LunaticTrader

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Posts Tagged ‘Bitcoin’

The bitcoin crash

Posted by Danny on February 5, 2018

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:

bitc_m

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:

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:

dji_w

Gold in 1980:

gold_w

Nikkei in 1990:

nikkei_w

Nasdaq in 2000:

nasd_w

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

ddd_w

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:

bitc

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Stocks and bitcoin

Posted by Danny on November 20, 2017

Stocks have basically gone sideways so far this month. Since the November 9 drop the S&P 500 is trying to climb back, but it looks like a tired effort. Meanwhile bullish participation continues to weaken, as reported in my weekly reversal levels outlook.

The lunar green period is about to end, so it will be interesting to see what comes next. Here is the current S&P 500 chart:

^SP500 (Daily) 2_11_2016 - 11_17_2017

This index keeps pushing into an important trendline. But my Earl indicator is showing a multi-month bearish divergence. And the slower Earl2 (orange line) keeps moving lower with no signs of a bottom. The MoM has cooled off since peaking into the +8 zone in mid October.
While all those warning signs have not resulted in any significant downside action so far, it doesn’t mean the market is becoming safe. Sometimes the real drop comes at the very end of a longer sideways period.

A few readers have asked about my bitcoin targets. Since my August post, the next target of $6430 was reached quickly. And I had one higher target, posted on Twitter a few months ago:

I would not be surprised to see stock markets and bitcoin reach important peaks together, before entering “cooling off” phases. With bitcoin now well above $8000 a move to my higher target at $9374 looks realistic here, and yes an overshoot to just below $10 is possible too. I would expect some serious profit taking if $10k is approached. Here is an updated chart:

bitcoin

Bitcoin is bumping into an overhead resistance line and a jump above $9k would look like a breakout. But false breakouts are a fairly common way of ending major bull markets. A one or two day jump to $10k that is quickly reversed would be a textbook blow-off peak. The ELC indicator has peaked out already and such a move would paint a clear bearish divergence. I will keep you posted on Twitter.

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So bitcoin hits my long term target

Posted by Danny on August 14, 2017

Normally I write about bitcoin once a year, but since my last post in May the cryptos have become a very fast market and now my long term price target of $4246 is being reached. So, I will give a quick update and some new price targets.
But first I want to take a look at stock markets where some interesting things are happening too. Here is the current Nasdaq chart:

^COMP (Daily) 10_27_2015 - 8_11_2017

Nasdaq has reached 6400 and S&P 500 has stagnated just below 2500, which was the base scenario I mentioned a month ago. Markets had a quick dip last week. Nothing unusual, the S&P was down 1.4% for the week, but people have become so accustomed to low volatility that this was enough to get some traders panicked already. What are those traders going to do if the markets are down more than 2 or 3% in a week (or day)? We will find out some day.
Long term trend lines in Nasdaq and S&P and are being tested but not broken yet. As long as that is the case we better assume that the bull run is ongoing. We are more likely than not to get a rebound rally here. We are starting a new lunar green period and the Earl indicator is in bottom territory (but not turning up yet). Whether that rebound will be weak or strong I don’t know. A sustained drop below 6200 would not look good and then the chances for a rebound rally would dwindle quickly.
Keep an eye on August 23rd, when our LT wave will peak for August. If that paints any kind of high (rebound high, double top or even all time high) then we could very well see a new downturn in the ensuing days.

So, what about those bitcoins? In February 2014 I posted price targets based on my reversal levels calculations. Bitcoin was trading above $600 back then, but my bottom target of $180 was nicely reached by early 2015 and then bitcoin started climbing again. I reiterated my long term buy signal in October 2015, when you could still buy bitcoin at $280. Of course we had to wait longer to get to my top targets of $2457 and $4246, but here we are with bitcoin knocking on $4200 over the weekend. So, does this mean the move is now over?
I really don’t know here, because the $4000 level is a very critical juncture in the long term chart:

bit

Some people are warning about parabolic moves and bubbles already, but that’s because they are looking at a linear scaled chart. Moves of this magnitude can only be judged on a semi-log scale chart. What we see here is a sustained (but very high) rate of change, with the move confined to a rather narrow channel since 2015. The same rate of change it also held throughout 2012 before going parabolic in 2013. 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.

