Is the bubble in Bitcoin and cryptocurrencies over?


Let’s not kid ourselves. Bitcoin is in a massive bubble. It is literally the fastest bubble in history. With Bitcoin falling more than 50% from its all-time high, the question is:

Is the bubble in Bitcoin and cryptocurrencies over?

*Some people assume that Bitcoin can tank 80% while other cryptocurrencies will be unaffected. I disagree. A crash in Bitcoin = a crash in the entire crypto space, as we’ve seen over the past few days.
*Cyptocurrency is not the same thing as blockchain. Blockchain is the technology behind cryptocurrencies. Investing in crypto because you want to “get in on blockchain” is silly. Using my favorite analogy, people invest in Google not because they want to “get in on the internet”. People invest in Google because Google makes money. People who invested in tech stocks during the dot-com bubble just to “get in on the internet” were financially clobbered when the bubble burst.

Fundamentals

The bubble in Bitcoin is purely sentiment-driven. In a bubble, the market loses all disconnect with fundamentals, which is what’s happened to the entire cryptocurrency space since 2017.
2 academics did an interesting study which demonstrates that Bitcoin’s fundamental value is $20 a coin. Here’s an excerpt from Business Insider:
“Bitcoin was developed as a form of money, and money has value even though most money, like bitcoin, has no substance other than the electronic.”
That value, according to Jackman and Savouri, is based on its demand as a vehicle of exchange. 
“And on this basis it is fairly easy to calculate, approximately, what its fundamental value is.”
That number, according to Jackman and Savouri, is a mere $20. Here’s their logic:
The supply of bitcoin increases only slowly towards its famous fixed limit and is now around 15m. The use of bitcoin as a means of payment is currently around $100m per month, or $1,200m a year. Were bitcoin just like ordinary money each bitcoin would be used around four times a year in making transactions. So we have 60m bitcoin payments supporting $1,200m worth of bitcoin transactions, which requires that each bitcoin is worth $20. 
There’s always a “but” with such analysis. And the “but” in this case is that bitcoin could be worth its current value, but it would have to see a 1000-fold increase in its use as a form of payment (which is basically impossible).
I think the fundamental value is higher (if you include illegal money laundering). But the basic point is this:

Bitcoin’s current price has no connection with fundamentals at all.

Since Bitcoin is driven by speculators’ sentiment, we can only use technicals to guess if Bitcoin’s recent decline is just another correction, or if Bitcoin’s bubble is over.

Technicals

Bitcoin has been in a bull market since 2015. This “correction” is very different from previous corrections. This suggests that Bitcoin’s recent “correction” is the beginning of a bear market (i.e. bubble popped) and not just another correction.
For starters, the current “correction” is already the biggest since 2015. But here’s the more important part:

Bitcoin fell approximately 30-50% in its previous corrections. In each of those corrections, Bitcoin fell at most 50%, bounced, and never made a new low.





The current “correction” is different. Bitcoin fell almost 50%, made a massive retracement that exceeded 61.8%, and then made a significant new low. Bitcoin is making lower highs and lower lows.

So from a pattern perspective, Bitcoin’s bubble is already over.
Bubbles are like ponzi schemes: “investors” and speculators are hunting for the next big thing that will yield 1000% returns in 2 months. And like ponzi schemes, bubbles need more and more fresh money to keep them going.
The more Bitcoin falls, the less people will believe in the “magical properties” of cryptocurrency and blockchain (aside from hardcore believers who rode the bubble all the way up and will ride the bubble all the way down).
That’s how bubbles die. The self-fulfilling cycle of “the market going up attracts new money, which pushes the market even higher” ends.

Other factors

Governments around the world are moving against cryptocurrencies. There is too much illegal activity in this market. Many companies are literally selling thin air and dreams of vast crypto profits (ICO’s) to fund their projects. After all, why sell shares in your startup to raise capital if you can raise capital by selling thin air?
In addition, there is an inverse correlation between Bitcoin and gold. Both of these markets represent anti-fiat alternatives to the U.S. dollar. Bitcoin’s bubble over the past 2 years has capped gold prices. A lot of the doom-and-gloom money left gold for crypto. You can see this in the comments on Zerohedge, a big doom-and-gloom website.

  1. Most Zerohedge commentors were diehard gold buyers 2 years ago. Every dip in gold was meant to be bought, because “the U.S. dollar is going to hell”.
  2. Today, most commentors are diehard Bitcoin & crypto buyers. Every dip in Bitcoin should be bought, otherwise you’re “an idiot who just doesn’t get it”.

There are 2 types of money in cryptocurrencies:

  1. Diehard believers who are looking for an alternative to the U.S. dollar as inflation rises.
  2. Speculators (i.e. most “investors” in cryptocurrencies) who are looking for fast profits.

Gold is on the verge of a massive breakout because the U.S. dollar is in a bear market. Inflation is coming, and historically the best hedge against rising inflation has been precious metals. When gold breaks out, all the money that left gold for Bitcoin will flow back into precious metals.

In addition, gold and silver (silver in particular) can act like Bitcoin. Silver is an insanely volatile market and it can easily go up 10x in 1-2 years. When silver makes a new high above $50, all the speculation money will flow into silver and away from cryptocurrencies. Speculators are attracted to the scent of fast money, and the fast money over the next 2 years will be in precious metals.

Conclusion

Ultimately, it’s impossible to know for sure if Bitcoin’s bubble is over or not. The only way to know for sure is if Bitcoin makes a new all-time high. But if I had to guess, I think the bubble is already over. The top is in.
If Bitcoin makes a new all-time high, then its bubble isn’t over and it will go MUCH HIGHER. Otherwise, Bitcoin is dead.
This is why the trend following strategy in cryptocurrencies works.

  1. If the bubble is over, you will never go long crypto again and you don’t have to ride the crash all the way to the bottom like contrarian traders.
  2. If the bubble isn’t over, you will miss out on some profits from here to the new all-time high. But you will still make a ton of money after that because each leg of a bubble is significantly higher than the previous leg. Trend following is a safer way to play bubbles than trying to “buy the dip”, because you never know which “dip” will be the end of the bubble.

8 comments add yours

  1. Hello Troy,
    In your fib retracement zero starts in 10k, why not in 6k?
    Thanks for the great work.

  2. I know you mostly trade UPRO, but if you smelled a silver bubble coming, would you dabble in some USLV?

    • No, but I would buy some SLV. Just in case my unit is wrong, the erosion in USLV won’t kill me. And I can always transition from SLV to USLV as the market goes up.

  3. Hi Troy,
    Is there generally a lag in precious metals rising after the decline of the dollar? The dollar has declined but silver, for example, has not started an uptrend.

  4. Hello
    I would like to thank for your captivating blog. As a rookie, your articles are very enlightening.
    Bitcoin already knew bubble territory in the end of 2013 and suffered afterwards a long bear market.
    Can we imagine another rollercoaster for bitcoin or other cryptos in a few years ?
    Thanks!

    • I don’t know if Bitcoin will go up again in the next few years. But I expect this bear market in crypto to last 1-2 years if Bitcoin’s top is already in.

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