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Analysis

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 money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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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

Bitcoin’s Record-Breaking Rally Continues as Prices Cross $8,100

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Bitcoin surged to new highs on Sunday, as the world’s largest crypto by market cap continued to generate bids following the cancellation of Segwit2x.

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BTC/USD Price Levels

The value of a single bitcoin reached a daily high of $8,110.59, its best level on record. At press time, BTC/USD was valued at around $8,002 for a gain of 4%.

With the gain, bitcoin’s market cap now exceeds $133 billion. That’s roughly $100 billion greater than Ethereum, the market’s second most valuable cryptocurrency.

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Bitcoin has added more than $1,100 over the past five sessions. It was down around $5,600 just one week ago.

Bitcoin Cash (BCH), a digital currency alternative that broke away from the original blockchain Aug. 1, was down 5.1% at $1,185. BTC and BCH locked horns earlier this month after the Segwit2x hard fork was abandoned.

$10,000 and Beyond?

Institutional clearing platform LedgerX has initiated its first long-term bitcoin futures option, which is set to expire Dec. 28, 2018. In setting up the option, LedgerX is assuming a price of $10,000 at the time of expiration. That’s a 25% premium on current levels.

Investors who buy the option are essentially saying they believe prices will exceed $10,000 by the time of expiration.

Bitcoin is being helped by growing institutional demand for the digital currency, as hedge funds, day traders and other mainstream investment outfits look to access this burgeoning asset class. CBOE and CME Group have each announced plans to integrate bitcoin into more conventional investment vehicles in the coming months.

The rush of institutional money into bitcoin is a sure sign that the digital asset class is becoming too big to ignore. The value of all cryptocurrencies in circulation has already exceeded $230 billion, with more than a dozen coins valued at $1 billion or more. Nine others have a market cap of $500 million or greater.

Coinbase Responds

The rise of institutional capital has also compelled Coinbase to introduce a custodial service targeted at account holders with more than $10 million in assets. This service targets hedge funds and other institutions that have remained largely on the sidelines of the crypto revolution.

In a recent blog post, Coinbase CEO Brian Armstrong announced that the new service will launch sometime next year.

“When we speak with these institutions, they tell us that the number one thing preventing them from getting started is the existence of a digital asset custodian that they can trust to store client funds securely,” Armstrong wrote.

In addition to maintaining the minimum $10 million asset requirement, institutions must pay a $100,000 setup fee to gain access tot he Custodial program. In response, institutional investors will receive assurance that their assets are secure.

The Coinbase Custody website lists broad support for bitcoin, Ethereum (ETH) and Litecoin (LTC), as well as ERC20 tokens. The ERC20 protocol has emerged as the favorite for startups launching initial coin offerings (ICOs), a controversial crowdfunding model that has already overtaken early stage venture capital.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

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Cryptocurrencies

Is Ethereum Ready to Play Catch Up With Bitcoin?

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In mid-June of this year, the difference between the market capitalization of bitcoin and Ethereum had narrowed down to less than $8 billion. This had many market participants excited. They expected Ethereum to dethrone bitcoin as the leader, a move popularly termed as flippening.

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Key observations

  1. Ethereum has hugely underperformed bitcoin
  2. The chart pattern suggests that Ethereum is likely to play catch up in the next few months
  3. Stay on the long side of Ethereum to benefit from the bullish setup

However, fast forward five months and the difference in the market capitalization of the top two cryptocurrencies has increased to about $96 billion. This shows that while bitcoin has raced ahead in the past few months, Ethereum has hugely lagged behind.

However, is the underperformance about to end?

The chart pattern shows that Ethereum is likely to embark on a rally of its own that can carry it to $645 to $670 levels in the next few months. Let’s see how we arrived at these levels.

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Ethereum opened trading at $8.16 on January 1, 2017. It started its rally in March and by June 12, it reached a high of $420, an astronomical rally of about 5047%. Thereafter, it entered a period of consolidation, digesting the gains.

On the charts, Ethereum has formed a large symmetrical triangle, which usually acts as a continuation pattern. The breakout is generally in the direction of the long-term trend, or the trend that was prevailing before the pattern formed. In this case, the sharp move from January to June confirms that the cryptocurrency was in an uptrend before forming the triangle.

However, this is not a fool proof trade because sometimes the symmetrical triangle acts as a reversal pattern. Therefore, the best way to play this trade is to wait for a breakout of the triangle before initiating any trade.

Where can we take an entry?

Currently, the resistance line of the triangle is at about $378 levels, a level close to today’s intraday highs. The bears are likely to strongly defend this level. However, if the bulls breakout of $378 and manage to close above the resistance line, the trade on the long side will set up.

Different traders use different methods to confirm whether the breakout is valid or not. Some wait until price moves 3% above the breakout level, others wait for three consecutive closes above the resistance level.

However, we have observed that the best breakouts never look back, hence, waiting for three days may lead to a missed opportunity. Therefore, we can wait for a closing above the resistance line of the triangle and initiate the long positions on the following day.

The breakout can face resistance at $400 and $420. However, we expect the virtual currency to scale both these resistances and rally towards its pattern target zone of $645 to $670.

Notwithstanding, even the most reliable patterns can fail. Therefore, our stop loss will be kept at $340. We don’t want to hang on to the trade if it falls back into the triangle. We shall raise our stops to breakeven as soon as Ethereum breaks out to new lifetime highs. From thereon, we shall trail the stops higher to protect our paper profits.

Note

The chart pattern suggests a resumption of the long-term uptrend in Ethereum. However, this will not get confirmed until the cryptocurrency breaks out and sustains above $380. Therefore, please initiate positions only on a breakout and close above the triangle. Entering presumptive trades may result in losses.

Featured image courtesy of Shutterstock. 

 

 

 

 

 

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Analysis

Long-Term Cryptocurrency Analysis: Bitcoin Flirts with $8000 as Altcoin Bull Persists

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Bitcoin’s swift recovery was the main topic of the week, as the most valuable coin not just regained its steep losses, but hit a marginal new high towards the end of the period. The entire segment is experiencing capital inflows as the total value of the coins climbed above $230 billion for the first time ever after finally leaving the vicinity of the $200 billion mark.

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BTC breached the $8000 level before turning slightly lower on Friday, but despite the severely overbought daily chart, it is still trading near its all-time highs. As the long-term picture still suggests a deeper correction, investors should wait with opening new positions and traders should also control position sizes here. Key support levels are found at $7700, $7000, and $6700, while the recent key break-out level at $5000 still hasn’t been re-tested.

BTC/USD, Daily Chart Analysis

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Dash is still the most bullish altcoin from a technical standpoint, despite this week’s short-term correction, as the coin is trading above its prior all-time high, and this weekend, it looks ready to test the break-out high near $500. Support levels are still found at $400, $360, and $330, and as the long-term picture is approaching overbought territory, investors should only hold on to their positions here.

DASH/USD, Daily Chart Analysis

The other major altcoins are also mostly in bullish setups, with some of them already in the latter stages of this cycle, like Monero and IOTA, but elsewhere in the segment, there are still opportunities for both traders and investors. Let’s see the detailed long-term view.

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