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Comparing the Cryptocurrency Bull Market and the Dot-Com Bubble: A Tale of Two Revolutions

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The infamous .com IPOs and the recent cryptocurrency ICOs, Google and Ethereum, Microsoft and Bitcoin, 1999 and 2017 and so on and so on… We can draw several parallels with the euphoric years of the late 90’s in the dot-com segment and today’s blossoming cryptocurrency-blockchain industry. But before we get overly excited about the parallels, we also have to add that although history often rhymes it never repeats itself.

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The Number of Technology IPOs before and after the Bubble

There are also huge differences in the structure of the two booms, starting with the more fundamental importance of the Internet as an infrastructure and the money properties of the coins besides their business value. That said, basing one’s investment strategy on past patterns, be it price or behavioral ones, is far from being foolish. Heck, most super-investors and top traders do that for a living; and a good one for that matter.

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The ICO boom of 2017

The recent evolution of the number of ICOs (Source:www.techcruch.com)

So are we there yet? Should crypto-investors be worried? Are we at the end of a hype cycle? Let’s look at what we can learn from one of the most devastating bubbles of our lifetime.

How it all Started

Let’s try to understand the logic behind the dot-com boom first. It started with a regime change, much like the introduction of the blockchain technology. People, rightfully so, thought that our lives will be nothing like before the internet, although most of them were a bit off with the timing of those changes, and some of the wildest predictions are still yet to materialize. So, in short, a lot of bright minds saw the revolutionary nature of the connected world way before it changed the way we live and interact with each other, let alone before companies were making a meaningful profit in the segment.

The Dynamics of a Revolution

That realization slowly “infected” the perception of the general public, and that had a profound effect: everyone was convinced that the internet will be everywhere in 10 years, and that led to a buying frenzy in everything that had .com in its name no matter of the concept, the business model or the viability of the project.

Here we are in 2017, and the prophecies regarding the internet have basically come true. Also, there is a ton of things that we couldn’t imagine in 2000 that exist now, based on the technology. When I waited 20 minutes for a short MP3 download, probably I had no Idea about HD streaming services and the internet of things that are common things as of now.

And that’s not a new thing too; the real technological revolutions have huge potentials that are at least in part unforeseen in the early days of the boom. This was the case with computers, electricity, the internet, and probably all the major technological revolutions.

In the case of the blockchain technology, we are probably somewhere where we were with the Internet around 1999. Even the biggest bears admit that the technology is here to stay, and it will be used in a wide variety of industries on a daily basis while having possible applications in now unimaginable fields as well. This should mean that the segment has a bright future ahead and as whole its capitalization will probably rise dramatically from here.

So if the industry has a similar path ahead of it, we have to look at what caused the steep losses for the late investors of the .com boom, and at the possibility of the same thing happening with cryptocurrency investors?

Markets Run Ahead of Themselves

There were two key reasons of the .com bubble and the following bust (granted, we have the benefit of hindsight); first the realization of the revolution came well before the industry matured enough to generate profits anywhere near the amounts that would have justified the lofty valuations that existed towards the end of the bubble.

The second reason is the unconditional buying that was the norm among investors during the late phase of the bubble. If we take a look at the real winners of the internet boom (like Google, Amazon, Microsoft) and the participants of the industries that grew out of it (Apple, Netflix, Facebook), the outlandish projections were not so exaggerated after all, with the segment providing the majority of the most valuable companies today.

The Tech Sector Took the World Over

Global Capitalization List in 2017

That said, a large percentage of the .com companies simply didn’t make it. They failed partly because the vicious competition that investors conveniently ignored, partly because the ideas themselves were not viable, and of course partly because of the fraudulent IPOs, which were only created to milk the unstoppable flow of capital.

The Nasdaq Bubble and its aftermath

The NASDAQ and the Dot-Com Bubble

Now that the NASDAQ is finally at all-time highs, after 15 years of “correction” mind you, investors shouldn’t forget about the companies that are non-existent or at least are not a part of the indices and faded into oblivion. All in all, a large number of investors are still under water nominally, not to mention the real, inflation-adjusted value of the investments placed in 2000.

 The Lessons to Learn for Cryptocurrency Investors

With the above in mind, the current state of the cryptocurrency segment has several dangerous components apart from providing very promising opportunities. One of the earliest and most persistent crypto-bulls called Cryptocurrencies the bubble of his lifetime, as the rally of the past few months catapulted the coins’ market value above the $100 billion mark.

The Market Took of in 2017

Total Value of Cryptocurrencies in 2017  (Source: Coinmarketcap)

The segment’s market capitalization increased 5-fold since the start of the year, and now the gains were shared equally between the largest coins and the smaller players of the segment, as investors rushed to take part in the enormous gains of the cryptocurrency market. The ICO boom definitely resembles the IPO craze of the late 90’s. New coins are popping up in every imaginable sector, and a lot of new investors are piling in, mesmerized by the stellar gains of the whole market.