Meanwhile my method shows two new price targets: $6430 could become relevant as a next top target or as a resistance zone on the way to even higher levels. And there is a bottom target at $1470. This would come into play if we get a big drop. Bear in mind, not all my targets and forecasts will work out. I am probably due for some bad calls on bitcoin.

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The bitcoin boom

Posted by Danny on May 9, 2017

Stocks keep trading with a positive bias and major indexes are reaching new all time highs. Our LT wave for May suggests some weakness is up next. We will find out soon. Here is the current S&P chart:

^SP500 (Daily) 7_28_2015 - 5_8_2017

The S&P exceeded its March 1 high yesterday, but it didn’t manage to stay above the 2400 resistance level. It may push through in the coming days, but if that doesn’t happen it will start to look like a failed breakout and that would probably trigger some selling.
The Earl indicator (blue line) has turned down, but the slower Earl2 (orange line) is still headed higher. This can go either way. A continued rally would probably target 2500 where it would test the upper boundary of the blue trend channel. A pullback could give us a revisit of 2300 for a test of the lower boundary.
I am short term neutral until we get more clarity.

Bitcoin is getting a lot of buzz recently as it keeps climbing to new record highs. I try to do a post about bitcoin once a year, so this a good opportunity for an update. I have been quite lucky with my calls on the crypto currencies. I went bearish on bitcoin in December 2013, just weeks before it peaked above $1000. In my second article I called for bitcoins to drop as low as $180, which came true a year later. And in my most recent post in October 2015 I gave a long term buy signal for bitcoin and also tipped ethereum. Ethereum has indeed grown into a strong contender in this space. You could pick up ETH for less than $1 when I wrote my piece and it traded just below $100 in the recent weeks. That’s a nice 100-fold increase in less than 2 years.
So, what’s next for bitcoin? Here is a long term chart:

bitcoin

Bitcoin has been climbing in a nice trend channel since 2015. BTC trades above $1700 as of today, so it looks like it’s going to test the upper boundary of the channel. A breakout above $1900 is possible and would start a blow-off phase like in 2013. But that remains to be seen.
On the downside, the $1000-1200 zone is major support that must be held. A drop below that zone would tell us that newer crypto currencies (possibly ethereum) are taking over, just like Google took over from Yahoo at some point. I still think that most altcoins will go to zero once a crypto currency becomes the clear winner in terms of linking real value and services within its coin.
The next upside targets for bitcoin remain at $2457 and $4246.

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Bitcoin wakes up

Posted by Danny on October 26, 2015

The market kept climbing last week and didn’t stop for any of the resistance levels we had expected. It’s also not bothering about the current lunar red period. What’s going on?
Maybe we are seeing the first positive red period in almost a year. And that would be an indication that the market is starting another leg higher in its multi-year bull market. It will be more clear by the end of the week. Let’s have a look at the S&P 500 (click image to enlarge it):

S&P 500

The S&P is back within the range it held from February until August. The next major overhead resistance is now at 2100-2130. The Earl (blue line) has dropped a bit but appears to turn back up. We could be going to a bearish divergence in this indicator. The slower Earl2 (orange line) is still going up but getting very high. This looks like a market that is more than ready for a pause, so I don’t think there is much upside left at this point.

***

Bitcoin quietly gave a weekly buy signal in our weekly reversal levels a few weeks ago. In my previous articles on bitcoin I was rather bearish: What will replace bitcoin? and Bitcoin price targets, but now could be a good time to turn bullish. Here is a long term icebergs chart for bitcoin (click image to enlarge it):

bitcoin

For the first time since late 2013 we see some significant bullish energy (green) enter the picture. In 2013 the rallies ended in massive overheating (red lava) followed by major corrections. My downside target of $180 was reached earlier this year and a nice base has formed just above $200.
A very long period of “floating ice” has just ended and bitcoin is slowly heading higher. How high can it go? I don’t know, but with this chart $500+ is certainly not out of the question.

