The price of Crypto continues to move from the upper left to the lower right, the very definition of a bearish move. One might want to say that cryptos are struggling, but this would be an understatement of biblical proportions. A better description of crypto as an investment or speculation is a crash, wipeout, beat down, splattering, etc. Pick your descriptor.
Our readers know that we focus on 4 cryptos that we think will survive the shakeout that is taking place at the moment. One of the appeals to crypto is that with the proper design, their supply, in the long run, is limited and they cannot be counterfeited along the way. With this in mind, we like to think of crypto as digital gold.
The problem with crypto at the moment is that the cost of creating a new one is relatively minor. The source code of existing crypto is open source, so anyone with some programming skills can create a new coin and network. Getting people to be a part of the network is the hard part. Open source is good because it keeps everyone honest so our comment is not a critique on that front. The problem is the mania we just went through. With prices rising, people simply bought every crypto that was created without really thinking about it. Everyone played the greater fool game. “I will buy and sell to a greater fool.” People did not really differentiate between currencies and tokens that were created. This essentially created the potential for infinite supply, thus defeating the “digital gold” aspect of crypto.
We are now going through the inevitable wash out that will relegate hundreds of crypto defunct, null and void. We are going to find out that many of the cryptos were created as part of pump and dump schemes. Bitconnect is one that comes to mind. It shot up like a rocket, only to crash and burn.
When the dust settles, we think that there will be just a handful (probably less than 10 or 20) of cryptocurrencies that will have worldwide acceptance. We are sure 100s will linger along, hoping for life down the road. Our short list of potential winners at the moment is Bitcoin, Bitcoin Cash, Etherium, and Litecoin. We have our eye on another 15 or so, but we think if we keep our eye on these 4, we will have a handle on what is taking place. As for tokens, we find identifying survivors more difficult as they are dependant on the ecosystem that they belong too with little way or a use reason of expanding upon that. They are sort of like casino chips. You can only cash them in at the casino that issued them. If the casino is not economically viable, neither are the chips.
There is an interesting phenomenon that has taken place, one that we have never seen before. The volatility of returns on crypto is realizing at unheard of levels. While the recent price action of cryptos can only be described as a crash, they are still up over the past year.
The average gain on the cryptos we follow is up 59% over the past 365 days. Bitcoin Cash is up the most and Etherium has advanced the least. But the average cryptos on our list is down 76% from their peak prices. Bitcoin Cash ironically is down the most, followed by Litecoin and Bitcoin is down the least.
Such is the price action of bubbles, and cryptos are the biggest bubble of all time. The “South Sea Bubble” and “Tulip Mania” do not hold a candle to what we have witnessed in crypto.
Our readers know that we have been bearish crypto as a speculation ever since a few months before the peak, and we are still bearish. We could be wrong of course, but we do not think the sell-off is over. Commentators suggest that the recent selloff is due to the failure of various sponsors to get an approval to issue a crypto ETF. Maybe so.
I for one, am conflicted about a crypto ETF. On the one hand, it will make it easy for the average bloke to buy and hold crypto. But most sponsors want to do a Bitcoin ETF. As those ETFs gains popularity (assuming), it will gobble up the “cash” supply crypto out there. As that happens, the transactional aspect of Bitcoin is likely to be hampered. Thus, Bitcoin will lose its use case as a vehicle to lubricate transactions. If that happens, then Bitcoin could simply become just another speculative vehicle without much potential to create the economic contribution people hope it would.
The table above shows us where the price of crypto has been and where we think it might go. The downside potential is still substantial. History shows that manias often completely retrace their bubble and go back to the origin of the bubble or even below it. From this perspective, the charts below show there is still a bit more room to the downside.
Bear in mind that price can do whatever it wants. It is entirely possible that we are closing in on a bottom. But we are waiting for the market to tell us what investors want to pay for crypto. In a highly emotional market like this one, we like to compare where we are with the emotion cycle.
At this point in time, we think investors are approaching the “I cannot believe I bought so much” part of the cycle. We have not seen any article reflecting as much, but we think we are about to see people say they are “lightening up” or “waiting for lower prices before I buy more.” The HODL meme seems to be vanishing from the vernacular, which is the first stage of returning sanity to the marketplace. But in the final analysis, we have not seen capitulation.
We are keeping a sharp eye on these markets as we think they will be transformative at some point. The only question is when.
We like to remind our readers that investing involves risk and that it is possible for one to lose most or all their investment when trading options (or any investment for that matter). Be sure to trade within the limits of your capital. Limit the size of your trades to an amount that will not harm you should they result in a loss.
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Mark is long a de minimus quantity of crypto
Image Source | David McBee, Pexels.Com
