The bitcoin crash

All eyes have been on Bitcoin BTC and other crypto currencies recently. After reaching a peak near $20000 BTC is now down to $8000. So what’s next?

Here is what I wrote about bitcoin last August:

A sustained breakout above $4000 that quickly heads for $5000+ would start a parabolic move like in 2013. And then it can go above $10k. A failure to do so would probably give us a peak near my $4246 target and be followed by a significant decline when traders notice that the steep rally has ended.
Both scenarios have 50/50 chance at the moment, so if you hold bitcoin from a much lower cost base then I would sell some and hold the rest at zero cost base. A tulip mania type move is possible here and then bitcoin could reach $10k or $20k before a big panic.

Here we are. BTC reached $20k and is dropping quickly, but investors are not really panicking (yet) and that’s a reason for concern. So, let’s have a good look. Here is an update of the long term chart I posted in August:

The rate of change is slowing down, which is normal after a move of this magnitude. The best case scenario is now a continued climb within the more sustainable pale green trend channel. But that would mean a drop to $2000 if the lower bound of this channel is to be tested. A failure to hold this channel would probably tell us that BTC is going to near zero. That’s the big picture.

Of course, Bitcoin has come back from similar drops on several occasions. But that’s the problem here. Too many investors/speculators seem to believe that will happen again and that’s why there is little or no panic, even after a 60% crash. Many traders are just doubling down on their losses, encouraged by “expert” predictions that keep talking about $50k, $100k BTC in the near future (e.g. https://www.buzzfeed.com/rabbiyitziweiner/21-bitcoin-experts-share-their-predictions-about-t-37p3h)

Small investors’ enthusiasm and confidence has become too high and that never ends well. As I pointed out on Twitter near the highs in December, Bitcoin has become more popular than SP&P 500 ($SPY) on sites like Stocktwits:

Stocktwits reports a 7 day average message volume of 20400 for Bitcoin, which is now signifcantly higher than for $SPY (15400), normally its most active ticker. Make your own conclusions ;-) $BTCUSD

— LunaticTrader (@lunatictrader1) December 7, 2017

10 Days later BTC printed its current peak. But traders’ appetite for BTC has not cooled down on Stocktwits. The 7 day average message volume is now regularly above 30,000 and there are 85,700 people who are watching BTC. That’s more than the 73,500 investors who watch SPY (S&P 500 etf) on the site. By the time BTC finds a real bottom I would expect those numbers to be a lot lower.

Ongoing popularity in the face of a significant drop is usually a sign that there is more pain to come. This has happened before in other popular manias and it typically ends in a similar fashion. A first 50% crash is met with denial and after a few months of stabilizing prices (which many traders interpret as a last chance to buy before the next explosive rally) the so-called “waterfall declines” start, often ending 70-90% below the peak prices.

Classic example include the Dow in 1929:

Gold in 1980:

Nikkei in 1990:

Nasdaq in 2000:

And even individual stocks or sectors. Remember 3D printing in 2014:

We always see the same thing. A huge run-up that triggers traders’ imagination of easy riches followed by a 50% crash that is seen as the next great buying opportunity. A few months of stabilizing and rebounding prices convince the remaining skeptics that the bull market is continuing. And that’s how the stage is set for the second phase of the crash.

If Bitcoin follows the same pattern by bottoming in the coming weeks followed by what looks like a healthy rebound then remember those charts and be careful. I will keep posting my observations on Twitter until I do another post on crypto here on the blog.

Good luck to all.

PS: Good question by a reader: Could it be that BTC moves quicker and that we are already in the waterfall declines? A: Yes, that’s possible. Here is a daily chart, 50% drop and a one month rebound: