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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.

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.

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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4.6 stars on average, based on 321 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

Crypto Update: Ethereum Classic on Track for a Bullish Reversal

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Ethereum Classic (ETC/USD) is among the many altcoins that suffered a massive beating this year. While the pair managed to go as high as $47.296 on January 14, 2018, it has been on a downward spiral ever since. On August 14, it registered a low of $10.10 and at that price point, Ethereum Classic has shed close to 80% of its value from this year’s high.

Just as gloom and doom articles started to circulate on the internet, Ethereum Classic came back from the dead. The market is still weak but it is gaining strength. In this article, we reveal three reasons why we believe ETC is on track for a bullish reversal.

Successful Backtest of a Breakout

Many investors believed that Ethereum Classic was headed into even deeper bear territory. It breached support of $12.00 on August 13 and generated another lower low. After all, lower highs and lower lows are the hallmarks of a downtrend. ETC seems consistent in following the textbook definition of a downtrend.

With these developments, it’s difficult to imagine that Ethereum Classic has already broken out of a reversal pattern. However, it did break out of the large falling wedge on the daily and weekly charts. What we’re seeing right now is the backtesting of the breakout.

Daily chart of ETC/USD

In technical analysis, a resistance becomes a support level once breached. The chart above shows the clear breach of the resistance, hence the breakout. Even with the breakout, Ethereum Classic still dropped. This may seem counterintuitive that’s why many are still saying that the market is bearish.

However, the chart clearly depicts that ETC bounced from the support. It is respecting the new support, which means the breakout is still valid. The backtesting was a resounding success.  

Ethereum Classic Indicators Look Strong

We’re bullish on Ethereum Classic because technical indicators are glowing. Ignore the price drop and you’ll see that the market is gaining strength.

A quick look at the weekly chart reveals that bulls are returning in massive numbers. The extreme volume surge over the last two weeks tells us that bulls are buying the market. The last time ETC printed the same volume level was back in February 2018. However, this is the first time the market is printing such heavy volume for two consecutive weeks.

Weekly chart of ETC/USD

On top of that, a long bullish divergence can be spotted on the daily MACD. Also, ETC has bounced from historic daily Stochastic support of 7.00. These indicators tell us that bulls are wrestling the momentum away from bears.

Daily chart of ETC/USD with indicators

Projected Move

ETC/USD may be looking bullish, but that doesn’t mean that the market will skyrocket anytime soon. On the contrary, it would be better for the long-term health of the market for the price to consolidate between $12 – $20 before making a major move up. If a massive rally occurs that works, too. Whatever happens, we believe that the future looks rosy for ETC.

ETC/USD may have bottomed out

The main reason for the optimism is because the market just bounced from its historic support. This tells us that a bottom may be in place and it’s highly likely that ETC will not go anywhere but up.

Bottom Line

ETC may look extremely bearish but a closer look tells us the exact opposite. The successful backtest of the breakout and the flashing of bullish signals from multiple technical indicators tell us that Ethereum Classic is on track for a bullish reversal.

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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3.6 stars on average, based on 224 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Analysis

Ethereum’s Tumble:  ICOs Aren’t The Problem

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Trying to come up with a rational explanation for crypto price movements is a thankless task. Sure, there are several attempts being made by quant jocks to develop a model for valuing coins and tokens.  Most of these that I have reviewed suggest that prices undervalue both the underlying asset or the eventual demand.

In other words, crypto prices are cheap: what a surprise.

This bit of wisdom may be of some comfort to committed long term investors, but it hasn’t translated into higher market prices. A good example of this is Ether. Over the past six months, while Bitcoin has been treading water (down 7%), the price of Ether has been cut in half.  This altcoin was the topic of one of my recent articles called: Has Ethereum Lost It’s Cache?

The essence of this article was to point out how Ethereum, the platform preferred by 75%-80% of all ICOs, was suffering from investor indifference.  When you measure the activity of the top 100 tokens according to CoinMarketCap.com, the US dollar value of 9 of the top 10 most actively traded amounted to an average of $14,000 over the previous 24 hours.  Please keep in mind, trading activity in ETH over the same 24 hour period amounted to $1.8 billion USD.

Bloomberg Speak

One of the more interesting contradictions to my research into Ethereum’s plight comes from an article originating from a highly respected source: Bloomberg News.  The headline reads: “Ether Tumbles as Concern Increases That ICOs Are Cashing Out”.  It is totally defies the data to believe that every ICO cashing out when there is almost no volume to confirm this claim.

Quoting from an August 13th article:

Initial coin offerings using the Ethereum blockchain are seen as one of the main catalysts for sending Ether’s price surging last year. Now they’re being blamed for its decline.

