial rally attempt that we pointed out in our previous long-term analysis failed, and the major coins sold off heavily afterwards, the segment is now in a difficult situation. While Bitcoin and especially Ethereum are still in bullish setups, the most valuable coin is now close to a major breakdown that could lead to structural bear market as we laid it out back in January.

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Some of the weaker coins are already below the large-scale consolidation patterns that developed after the year-end run-up, and as the divergence between the leaders and the laggards widens, the path of the two dominant coins even more importance.

BTC/USD, Daily Chart Analysis

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Bitcoin failed to trigger a short-term buy signal throughout the Ethereum-led rally in May and early June, and that technical weakness still persists, as BTC is now trading right at the April low, testing the key long-term base pattern.

A break below the strong support zone near $5850 would be the first similar event since the beginning of the bear market in 2014, and it could lead to an extended period of bearish bias for Bitcoin after the spectacular bull run of 2017. For now, the bull market is intact, with support found near between $6000 and $6275, at $5850 and below that at $5500, while resistance is ahead at $6500, $7000, $7350, and $7650.

ETH/USD, Daily Chart Analysis

Although Ethereum is clearly stronger from a technical perspective compared to Bitcoin, the coin is struggling to hold the key $500 level, as it is resumed its short-term downtrend. The April lows are well below the current price level and the long-term setup is bullish, so long-term investors could still add to their positions during the selloffs. Resistance above $500 is ahead between $555 and $575, while strong support is near $450, $400, $380.

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 276 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Altcoins

Crypto Psycho:  Crazy Price Action

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Say what you will about the cryptocurrency bubble of 2017 not making sense, what about the action lately?  Prices are acting terribly. Professor John Griffin claims last year’s bitcoin rally was manufactured by Bitfinex. Economist Nouriel Roubini proclaims bitcoin is going to zero. The founder of Crypto Asset Management says about bitcoin: “We are shorting it like maniacs at the moment.”  If that is not enough, technical indicators keep barking downtrend.

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Over the past week already depressed prices have fallen further with things like bitcoin down 14%+, Ethereum 17% and XRP 21%.  Yes, there were those stories about the CFTC digging into price manipulation and demanding more data from Coinbase and other exchanges. And then there was the hack on that small exchange in South Korea.  But nobody could reasonably pin the blame of this week’s performance on these two factors.

MarketWatch quoted Matt Hougan, head of global trading at Bitwise Asset Management: “The big story to me is the absence of positive news”.  There is some truth to this but that is only part of the story. As we pointed out in a recent article, most serious investors in crypto don’t pretend to understand what is causing the mess.  

When bitcoin evangelist Alistair Milne published a survey of his Twitter followers, 81% of them had nary a clue.  Interestingly enough though, almost half of these respondents checked the box “Crypto iz ded”.

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What exactly to conclude from this is open to interpretation but one thing is clear.  It is a big part of the problem long term investors face today. Crypto psychology sucks, the worst it has been since the Mt. Gox hack of 2010.

Good News Being Ignored

One of the barriers to progress in the crypto wars was the issue of regulatory clarification. Are cryptocurrencies simply digital assets or a class of securities that fall under the regulation of the Securities and Exchange Commission?

That question has now been answered.  On Thursday, the SEC’s announced that both bitcoin and Ethereum were not securities but digital assets.  However, the good news does not end here.

William Himman, representing the SEC, clarified the position of Initial Coin Offerings.  In cases where the ICO does not convey equity ownership of an enterprise and where the digital asset is sold only to be used to purchase a good or service available through the network on which it was created, it does not qualify as a security.

This represents one huge step forward in clarifying the regulatory environment and yet the markets response was brief and uninspiring as the full week’s performance unfortunately demonstrates. Honestly, this is a bit bizarre.

Other Good News Being Ignored

Crypto Asset Management may be short selling lots of currencies, but they are not alone.  According to www.bfxdata.com/swaphistory/usd  margin interest in bitcoin and Ethereum is in excess of $1.2 billion.  While this is down from around $2 billion last December it still represents a sizable pool of future buyers.

It’s In The Mind

For digital asset prices reflect not only investor sentiment but also those who represent ultimate users.  For a digital currency to represent a storehouse of value, it must have public trust. Right now that appears to be at a low.

According to the British publication London Loves Business, the story is pretty clear. Headlines state “71% of the UK public think the value of Bitcoin will either decrease or collapse over the next six months.”  According to LLB,  this represents a 10% fall in investor confidence since the same question was last asked in April’s 2018 poll and a 24% fall in investor confidence from November’s 2017 poll figures.  In other words, the price of bitcoin holds the same implication for investors as it does for potential users.

This Too Shall Pass

Mob psychology often proves wrong and this negative mindset appears to be feeding off of itself right now.  Even one of crypto’s biggest critics Warren Buffett would agree that betting against the mob has been a big part of his investment strategy. At some point the mob will once again be proven wrong when short sellers get spooked and forced to cover positions or value investors will filter over from an overpriced U.S. equity market.  Either way, there is value in the crypto market that has not existed for quite some time. In the end, 71% of the Brits surveyed will be proven wrong also.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 81 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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