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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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4.6 stars on average, based on 256 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

Long-Term Cryptocurrency Analysis: Correction Deepens but Leaders Remain Stable

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As the major cryptocurrencies got hit hard this week, losing around 20% on average, the long-term picture in the segment got close to an entry point for investors. The overbought readings that developed during the late-April rally are now cleared and although the short-term trends are still clearly negative, we still expect the coins to resume the recovery. With that in mind, long-term investors could start accumulating the relatively stronger coins.

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On a negative note, even the leaders violated key support levels during this week’s selloff, but the secular long-term trends are not yet in danger. The prior leaders Ethereum, EOS, and IOTA are still in the center of attention, as we expect them to form a bottom soon. Bitcoin and the other relatively weak coins, like Litecoin, Monero, Dash, and NEO are still lagging the form a technical perspective, but they are also well above the support levels that would indicate an end of the secular bull market.

BTC/USD, Daily Chart Analysis

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Bitcoin is below the key $7650-$7800 support level and it remains the biggest drag on the market, despite a brief period of relative strength this week. The upper boundary of the base pattern that we identified in April is found near $6150, with a weaker zone around $6500, and with the short-term trend clearly being negative, the latter might be tested before a bottom forms. Further resistance is ahead at $8400, $8700, and between $9000 and $9200, and traders and investors still shouldn’t enter positions here.

ETH/USD, Daily Chart Analysis

Ethereum is testing the $555-$575 support zone after violating the $625-$645 range, with the declining short-term pattern being intact. A bottom near the $500 would still keep the recovery intact, but the correction low might already be in, and investors could already add to their holdings here. Further resistance zones are ahead between $735 and $780 and near $845, while support is found near $450.

(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 256 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

Pre-Market: Oil Plunges Below $70 as Markets Mixed Before Long Weekend

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Financial markets are relatively calm today, despite the hectic week that was highlighted by the Turkish currency crisis, wild swings in bonds, and a step back in US-North Korean relations. Stock markets turned lower globally, with US equities outperforming the rest of the world, essentially drifting sideways all week long, thanks to the slight correction in the Dollar’s rally, and the dip in Treasury yields that was triggered by the dovish Fed meeting minutes.

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S&P 500 Futures, 4-Hour Chart Analysis

Today, the durable goods report came out before the opening bell and although the headline number was a tad worse than expected the more important core figure beat the consensus estimate, helping the slightly dampening economic outlook, even as yields continue to fall, especially with regards to long-dated Treasuries.

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EUR/USD, 4-Hour Chart Analysis

Although emerging market currencies are way less volatile today than recently, despite the rebound in the Dollar, equities shed their early gains and are now slightly in the red. The all-important EUR/USD pair hitting yet another 6-month low near 1.1650, and the test of the key long-term 1.1450-1.15 zone looks more and more likely in the coming weeks, even as the pair is a bit oversold.

Energy Markets in Turmoil as OPEC Signals Production Increase Again

WTI Crude Oil, 4-Hour Chart Analysis

It seems that the crude oil market is in for a strategic switch yet again, as the OPEC, together with Russia made it clear today that the price of the Black Gold finally reached a desirable level. The cartel will be targeting a higher level of output later on this year in order to keep the US shale players under pressure by capping the advance in the key commodity’s market.

The WTI contract reached a 4-year high at $72 per barrel recently and the Brent contract which is more exposed to Middle East woes rose as high as $80 per barrel after trading below the $30 level just two years ago. The last phase of the advance extended above the level where a large portion of the shale plays turn profitable, and as global growth worries also surfaced, the commodity entered a selloff this week.

Gold Futures, 4-Hour Chart Analysis

Safe haven assets continue to be bid despite the relatively calm environment, and gold hit a two-week high today despite the bounce in the Greenback as buyers are back after the wash-out plunge below $1300. With the long-term setup and fundamentals still being favorable for the precious metal, the short-term downtrend line is in danger here.

As US markets will be closed on Monday, which usually favors an active session, volatility might remain high throughout the day.

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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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4.6 stars on average, based on 256 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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Recommendations

Trade Recommendation: Intact Financial

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Technical Overview

  • Since double-bottoming in 2008 and 2009 at $26 (violet horizontal trendline in Figure 1), Intact Financial (IFC.TO) has enjoyed a four-fold increase. During the 2013, 2016 and 2018 corrections, the stock found support at a long-term trendline (support – green trendline; retests – green arrows).

Figure 1. IFC.TO Weekly Chart

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  • Zooming in, after topping in November’17, IFC completed a H&S pattern (tops – yellow ellipses, neckline – yellow trendline in Figure 2).
  • In January, March, April, and May, all up-moves halted at a well-defined short-term resistance (red trendline). Yesterday (May 25), the stock managed to break and close above the resistance.
  • Today, the stock closed in positive territory, whereas the Financial sector (TTFS.TO) declined by over 0.5%.
  • The $95 level had served as support on multiple occasions in 2018 (purple horizontal trendline and arrows).

Figure 2. IFC.TO Daily Chart

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Implications

  • The bounce off of the long-term support and the break above the short-term resistance are considered constructive.
  • The stock is expected to find support in the $95 – $96.50 range during pullbacks (i.e. at the red and purple trendlines).
  • The downward target from the H&S pattern was nearly met during the May decline (target – $92.25 – white vertical trendline in Figure 2, May 9 low – $92.65 – last purple arrow).

Outlook

  • Short-term bullish as long as the stock remains above $95
  • Long-term bullish as long as the stock remains above its long-term support (green trendline in Figure 1).

 Trade Recommendation

  • Buy the stock at current levels ($97.50 at EOD on May 24).
  • Target: Half at $101 (the January low which served as resistance in March – second red arrow). Other half at $108 (origin of the late 2017 decline).
  • Stop: Half upon a close below $95. Other half upon a close below the long-term support (currently at approximately $93.50).

Disclosure: No position yet but may initiate at any time. Will likely recommend the stock to my clients as a potential play within the financial sector.

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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4.8 stars on average, based on 12 rated postsPublished author of technical research. In his work on price “gaps”, published in the 2018 International Federation of Technical Analysts’ Annual Journal, he developed a new technical tool for analyzing and trading the “gap” phenomenon – the “K-Divergence” (http://ifta.org/public/files/journal/d_ifta_journal_18). Besides obtaining a Master in Financial Technical Analysis, he has completed a BBA and an MBA from the Schulich School of Business in Toronto and has completed all exams for the CFA, CMT and CFTe designations. Currently, providing research to investment management and financial advisory firms. http://www.linkedin.com/in/konstantindimov




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