As I wrote in 2013, the value of a crypto-currency will start to depend on real intrinsic value that becomes tied to it in some way. It is now clear that this can also be the value of services that are being connected to blockchain technology. This is starting to happen with Bitcoin and also with newer implementations like Ethereum.

Danny

Posted in Financial Astrology, Market Commentary | Tagged: , , , | 4 Comments »

What will replace bitcoin?

Posted by Danny on December 3, 2013

It seems like every other site or blog is cranking out an article about bitcoins those days, so let’s do one too.

Let me start by telling that I have always been a fan of internet currencies and 15 years ago I was among the first one thousand people to open an account with the now defunct e-gold. So, it may surprise you (or not) to know that I haven’t gotten into bitcoins and also do not plan to buy any. Here is why.

As with every other form of “money”, a given piece of currency is only worth what other people are willing to give you in exchange for it. It can always go up or down. This is no different for bitcoins. And what people are willing to give you in exchange for a given unit of currency depends among other things on how scarce that currency is.
When I first heard about bitcoins a few years ago, the concept stood out for its decentralized system, and for its mathematically guaranteed limit of no more than 21 million units that can be created (“mined”). The latter was of course designed to create a certain scarcity, which is needed if the currency is to have any perceived value.
But I was always wondering: what will stop people from tweaking the formulas a bit and start other competing crypto-currencies? And that’s of course what is starting to happen. On an exchange called cryptsy over 60 different crypto-currencies can be traded, and you can only expect that number to continue to rise as long as there are people who pay for such currencies.
The implication is that there is only an artificial scarcity of bitcoin style crypto-currency. There is no real limit to the number of different crypto-currency systems that can be designed, so in reality there is an unlimited amount of crypto-coins, which means their true value is zero. What will happen when people wake up to the fact that crypto-currency can be created in unlimited quantities? I don’t know, but that’s why I don’t buy into bitcoins or any of its clones that are popping up.

That being said, I do think that crypto-currencies are here to stay. I think some of the decentralized protocols designed for bitcoins will find good use.
But some competing crypto-currencies will eventually find ways to offer a more attractive set of features than bitcoin does. For example, savvy companies may link a crypto-currency to intrinsic value , e.g. the delivery of a future service, just like corporate scrip. A company could also use its own stock to be the currency to float within their network. I think facebook and twitter have missed a really great opportunity by cashing in their shares for $. They could have issued 1 crypto-share to each of their users, and let that share be used as a currency. The more the currency gets used, the more valuable the network and thus its shares become, attracting more users. Such a crypto-currency would have intrinsic value because it represents ownership in the company and could pay dividends.

So, I think that’s what will replace bitcoin: crypto-currencies that are somehow linked to real intrinsic value, and crypto-currencies that have designed a way to pay dividends out of profits generated within the system, without needing to know who owns the crypto-coins. They will neither be centralized nor decentralized but rather “semi-centralized” . When that happens the decentralized crypto-currencies with no link to intrinsic value will start going to zero.

I don’t expect bitcoins and its spinoffs to be outlawed. It will become too difficult to control. Governments will eventually adapt by abolishing income taxes and increasing property taxes, as they will always find a way to suck your blood “help you”. Unfortunately, you can hide your crypto-coins and what you do with them, but you cannot hide your home or your car. So, it will be far more simple and effective to tax you on your tangible property. Income tax has never made sense anyway, because it amounts to punishing creativity and productivity.
Zero interest rates will never revive the global economy, while zero income tax rates would do it within a year. The only question is: how long will it take our goverments to realize that they are the sugar in the economic tank? Bitcoin could become the catalyst for that change. But I expect it to be replaced by newer ideas fairly soon, just like AltaVista was superceded by Yahoo and Google…

Be well,

Danny

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