Bitcoin will survive – but it could easily fall to $3,000
Bitcoin's spectacular slide is no surprise, given the speculative excess that surrounded its earlier rise. It's not done falling yet, says Dominic Frisby. But its day will come again.
Bitcoin has been quietly falling off a cliff.
It might have been the world's top-performing currency for eight of the previous nine years, but this year only the Venezuelan bolivar beats it in the disaster stakes.
Even the Argentinian peso, which has lost a good 50% of its value against the US dollar in 2018, has beaten bitcoin this year.
This sort of correction has happened before in bitcoin
Bitcoin began 2018 somewhere near the $20,000 mark. By February it was at $6,000. There then began a nine-month period in which bitcoin bounced then fell then bounced again. Each high it made was lower than the last not a good sign but each low held above $5,800. The effect was that it traced out an enormous triangle shape.
Over the past three months, the bounces had become modest, but that $5,800 area stayed firm. Thus the effect was that bitcoin flattened out altogether. So low was the volatility that my buddy, Jon Matonis, a bitcoin OG (original gangster) texted me in jest to say that "bitcoin is the new stable coin".
Then last week that $5,800 level gave way. It has been such an obvious line of support for so long that, once it was breached, a plethora of stops was likely to be triggered.
And so they were. Just seven days ago bitcoin was trading at around $6,300. As I write this (on Tuesday evening), it is around 30% lower at $4,400.
It's no surprise, really, that bitcoin should have a rough time of it, given the speculative excess which gripped it in 2017, when it went up roughly 20 times. Corrections of 80%-90% are somewhat normal in this asset as a new technology with enormous potential, which also happens to be a new system of money, it is about as speculative a vehicle as you could possibly conceive.
I remember 2011 when it went from $32 to $1. I bet you wish you'd bought it at $32 now!
I remember 2014 when it went from $1,200 to $180. So these kind of corrections are normal.
It usually takes a year or so from high to low for bitcoin to find its feet again. I dare say this sell-off might take a little longer. I'm budgeting 12 to 18 months.
Bitcoin could easily fall below $3,000
Here's bitcoin over the past year. I've identified the triangular pattern with red dashed lines. The blue line is the 55-day simple moving average.
This chart does not look good at all. There is some support around the $4,400 area (it was resistance on the way up). The next technical area of support, if that doesn't hold, lies at $3,000. I would not rule out that we get to there, nor even lower.
It's not really clear quite what has driven this sell-off. It has coincided with a dispute between developers and miners involved in one of bitcoin's off-shoots bitcoin cash. The dispute has been dubbed "hashwars".
But this is coincidence, rather than causation. To blame this dispute for bitcoin's sell-off is like blaming a dispute in the Italian league between Roma and Napoli for the decline of Manchester United.
There is also the fact that in the latter part of 2018, the investment world has fallen very much out of love with tech, whether FANG (Facebook, Amazon, Apple, Netflix and Google) or crypto. What was once the golden boy who could do no wrong, is now a dirty overpriced serf who spies on you. The investment world is a fickle beast. I rather expect this falling-out is a more tantrum between lovers than an acrimonious divorce.
It's also worth bearing in mind that many of the altcoins have fallen by much more than bitcoin. While bitcoin had held around $5,800, the altcoins had ground lower and lower. I was rather hoping that bitcoin would drag them back up, but the opposite seems to have happened and they have dragged bitcoin lower.
I'm a little bit minded of that long period in the early part of gold's bear market when the price held up above $1,500. There seemed to be a permanent floor there, though it eventually gave way.
I don't think bitcoin's bear market will be as protracted as gold's though. Gold is an ancient analogue asset. The mining investment cycle is much slower and more drawn out. Bitcoin on the other hand is a groovy tech, populated by whippersnappers. The bear market won't be as long-lived.
I remain a huge fan of bitcoin and the enormous possibilities of the technology. It's going to play a huge role in our future. As an investor, a speaker, a commentator and business man, I plan to play a role in it where I can.
But a bear market is a bear market. It must be recognised for what it is. There's no point pretending otherwise. Defence should be your first instinct. Self-protection and everything else.
I rather suspect the worst of this bear market is over, but that doesn't mean it is over, or that the remainder it will be nice. The punches at the end of a fight aren't as hard as the punches at the beginning, but they hurt more because you're so worn down.
Bear markets can grind on for a long time. Just as bull markets defy logic on the upside, so do bear markets defy it on the downside.
Bitcoin's day will come again. Just not tomorrow.