I've been covering bitcoin rather a lot lately, so I was planning to write about something else this week.
But then Monday happened.
There's this ridiculous expression that people often use about something extreme. They say "it can only be described as" and then insert some word. Well, there a number of words you can use to describe Monday in cryptocurrency land.
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I'm going to go with "carnage"...
Trying to write about bitcoin while it's crashing is tricky
I'm in Asia this week (lucky me) giving some talks for the EO Network in Singapore, Malaysia and the Philippines on bitcoin.
As I finished my talk in Kuala Lumpur, somebody from the audience came up to me, holding her phone, and said: "Bitcoin's fallen by $2,000 in the 90 minutes you were up on stage."
She was right.
It was down by about 20% on the day. And bitcoin was one of the better crypto performers.
Below is a screenshot taken from coinmarketcap showing the state of the 15 largest cryptocurrencies. There are 25%, 30%, even 40% corrections across the board 40% in 24 hours!Red is everywhere. It does not make pretty reading.
Well, the party was going to end sooner or later. So is this it is the bubble finally popping?
Maybe some aggressive buying comes in now that turns it all around. But it's hard to see how the sector, in the short term, can survive this level of aggressive selling. There's a scramble to protect profits, while those who bought at higher levels are bound to be panicking.
I'm concerned that there might not be that many willing buyers. Most of those who were likely to come in on this run are already in, I would have thought. Those who stayed out will mostly stay out it takes strong nerves to buy into corrections like this.
But I say all this with the strong disclaimer: bitcoin had five corrections last year of more than 20%, during which it went from $1,000 to $20,000.
It's bitcoin. The mistake has always been to underestimate it...
But this correction, I don't know, feels different somehow. The market's exhausted. It needs to pull back.
When I look at the chart, I can see the massive run from around $1,000 to $20,000; a sell-off; and then a rather flimsy rebound to $18,000.
I can't help thinking it rather looks like a top.
I see the $10,700 area as important. That was the low in the initial sell off last December. If it can hold, and we can consolidate above $10,000 for a while, then maybe the game is still on oh, my goodness me!
Literally as I wrote that last sentence, I went to look at the chart again and $10,700 has just been breached. My gosh, this market moves fast! If nothing else, it's mighty exciting. I feel like I'm covering the crash in real time.
We're now at $10,300. We'll probably be back up above $12,000 by the time you read this!
The dangers of trading bitcoin
My gosh, you need nerves of steel if you're going to try and trade this thing. I do not recommend it. For all you know you're probably up against an army of computerised models, black boxes and algorithms (perhaps they will be the strong buyers this capitulation needs).
I mentioned last week that I had bitcoin on a sell signal, based on my simple system of moving-average crosses. Here's what I was talking about.
I use the six- and 21-day moving averages (hat-tip to trader Vince Stanzione for putting me onto this particular pair).
The green line is the 21-day moving average, the red line is the six-day moving average. Basically, when the red line crosses up through the green that is your buy signal (black arrows). When the red line crosses down through the green, that is your sell signal (blue arrow).
This system works beautifully in a trending market and you caught the lion's share of the run up but in a range-trading market, it does not work anything like as well. In the volatility of the last month, the system gave false signals twice. But the sell signal from a week ago is currently working.
I stress this is a short-term trading signal, using one simple strategy that does not work 100% of the time (nothing does). That is not me telling you to rush out and sell all your bitcoins.
Heck, I've just looked at the chart again. In the time that I wrote the last few paragraphs, we've now gone through $10,000 and bitcoin has got a $9,000 handle!
How low does it go? That, of course, nobody knows. Bitcoin has had five 80% corrections in the past. So an 80% correction would be nothing new. We're already down 50% from the December high of $20,000.
An 80% correction would take us down to the $4,000 area. That would unwind the entire mania since the autumn.
Staring at the chart, I can't help thinking that $3,000 is a possibility.
But, who knows? It's bitcoin. Anything is possible. It could just as easily go to $50,000. All I can say for sure is that the whole picture could have changed again by the time you read this.
But trade it at your peril. I'm afraid to say there are so many newbies in this game. For sure, their risk is not going to be properly managed. That only adds to the volatility.
Make sure your risk is managed. A lot of people are going to get hurt. Don't be one of them.
It's a speculative mania. But it's also the future. Enjoy the ride!
Dominic Frisby is the author of Bitcoin: the Future of Money?
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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