The Cryptocurrency Craze

 

BTC $10,505                                                                          ETH $451

Bubble After Bubble

Every 7 or 8 years, our system seems to produce a new bubble in the markets. Just in the last 20, we have had two that are still fresh in our memories (unless you are a newbie millennial); the dot coms which represented the first coming of the internet as we know it, and the real estate crash that almost sent the world under. Each of these euphorias had key aspects in common when it came to the stocks in their respective spaces. 1. A small number of names that dominated the area or industry  2. A small number of shares available to trade by the public (float) in each of them 3. Massive institutional sponsorship (mutual funds, ETFs, hedge funds) 4. A media hysteria that perpetuated the bubble by showering the space with attention that drove further demand 5. Which led retail investors to pile in even more 6. … and then left them holding the bag when it all collapsed.

In the 1990s, there were only a true handful of names that controlled the dominant share of gains, into which everyone piled in, most with small floats; names like Yahoo, AOL, Amazon, Priceline, etc. The big boys that figured it out and collected the cash, survive to this day, while killing off the Infospaces and the sock puppets. Then In the mid 2000s with the real estate bubble, it was again a handful of high-flying homebuilding stocks that once again, had a significant amount of capital competing for a small supply of stock. This added fuel to the fire in these stock’ meteoric rise. Institutions jumped in as they always do (for fear of not beating the market) adding a tailwind on the way up, and inversely as these markets corrected with each bubble, that same demand for shares then became massive supply which was dumped onto the market en masse, exacerbating their falls and in turn, ending the bubble. The cycle once again, repeats.

Enter the Crypocurrency Craze:
The new Tulip Mania, only bigger and more meaningful to society

bitcoin chart 2017 12-01

Bubble #3 began a few years back with technology creating a new way of transferring money from one person to another (peer-to-peer or P2P) via digital currency called Bitcoin and others which now offered the following unique characteristics that hadn’t really existed before:

  1. Limited government involvement or intervention due to its decentralized setup…
  2. Existing without a fear of inflation ruining the value of these currencies due to excess printing or minting…
  3. Seemingly immune from budget and government tampering through monetary policy overreach or overzealous political parties…
  4. With a fixed supply of shares (see the first two paragraphs above)…
  5. While in turn, giving investors another way to cut out the middleman like banks who in essence if you think about it, have historically scalped money off of us all througout our lives in almost every transaction we’ve made from our checking and savings accounts, to our mortgages and car loans. We just got used to it and didn’t question it.

Digital currency and coins by their very nature, overcome many of the above concerns. Bitcoin (BTC) is arguably the most popular of these cryptocurrency coins. The airwaves do not go without a mention every time it adds a few hundred points, or  breaks a round number price level. Bitcoins parabolic ascent is creating a can’t lose psychological euphoria in the average investor’s minds, which is the primary danger out there now. Seasoned investors know that there are two primary emotions that rule in hot markets; fear and greed. This one is no different.

Bitcoin and co. operate on what is called blockchain. There are hundreds and thousands of YouTube videos on blockchain so I will not review it other than to say that it is the beginning of a transformation of the digital commerce system as we know it. Every possible conceivable electronic transaction that you can think of will in the near future, operate off of blockchain or the ethereum network which will be a complete reinvention of how business is conducted over the web. If companies don’t embrace this technology now they will be left in the dust. There are several retailers that allow you to use BTC to make purchases, like Overstock and this will increase rapidly in the near future.

Bitcoin, like the few names mentioned above in the dot com space and the homebuilders, has a very small supply of “coins” available and was set up so that it will never have more than 21 million of them. And as investors, we must think about this number of coins as “shares outstanding,” just like our previous discussion of the two bubbles above in terms of supply and demand and the price of these coins being pushed higher and higher. With just a few major coins in the space and given their small levels of supply available, it is akin to everyone in the world speculating and placing their bets on just a few micro-cap stocks. The media hysteria (#4 above) is pushing increasingly rapid adoption of the retail investor base and institutions are scrambling to offer futures products on Bitcoin, which will then spur the creation of futures based mutual funds and ETFs, so you won’t actually need to own bitcoin in itself. Companies like ProFunds, Powershares and Rydex are I’m sure, already prepping these products in advance of the Chicago Mercantile Exchange and CBOE launching their BTC derivatives. Jamie Dimon of Morgan Stanley who publicly trashed BTC, has now acquiesced and is allowing his team to begin trading it. This aside, institutions and hedge funds will also be buying raw BTC on the open market, adding even more upside fuel to its price.

Ethereum is a newer entrant, and second largest in terms of market capitalization next to Bitcoin, but is coming on very, very strongly. Ethereum’s “coin” or fuel is known as Ether (ETH) and this ether is mechanism which allows for each part or node of the network to be created and grow. Ethereum’s beauty is its ability to create and execute smart contracts for a multitude of industries that operate on their own once conditions are met. In terms of structure, there are just under 100 million ETH now and the way it is set up, is that the count grows by around 10%ish or so a year – I hear they are working on reducing the count, which would be good. The plus side of this versus BTC is it is a little more liquid, but should still allow it to participate in significant upside and not hamper the “tide lifting of all the boats” with only a few major coins in the space. Ethereum to me, is far more interesting than Bitcoin in its long-term potential and I have heard many experts say that it will EXCEED BTC’s market cap in a very short period of time.