On the other hand, 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 let that could fuel the rally. Still, investing consciously and being selective with long-term holdings will always be rewarding and blindly chasing the market higher will always be dangerous to your financial wealth.

Bitcoin, the largest cryptocurrency is Still Small

Bitcoin’s market cap compared to enormous size of the global economy (Source:Howmuch.net)

How To Invest in a Revolution

The already mentioned Novogratz still holds 10% of his wealth in cryptocurrencies, while calling it a huge bubble, and he urges all investors do so themselves. For sure that 10% is almost laughable for some, who might have the 100% (or even more through leverage) of their savings in the segment, but for a diversified portfolio, it’s still a lot.

He is trying to maintain that level of exposure, so he uses advances to reduce his positions and loads up again if prices are tumbling. And oh boy, they can tumble… Just recently, Ethereum (the second largest coin) completed a 50% correction while also falling 75% in 2016. For leveraged players, those dips most likely meant the end of their portfolios, but with a 10% rebalancing rule (or a more aggressive 20% one) they were great opportunities to buy in again.

Ethereum's Stellar Rise

The Volatile Bull Market in Ethereum

Of course, if we take warnings of the NASDAQ on face value—that the popping of the bubble can mean a decade-long correction for the industry, rebalancing won’t do the trick. A selective approach is as, or even more important as controlling your exposure.

If you think that the Ethereum (or maybe Stratis or Neo) network will be the backbone of the blockchain universe than probably putting your money in it and forgetting it for 10 years (or adding a certain amount every month) will be a more than simply lucrative strategy. Also, if you think that Bitcoin (or one of its competitors) will really take over, at least a part of the role of gold as a hard. Safe haven currency, the heights that that currency might reach are unimaginable.

The Apple Bull Market, a Possible Route for the Winners of The Cryptocurrency Revolution

Apple (AAPL) Before and After the Dot-Com Bubble

Combining thorough research, common sense, and money management should be the way to go (start with our ICO analysis series for example) while using some of the old and tested investment rules will likely not hurt.

What’s Next for the Cryptocurrency Market?

So are we calling a top here? No, we are not. We are just trying to warn investors that there is no substitute for conscious investments if you are in for long-term gains, and that you have prepare for the unexpected when it comes to financial markets.  If those who think that the segment is in a bubble are right, those blindly buying ICO’s might be in for a rude awakening when the bubble pops.

The good news is that if you do your research and choose the coins to invest in wisely, the blockchain-megatrend will save you from losses and multiply your investments even if you happen to buy right at the top of the bubble.

Featured image from 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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4.7 stars on average, based on 115 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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6 Comments

6 Comments

  1. bitsurfer

    July 5, 2017 at 6:45 pm

    Fantastic article, the much wanted comparison that is certainly on everyone’s minds. Thanks Mate!

  2. embersburnbrightly

    July 5, 2017 at 6:49 pm

    Superb article, very well-timed and very informative. It really helps to put everything into perspective, and the graphs and other images really helped with that. Thank you!

  3. ruthless_hodler

    July 5, 2017 at 8:50 pm

    Mate, this is awesome. Thank you.

  4. jjkateam

    July 7, 2017 at 1:40 am

    Another great article!

  5. Winklevoss

    July 7, 2017 at 2:56 am

    Exactly why we pay for this subscription: some perspective during the FOMO

  6. Chris G

    July 10, 2017 at 11:04 pm

    If I put 10% of my portfolio in crypto, pretty sure my financial advisor would strangle me … that is bold.

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Analysis

Daily Analysis: Oil Extends Rally as Nasdaq Leads Stocks Higher

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Friday Market Recap

Asset Current Value Daily Change
S&P 500 2749 1.38%
DAX 12,483 0.18%
WTI Crude Oil 63.58 1.29%
GOLD 1330.00 -0.16%
Bitcoin 10,14 -0.09%
EUR/USD 1.2295 -0.28%

US equities built up some bullish momentum towards the end of the week, ignoring the technical damage that the volatility-crash caused, and the major US indices rallied into the close today, squeezing the shorts. The Nasdaq, which led the rally as we expected, took out the key 6850 level in late trading and added another percent to, incredibly enough, finish only a hundred point of the all-time high.

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NASDAQ 100 Futures, 4-Hour Chart Analysis

Should the tech benchmark retest the high next week, it will be amid very strong negative divergences, but hey, those divergences have been building for months now. The rally in equities was boosted by the dip in Treasury yields, especially at the long end of the curve, while Amazon continued ot lead the charge, closing right at the historic $1500 per share level.

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Russell 2000 (Small Cap) Index, 4-Hour Chart Analysis

The advance in the Dow and the S&P 500 is much less convincing and with small caps also lagging the tech-behemoth juggernaut, we remain skeptical regarding the sustainability of the move. That said, if the broader indices stay above the key levels, we will be trading the long side in equities, even as from an investment standpoint, valuations are still way above acceptable.

