We are intrigued by cryptocurrencies. Even though we are options traders first, stock, ETF and Mutual Fund investors second, we will continue to follow crypto. Someday it might be a respectable asset in our portfolio. We watch the sector closely and are waiting for the day we can wade into the pool. The last time we discussed crypto was on 24-May-2018. Not much has changed in the crypto world since then except the price. We were bearish on the price of crypto then and it is a good thing we held this view. The price of crypto has “fallen and it can’t get up.” We will monitor this new asset class, we will do our best to identify a bottom in price when that day comes. We do not want our followers to jump into the waters too soon.
Needless, to say, the price of crypto is down substantially since we pinned our last article on the subject. Of the crypto we discussed, the best performer was Bitcoin, which fell 16%. The worst performer was Ethereum, which was down 38.8%. One might think this is a bit unusual as there is a strong use case for Ethereum. Many tokens are transacted on the back of the Ethereum blockchain. However, its popularity in the technical world did not translate into outsized financial performance relative to its peers. The average of the 4 coins we discussed is down 28.4%. In that context maybe Ethereum’s performance is not so bad.
So where to from here? In the short-term, the price can do anything but we expect more weakness. In the intermediate-term, we think the price is going lower, possibly much lower. We think most people are too on cryptos. To get a change in the mindset of investors, the financial beating must be brutal and unrelenting. So where are we in the emotions cycle? We think we are somewhere between “Ouch” and “I cannot believe I bought so much.”
We think this is the case because we are hearing less chatter on the internet from people bragging about how much money they made by owning and/or trading crypto. This tells us that most people are now holding crypto at a significant loss. Don’t get me wrong, there are people doing videos on Youtube discussing the merits of crypto, they’re just not as many.
There is an unbiased way to measure the energy people are putting into a subject. Google Trends. Google Trends is a method that measures how much energy they put into an idea by tracking people’s search habits. If we talk a look at a search for “crypto” or “cryptocurrency” we see people went crypt-nuts at the end of 2018, just when the price of Bitcoin closed in on $20,000, then when the price of Bitcoins and other crypto fell in price, people became less interested. We would not be surprised to see the index fall back to something less than 5 at the time we finally see a bottom in the price of the major crypto.
Google Trends Index: Crypto
If we compare the frequency of different crypto, we get an idea of what crypto people are interested in. Not surprisingly, Bitcoin has more searches suggesting that its first mover advantage has given it a bit more brand name recognition. Because of this, many crypto-enthusiasts think of Bitcoin first when they think of crypto and that it will be the ultimate winner in the crypto-space. So the conventional view is to stick with the leader.
The contrarian view, therefore, is that an alternative crypto coin may outperform and take Bitcoin’s place as the leader in the race. This is an interesting phenomenon as there have been great improvements in how the blockchains operate making some of the alt-coins more interesting from a technology point of view.
Google Trends: Index Comparison
Litecoin, for example, is a clone of the Bitcoin technology, but it was improved to make it faster, cheaper and more efficient to run the network. On a technology basis, Litecoin should outshine Bitcoin, and this is why we follow it. The same can be said for Bitcoin Cash. But it does not have the brand name recognition that Bitcoin does and it does not have as many people building apps for it. There is an entire ecosystem in the crypto space that is building the capabilities of the Bitcoin network to facilitate transactions and trading. But these apps, one adopted, can be adapted to at the altcoins.
By the way, we tend to focus on the cryptocurrencies as opposed to the tokens. The tokens are designed to be used as a currency in a narrowly defined ecosystem. So their use is very specialized. The value of those tokens is dependent on the defined ecosystem being of some value someday. This takes a lot of time and effort now that there are 1,629 cryptocurrencies and token out there according to coinmarketcap.com.
The market capitalization of the entire Bitcoin industry peaked at the same time as Bitcoin naturally, which was at the turn of the year. At its peak, the universe of crypto was worth about $760 billion. Interesting how value can be created out of thin air. Such is the nature of fiat currencies. At the moment, it looks like total market capitalization wants to form a base at the current level. But one should be aware that new coins and token (in particular) are being created all the time. So as they are sold, the market capitalization can hold steady or rise while the price of individual crypto continues to fall.
We are sticking with our price projections we made back on May, 24. If you want to see the technical analysis we did to make our projections, please see that post by clicking here. To summarize, the following are the target prices we are expecting to see before crypto form a bottom.
In short, we should expect to see additional losses of between 41% and 70%. Certainly, if we hit the lower end of this range, we are sure to see a barrage of negative articles, Tweets, Youtube videos saying crypto is dead. I lost all my money in crypto. I will never touch a crypto gain. yadda, yadda, yadda… If this happens, it will help us identify the bottom.
In our last article, we discussed the horrendous psychology that HODL (Hold ON for Dear Life) represents. Such a prescription is disastrous. Good traders always cut their losses. The chart below shows that HODL idea may be dying and thank goodness. The idea of HODL is one that bankrupts traders. If we see another 70% down in the crypto, I expect to see articles where people say HODL is the worst thing they could have done.
Google Trends Index: HODL
The ideal of HODL is not unique to crypto. In the precious metals market, they call it “stacking.” Buy gold or silver and stack it (take personal possession of your precious metal and stack is somewhere safe.) This strategy has decimated investors who bought in the last bull market that ended in 2012.
Be patient, there will a time to buy, but that day is not here yet.
Mark owns a few satoshies, litoshies, ethoshies and few other scraps of crypto of de minimis value.