The ethereum network is based on trust, verifiability and security, and in my opinion, is truly the second coming of the internet and a threat to all middleman companies that take fees from us. It will allow for very secure transactions with significantly lower fees, where anything involving transactions are rigidly documented, accounted for, and verified by 30 or so “miners,” before being accepted within a millisecond, creating a tight mesh digital ledger that can never be altered or tampered with over time. Think of the legal industry, compliance areas, banking and regulation, etc. With this in place, would we have had the issues we had in the mid to late 2000s during the crash where no one knew who actually owned a mortgage and all of the subsequent finger-pointing? What about every digital transaction oriented company rebuilding their payment systems on the ethereum platform (which will probably look the same to you as the user), that is so secure that it can’t be hacked and privacy violations will be impossible. Would you rather conduct business on an ethereum verified network, or make an “ethereum verified transaction” with all of the privacy and identity theft issues around, or the same way as you do now? The Ethereum network offers this possibility. It is the way the internet should have been built all along. Gone are the centralized websites that have invited our identities to be hacked and stolen, in favor of the “people’s internet” which is owned by everyone and decentralized.

Buying BTC or ETH

Coinbase.com, a coin based brokerage firm, is opening over 100,000 accounts a day and has surpassed the great Charles Schwab in terms of total number of accounts. This is staggering and a testament to the craze going on right now. They offer the ability to buy and sell three coins right now; Bitcoin, Ethereum, and Litecoin. Coinbase is all over the news, so naturally all the money that goes into these accounts and is then used to make purchases, goes into just THESE THREE names, with very, very small source of supply in their number of coins. This will push their prices up more and more.

Other factors that will add additional fuel to their upside price moves:

  1. Adoption of futures trading
  2. Subsequent futures based investment products being offered, which will increase adoption (mutual funds, leveraged mutual funds, and ETFs)
  3. More media hysteria, which fuels more account openings and deposits
  4. The coins being pushed up farther as money flow continues to go into just a few names
  5. More institutional “ownership” of the raw coins
  6. The wow/cool factor of how these new networks are changing the way we conduct business with businesses and with each other
  7. Talk of price targets (BTC will go to 1 million a coin)
  8. Talk of “It’s different this time”…
  9. Major retailers like Amazon and Wal-Mart adopting the coins (you have to buy the coins in order to buy thing with them). Remember, BTC will only have 21M of them, max.
  10. And more

What investors need to decide is what risk they want to assume with these high-octane trading vehicles, most of which have already produced returns a beginning investor would only dream about achieving – throughout an entire lifetime  and investing career!

In technical analysis, we need to respect and fear what is known as a parabolic chart. This is what BTC has right now. I personally would not buy this chart, which is a reflection of what every investor in it feels about it right now at this time. BTC will have very large corrections on its way to astronomical gains. Smart investors will wait to see on the news “CRYPTO CRASH!” or “COIN BUBBLE BURST,” before they jump in. Because these coins trade 24×7 and not during normal exchange hours, they are subject to incredible %age price swings. My personal bet would be that one day, we will see Bitcoin trading down 20-40% overnight, shaking out the weak hands. This will be a good buy opportunity for investors for the long-haul. So if you are inclined to open up a Coinbase account, feel free to leave it in the regular Money wallet and wait for your chance to pounce.

Ethereum Chart just break out to the upside out of this triangle pattern
(chart pattern below is right where I purchased it)

ethereum triangle 2017 11-22

Ether on the other hand just emerged from a nice and stable triangle pattern and has completed a sideways consolidatioton phase to absorb gains from May to present. That is where this is making the most sense from a buy standpoint. Knowing technical analysis, this breakout above the triangle pattern gives us a reference point to know where it could be sold if one was wrong buying at that point, or where one should be adding to it on a retest of the breakout level. As a technical analyst, I am much more comfortable owning a fresh breakout than a skyrocketing parabolic chart which could put me square in the losers seat and very quickly should major owners of BTC decide to exit.

Do they have room to run? With demand increasing at a rapid rate and supply shrinking, these major coinsets can most definitely continue to rise, but the issue is investing and placing your bets at the proper time. They will definitely be sharp pullbacks but we never know from what high of a level. But prudent speculators would be wise to wait it out for throwing caution to the wind with such a vertical Bitcoin ascent could lead to significant heartbreak and panic.

Conclusion

We are in very interesting times with this new technology that will change the way we live and conduct business. There will be huge money made and also lost. Retirement accounts will be destroyed as it will be made easier and easier to get into these crypto markets in the name of “true asset allocation,” and like how all great bubbles, capitalism and markets do, they suck in money at exactly the wrong time when investors should be walking in the opposite direction. Those that aren’t careful will in the end, like all of the other bubbles, be left holding the bag when the collapse comes. All of this being said and risks aside, we all have an opportunity to take part in a revolution that can change the world, if we dare.

Caveat Emptor.

Scott Worcester
12/1/17

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