It is quite true that initial coin offerings using the Ethereum blockchain was a catalyst for sending Ether’s price surging last year. It gave investors a reason to buy Ether even if they didn’t tell an ICO from a UFO. But are ICOs the real blame for both the good and the bad of Ethereum price?  I will step aside and let you be the judge.

For starters it is important to remember that ICOs raised $2.4 billion last year while ETH value appreciated almost $70 billion. The concept of ICOs may have fueled blind speculation but the math tells us that real demand was much less.

As for taking the blame for falling ETH prices, consider this notion. At its peak in January ETH was valued at $133 billion.  Currently that value is $100 billion+ lower than just eights months ago.

Using the data from ICOWatchList.com, since the beginning of 2017 ICOs have raised a total of $8.5 billion.  The statistical experts claim the Ethereum platform was used by between 80%-83% of all ICOs, thus reducing the $8.5 billion number to $5.7 billion.  

There is no question that ICOs influenced ETH speculators but that doesn’t begin to explain the more than $600 billion in aggregate losses for all crypto assets.   

Criticism Of Startup Managements

Critics claim that ICOs give startups the ability to raise lots of capital but they are proving weak in management on the funds once they are in their crypto wallet.  There is a certain validity to this since the number of founders with deep experience as CEOs and CFOs is pretty limited. But how can anyone separate insider selling activity from all other volume?

Research website Santiment, which compiles a selection of Ethereum-based projects, estimates startups have spent over 110,000 Ether in the past 30 days. At current prices that amounts to about $33 million.  For sake of discussion, let’s assume this high rate of token liquidation took place each and every month this year. Then use and average ETH price of $700 and that brings the total to $616 million.

There is no question that ICO sellers have contributed to the decline in ETH.  It would even be fair to call it a catalyst that created fear of losing all (FOLA).  Now if we could only quantify fear with an index like the VIX used by stock investors, we would see the major cause of the decline.

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 97 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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Analysis

Commodity Update: Wheat Not Yet Out of the Woods

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Wheat (WHEAT/USD) is up 29.12% year-to-date as the market came to life early this year. The successful defense of a key support level attracted investors who were staying on the sidelines for years while waiting for a tradeable bottom. This ignited a powerful rally that saw the pair generate volume that’s never been seen in over 15 years. As a result, many investors believe that Wheat may have finally reversed its trend.

In the midst of the bullish rally, it appears that bears are pulling the biggest trick that’s up their sleeve. In this article, we explore why Wheat is not yet out of the woods.

Premature Reversal for Wheat

A quick look at the daily and weekly charts reveals that the commodity appears to have broken out of a cup and handle pattern. From a short-term perspective, the market registered a higher low of $3.908 in December 2017. This gave bulls the confidence to stage a massive rally. The rally eradicated resistance of $5.00 in July 2018 with colossal volume.

Weekly chart of Wheat

The price action has led many to believe that the multi-year downtrend is over. But what if it isn’t?    

Major Roadblocks Ahead

A long-term view of the commodity reveals that it’s still in a downtrend. The market’s inability to close above $5.50 on the weekly and monthly charts is a signal that bears are not yet ready to hand over the keys to the kingdom. They are fighting back and so far, it seems that they have the upper hand.

Monthly chart of Wheat

Wheat is not reversing the trend as long as it respects the long-term resistance. This trendline has existed for 10 years and it is responsible for the commodity’s multi-year downtrend. From this perspective, it is easy to see that the pair continues to post lower highs and a lower low, which is the textbook definition of a downtrend.

Wheat still in a downtrend

Projected Movements

It’s not gloom and doom for bulls however. Even though a major resistance is staring down at them, they might still be able to come out on top. Keep in mind, bulls posted a record-shattering volume in July when Wheat went above $5.00. That means $5.00 has now become a key support level. It might just be strong enough to ignite a new rally and finally take out the long-term resistance.

Possible movements of Wheat

Otherwise, the record-breaking volume would work against bulls. All of those who bought above $5.00 are most likely using the support as a stop loss. Breach of this support would ignite a selling frenzy that can drive the market to even lower levels.

It is very possible that Wheat could capitulate during this plummet. When it does, there will be a long-term support where bulls can stage a rally to break out of the large falling wedge on the monthly chart.

Bottom Line

Wheat’s recent move above $5.00 with massive volume has attracted a lot of investors. The market may look bullish but in reality, it needs to deal with a long-term resistance before it can reverse its trend. In other words, Wheat is not yet out of the woods.

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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3.6 stars on average, based on 224 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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