It’s time to short bitcoin
For now, the bitcoin bulls are winning big. But Matthew Partridge thinks it might be time to bet on a pullback.
If you want to start a fight in a room full of investors, just ask them what they think of the digital currency bitcoin. Some reckon it will transform the world, making national currencies redundant. They argue that widespread adoption by retailers, and financial institutions, could push its value higher, with some predicting that it could reach $10,000 per coin. In contrast, JP Morgan CEO Jamie Dimon made headlines last month when he attacked it as a "fraud". Ray Dalio, founder of hedge-fund giant Bridgewater, has expressed similar sentiments.
For now, the bitcoin bulls are not only winning, but winning big. Five years ago a bitcoin was worth $10. Three years later, this had risen to $250. This summer it breached $1,000. While it dipped sharply after Dimon's speech a few weeks ago, it bounced back and is now a short distance away from $5,000. There are tales of people (including Dimon's daughter) who have made instant fortunes. A few weeks ago I met someone who's never invested in anything before, but had seen a £2,000 investment in bitcoin rise to £20,000.
This reminds me of the famous tale about the well-known speculator Joseph Kennedy (father of president John F Kennedy). During the latter days of the 1920s stockmarket boom, his shoeshine boy started giving him stock tips. Realising the market was out of control, Kennedy immediately sold all of his stock, just before the crash of 1929. If bitcoin really aims to replace national currencies, then governments are unlikely to cede control without a fight. Indeed, Russia is the latest country to announce a clampdown.
Of course, it's not always easy to spot when a market has reached bubble territory, let alone when said bubble will collapse. In December 1996, the-then Federal Reserve chairman Alan Greenspan warned that the stockmarket could be suffering from "irrational exuberance". However, if you'd shorted the market then, you would have endured three miserable years, with the Dow rising by 80%, while the tech-heavy Nasdaq surged by 280%.
I'd therefore use a stop to make sure you buy in at a point when the price is already starting to fall. Stop-losses are typically used to close a position, but you can also use stops to open one, so that a trade is only executed when a price reaches a certain level. In this case I'm going to suggest you wait until the price of bitcoin has fallen to below $4,100 (the 50-day moving average) before selling at £1 per $1 with IG Index. I'd also suggest you put a stop-loss on the trade at $4,900, giving you a downside of £800.
Trading techniques: how to use trend lines
A fortnight ago, we discussed how short-term traders use moving averages to measure price momentum. Another method popular with traders is to use trend lines. Put simply, you draw a straight line connecting the peaks in a share-price chart this line is then viewed as a line of resistance. You then connect the troughs in a similar manner to build a line of support.
The most basic way to use trend lines is to spot the general price trend and then invest in the same direction, buying shares when they are rising, and shorting them in a downtrend. As well as discovering the general price direction, trend lines can help spot the point at which the trend is coming to an end (known as a "breakout" or "inflection point"). If the price trend is negative (ie, the asset is falling in price), but the price goes above the resistance line, then this is a bullish signal and a sign that things may be about to change.
Similarly, if the price trend is positive, then the price falling through the support line is bearish, as it suggests the rising trend may be about to finish. Trend lines are very subjective, with many traders only recognising a trend as definite if they can connect at least three points on their chart. They also vary in their reaction to inflection points, with some closing positions once a trend has ended, and others completely switching direction, in anticipation of a new trend. Trend lines are sometimes used in conjunction with candlestick charts, which give the highest and lowest price of a share during a specific period. This makes it easier to spot when a share has breached either the support or resistance points.
How are our tips doing?
At the moment we have seven open trades: five buys'' and two shorts''. Our long positions are spread-betting firm IG Group (issue 846), Brazilian oil company Petrobras (issue 850), Renault (issue 854), Barclays (issue 856) and AA (858). Our star performer is Petrobras, with the company's management talking about the possibility of the company paying dividends again. Overall it is making a profit of £332.50. IG Group is also up £137, while the French car company Renault is up £101.50. The five positions are up by a net amount of £169, a decent amount.
However, our short positions aren't doing so well. Despite plans from General Motors to aggressively move into electric-vehicle production and concerns that the company won't be able to produce cars fast enough to satisfy demand, Tesla's share price remains higher than it was when we first recommended the trade back in July. As a result the trade is making a loss of £324. Meanwhile, despite ongoing controversy over its advertising policy and its response to terrorist propaganda, Facebook's price has increased from $164 to just over $172. Overall, both trades are making a combined loss of just over £500.
Having closed several positions in the past few weeks, we're not going to make any further changes at present. We're going to keep an eye on our two main losing trades, AA and Tesla. However, the recent bad news for Tesla (whose mass-market Model 3 has seen production delays) has only strengthened our conviction that the electric carmaker is overvalued, and due for a fall. At the same time we're still confident that AA has a good future if it can deal with its short-term problems. We're also positive on IG Group, our longest-standing position, especially given the surge in earnings that the company reported last month.