Forex Markets and Commodities

The lackluster performance of European and Asian stocks adds to the negative divergences, especially as the Euro stopped appreciating against the Greenback, and that should be helping stocks of the old continent. Of course, the DAX and the EuroStoxx 50 could play catch-up next week, barring another surge in the common currency.

EUR/USD, 4-Hour Chart Analysis

The most-traded forex pair remains in a short-term downtrend, as it failed to recapture the previously broken rising trendline, and the commodity related risk-on currencies also remained under pressure. The Canadian Dollar did bounce back off yesterday’s 8-week lows, boosted by the much hihger than expected inflation release and the jump in the price of crude oil.

USD/CAD, 4-Hour Chart Analysis

Oil benefited from the positive shift in sentiment, while the Syrian situation, which took a backseat in the headlines, still supports the rally. The Japanese Yen and gold were stable amid the risk-rally and that adds to our suspicions regarding the upside potential form these levels.

Cryptocurrencies

The segment started out the day with a strong bounce that carried the major coins higher by around 10%, but given the recent steep short-term pullback, even that wasn’t enough to turn the tide, and the day ended with an (almost usual) sell-off after the US close. Despite the recent volatility, the overall picture is still encouraging, with most of the majors being safely above the crash lows, likely in a new bullish cycle that has the potential to last for several more weeks or even months.

While new all-time highs are it guaranteed following the 60-70% declines among the largest coins, but even without those, plenty of upside potential is left for investors. With that in mind, investors should hold on to their coins and even add to their holdings on the short-term dips like the current one.

ETH/USD, 4-Hour Chart Analysis

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Analysis

Technical Analysis: Majors Stage Rally but Strong Levels Still Ahead

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The cryptocurrency segment has recovered from a broad correction today in early trading, with the most valuable coins all turning into green during the session, despite the bearish start to the overnight session. With bottom-to-top gains of up to 15%, the rally helped in easing the worries of bulls, especially in the case of the relatively weaker coins.

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Bitcoin and most of the largest altcoins remained stable during the selloff, and BTC recaptured the $10,000 level quickly after trading as low as $9600 overnight. The initial rally topped out near $10,400, and the coin is trading back near the $10,000 level, as the bullish momentum faded away somewhat.

BTC/USD, 4-Hour Chart Analysis

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That said, we expect the uptrend to continue even if the correction could still carry Bitcoin lower. Further strong support is found between $9000 and $9200, while targets are ahead at $11,300, $13,000, and $14,250.

ETH/USD, 4-Hour Chart Analysis

Ethereum showed strength during the bounce again after yesterday, together with the early leaders of the rally, and although the coin dipped below the $845 level in the second half of the session, the signs remain positive for bulls. Support levels are now found at $780, $740, $625 and $575, while resistance is ahead near $910 and $1000.

(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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Analysis

Pre-Market: Stocks Refuse to Fall Even as China Takes Over Key Insurer

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Although it should have been a very quiet week in China, thanks to the New Year celebrations, the recent surge in volatility and the plunge in equities didn’t pass without consequences in the key market. Just shortly after effectively shutting down the Chinese version of the Volatility Index (VIX) (presumably to calm the markets…), one of the main actors of the monstrous financial web, Anbang, of the country had to be taken over to avoid a systemic event and stop the “creative” financial engineering that involved criminal activity (the shadow of 2008).

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China will likely need many more duck-tapes like this one if it wants to stop the largest credit bubble in human history to collapse, but for now, the solution could work. Equity futures edged higher since yesterday’s volatile close, and as the major US indices are holding up well, not far off last Friday’s highs, our bearish short-term view might have to be revised.

Nasdaq 100 Futures, 4-Hour Chart Analysis

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As we discussed before, the long-term uptrend is intact, and we expect at least a re-test of the highs even if we are in a large-scale top formation, but we thought that the technical damage caused by the crash three weeks ago would require more healing.

We are not turning bullish just yet, but today’s session could finally decide if we the BTFD-crowd is strong enough to turn the tide after the choppy drift lower this week. We are still focusing on the Nasdaq, as the broader market seems to be following the lead of the tech benchmark, and a move 6850 (in the Nasdaq 100 futures, and still the 2735 level in the S&P) would be a very positive sign for bulls.

DAX Index, 4-Hour Chart Analysis

The German DAX index is also showing some tentative short-term relative strength although it remains almost 10% below its all-time high, and it remains a strong negative divergence to be monitored.

Forex Markets Quiet

EUR/USD, 4-Hour Chart Analysis

The main pairs are trading in a choppy narrow range today after the strong move in the Yen and the drop in the USD yesterday. US Treasury Yields are edging lower today, helping the calm in equities and currencies, but on a bearish note, commodity currencies failed to rebound so far, and they were providing good signals since the crash. Day-traders should note that the Canadian Dollar will likely be very active again, with the Canadian CPI report coming out pre-market.

To sum the outlook up, we are still leaning on the risk-off side here regarding the short-term outlook, but we wouldn’t bet the farm on that, as there are mixed signals before the weekend.

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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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