The price of Crypto continues to struggle just as we thought it would. When a major bubble deflates, the process of letting the steam out takes much longer than most people expect. This is because people do not recognize that the previous price runup was a bubble, so they presume that pullbacks are buying opportunities. It is not until the damage is deep and painful before people realize that a mistake was made and that a return to the halcyon days is far-far into the future.
As you know, Mike, Mark & the team here at theOptionsEdge.Com are presently bearish on the price of crypto, but bullish on its technological promise. One of the memes we have talked about on these pages is the concept of HODL (Hold on for Dear Life). This strategy suggests that investors should ignore the price of crypto today and for the near future. The price at which it trades today will have nothing to do with its price in the future. If you want to make a buck with crypto and be part of the new paradigm, buy crypto and hold it no matter what. Here are a few or many YouTube videos that put forth this meme.
(1) What is HODL and why is it important
Now let’s be clear. We are not troubled by the concept of HODL. We are concerned about its seemingly widespread adoption. From a market psychology standpoint, it is very bearish. Some of you may have seen this chart before. For those who have not, it shows the emotional process investors sometimes go through that causes them to lose money. It basically explains why we sometimes buy high and sell low.
It starts with a person becoming aware of a promising investment opportunity. When this happens, people typically watch a stock, for example, a rise in price. After they see that a trend is in place, the person buys. The uptrend catches the stock and it moves higher and they are glad they invested. At this time, one might get a bit complacent and greed begins to take hold. People begin to believe that only higher prices lie ahead. But eventually the stock price begins to fall and the typical investors convince themselves that it is just a dip in an uptrend.
(This, unfortunately, is where we think the HODL folks are right now.) But the bull back turns into a bear market and the bear market turns into a route or a crash. With no hope in sight the investor sells the stock and looks for something else to invest in, just as the stock is forming a bottom. When the investor should be buying, they are selling.
We think the decline in the price of crypto has more to go, simply because bottoms are formed out of desperation, despair, and capitulation. We think the market psychology for crypto is far from despair and there is nothing in the news that would suggest capitulation. Crypto is loved by most investors and market commentators. We see that day coming when there are months of bad news coming out. It could be frauds that scare people away. It could be heavy-hand of government regulation that makes people think crypto is no longer viable. Maybe it will have something to do with taxation. Or it might have something to do with an extended power outage and people realize that crypto is no help if the lights do not come on. Maybe it will be a deflation that causes the price of all assets to fall. We do not know what the news will be, but investors mood will be very negative at that time and there will be article after article and report after report with negative things to say about crypto.
Crypto is not breaking new ground here. Just a few years back, precious metals investors were suggesting you “stack” as much silver as you can. Stackers argued that silver is not as abundant as most people think because it is an industrial metal that gets used up in thousands of products, not the least of which was solar energy. A solar panel uses about 2/3rds of an ounce of silver, for example. These folks argued that if you just buy it and hold it long enough, you will make a fortune. Unfortunately, the price of silver has fallen from $50 an ounce and now sits at $16.50 an ounce and there is no catalyst in sight to get the price of silver back up to its old highs. Do a search on silver stacking on YouTube and will find loads of videos on precious metals accumulation.
We think the current state of the crypto market has the same feel as there is still too much optimism and there is not a touch of fear or dejection in the minds of crypto enthusiasts. So where do we think the price of crypto will go. Price can do whatever it wants in the short-term but we believe the trend is still in favor of lower prices. These charts suggest were we think the price of some of the more popular crypto could go before a long-term bottom is formed and the next leg of the anticipated bull market begins.
As you can see from the charts above, we suggest that the lions share of the price decline is behind us, but that we also expect another round of selling that takes the price of Bitcoin, Bitcoin Cash, Etherium and Litecoin to new lows. In addition to psychological factors that take prices lower, there are fundamental reasons as well.
The first factor is the explosion of new coins and tokens that come to market all the time. According to CoinMarketCap.Com, there are now 852 crypto and 771 Tokens. There is clearly not a need for all these coins and we expect the majority of them to fall away and disappear. This is likely to enough significant negative sentiment and may set the stage for the panic selling that comes towards price bottoms.
We mentioned the issue of frauds and scams and nobody seems to be focusing on this problem. DeadCoins.Com has a long list of crypto that are frauds, scams, Ponzi scheme, etc. When we found this website, we were astounded at the number of companies and crypto that were on the list. We certainly hope justice gets served on these bad actors. We expect this to become a popular website when the price of crypto closes in on a long-term low in price.
There has not been a debate yet about whether crypto is an asset or a currency. It is unlikely that the government will turn over the responsibility of currency to the free market. If the evolution of crypto takes its use as an asset and store of value, we think it will find itself as a new and viable asset class. If the industry tries to use it as a currency, there is certain to be a response by governments all over the world who want to protect their monopoly.
The evolution of crypto is in its infancy and the use of widespread use case is yet to come to the fore. However, we believe it will. Between now and then, we are likely to see all kinds of events that will shake the confidence of the HODLers as price action shakes their confidence.
As hard as it may be, we are doing our best to remain patient so we can buy when fear is in the market. When that day comes, we are sure it will be very emotionally difficult to do.
Image Source | Worldspectrum, Pexel.Com
