Bitcoin hits $100k – but is it the new Tulip Mania?

Dear Trading Diary: Is Bitcoin and the other cryptocurrencies another inherently worthless asset that has captured the imagination of ‘investors’ in their frenzy to exchange fiat dollars for a few lines of code that they ‘own’ (but cannot spend)? For the true believers that is heresy. But it is all part of the same speculative frenzy that permeates the world of finance, is it not? And the frenzy may persist for a long time.

From AI shares to Non Fungible Tokens to art to classic cars to vintage Rolexes to housing …the list goes on … prices for ‘these ‘investments’ have reached levels barely imagined a few years ago.

Of course, this could only have happened when fiat money is plentiful = and is being devalued by inflation, Central banks with their expansive monetary policies have ensured that. When money is tight (usually after a ‘credit event’), assets usually drop in value but so long as available liquidity is there and the will to speculate is strong, prices usually keep rising – as today.

But with BTC having reached that important round number milestone, this is a good time to put it in perspective. While BTC grabs the MSM headlines, trading volumes in it are only 1/200th of US equity trading volumes. Unless you have something nefarious in mind, go to the supermarket and try to pay in BTC.

Much of the bullish hype is linked to the expectation that central banks will introduce their own crypto – the CBDCs – to settle accounts. I have no insight into this except to say that with Trump as president, the outlook for cryptos is more positive (if that is possible). But I do know that BTC is in a feeding frenzy and who knows how far it can stretch.

But it is far from being a useful currency and medium of exchange with its exchange rate to the dollar (and other fiats) swinging wildly. It is a financial asset. But you could also say the same about gold of course – see last week’s 300kg gold ingot in Dubai. Try spending that!

But to me this is all very reminiscent of the famous Tulip Mania of 1637 when a much-fancied Viceroy bulb (picture above) was valued at five times the average house price at the height. Today in the US that would be around £2 million. So can we expect BTC to reach $2 million? That is not so crazy – after all, $5 million was recently paid for a banana (see my post of 23 November), so anything is possible in this crazy market environment where money has lost its value.

China is on the floor – or is it? A few weeks ago the MSM was full of bearish stories on the Chinese economy from the slumping real estate and consumer sectors to the Trump Tariff Terror coming down the pike that would decimate Chinese EV exports. The authorities tried to stem the flow by adding stimulus measures last month that seemed to underwhelm.

Stocks were truly beaten down on this very negative sentiment, especially consumer companies.

But in this slough of despond I spotted an opportunity knowing that when technical indicators are aligned, a bullish reversal is never far away. That is because the authorities who are smarting from the real estate slump they did not foresee feel they must make amends and pump a lot more liquidity into the economy and overdo the dose. It is only a matter of when not if.

Thus, a bullish stance was the preferred option last month. As ever, timing entries was critical.

The stimulus rally to the October high was met by heavy selling as the economic data remained weak. That was when I took my profits. But because I was expecting the rally phase to eventually resume to keep it in synch with the US, in this phase I sat on the sidelines waiting for a clear a-b-c corrective pattern to form.

And late last month the index dipped to touch the Fib 62% support level with the clear a-b-c pattern potentially complete. I was then able to set clear Elliott Wave labels as marked – and buy.

While stimulus measures have been mild so far, a more robust one to counter the expected Trump tariffs could set off a firecracker of short squeezes. Look out above!

Are the M7 shares cheap? There is so much hope for future profits from AI and tech in general rising on current sky-high M7 valuations. As a futuristic exercise, here is one possible pathway for Apple which has always been one of the leaders

The weekly shows the progress since the dark days of the 2010s. Joining the major lows you can see the slope of the uptrends has been getting steeper and steeper. This is the mark of an ‘exponential’ bull market. Of course, much of the advance has been supported by increasing earnings.

In this ten year period, the maximum drawdown has been about 30% in 2022. So if this still pertains, if we do see a drawdown soon the shares could reach a maximum low of about $175 ($242 currently). But in exponential rallies, the upside is almost unlimited and I have not yet found a reliable method for estimating targets in these conditions. Uncharted territory is exactly that – uncharted. I am long Apple for Pro Shares. The music is still playing.

Is this time really different? Based on the winners, it certainly seems so. The Nasdaq has advanced by 30% this year and Bitcoin by 130%. Nvidia is up 225% while Chargepoint Holdings (a leading US EV charging station operation) is down 60% to $1 a share. The major US index values are skewed towards the high caps that have lead the charge this year (the M7). Large moves in smaller caps put hardly a dent in the index.

As another measure of the extreme concentration in bullish bets here is a revealing chart of the ratio of leveraged long ETF assets versus short ETFs

It is is record high ground around the 11 mark and in an exponential rocket phase. For contrarians such as yours truly, this has to be one massive yellow warning light. If there are fewer bears who are willing to put their money where their thoughts are, at some stage the deck of cards will collapse of its own weight, surely.

And yesterday the US jobs and wage growth data came in strong but did that change anything? The Nasdaq was up over 100 points into another new ATH but the Dow did show some signs of trailing over. The Dow is actually at a very interesting juncture as it tries to break above my very reliable trendline of resistance from May:

The fourth accurate hit last week failed again and the internals such as the advance/decline ratio and the daily up/down volume remain very weak. The generals are thinning out while the foot soldiers grow in number.

So with the S&P, Dow and Nasdaq in fifth waves that can be counted as near complete, only a massive surge higher with fresh buying could cancel the negative implications above.

And just when bullish MSM mania could not not get any wilder, here is an extract from a recent article: “World economy has exited the boom and bust cycle” citing the ‘mega forces’ unleashed by AI.

Long time observers will be asking: Where have I heard the death of boom and bust before? Well, one time was from a certain Mr Gordon Brown who uttered it continuously from the late nineties to the early 2000s when shares were buoyant (the Dotcom boom), He was forced to eat his words when stocks collapsed in the Credit Crunch bust of 2007/2009.

It is a Golden Rule of markets that when everyone is completely convinced some forecast is obvious, it is obviously wrong (eventually). We may have to wait a long time for sanity to return, but when it does it arrives with a bang.

One hurdle the AI industry must overcome is the surging need for electricity. The proposed growth of wind and solar won’t do it and nuclear is several years away. And any grid upgrades are also years away. So will this power bottleneck finally pause the AI juggernaut?

But for now, investors are seeing a ‘Goldilocks’ economy with huge promise from AI. But under the hood, bad things are bubbling. Latest US credit card data shows another massive jump in o/s balances all the while interest rates on them are rising to latest 23.4%. The Fed cut its rate by a jumbo 0.5% in September so why are credit card rates going the other way?

Could it be that banks are expecting a flood of losses from defaults next year as consumers are unable to pay their huge balances off? With the coming Christmas spending that will weigh balances down even deeper, odds are high those defaults will balloon next year.

With cost of living still exceptionally high (US median rent is over $2,500 pm), will a credit card event signal the end of the free-spending US consumer – and the start of the bust part of the business cycle?

A sign of the new times? The assassination of the CEO of the biggest US healthcare company last week may be such a sign. It is well known that US health insurers are notorious for denying legitimate claims that the company reject on the basis of the screeds of fine print in their contracts. And fighting their decisions can be ruinous and most never try. This company is especially egregious and some reports state that it denies over 30% of claims leaving many destitute from their crippling hospital bills.

There must be many victims feeling outraged by the company’s actions and feel they must take direct action as a last resort. They have had enough of corporate avarice that enriches the top executives . I would not want to be in the shoes of senior executives of similar companies right now.

And having had enough was one motivation behind the Trump landslide. The public have become powerless against faceless company executives and government bureaucrats that create harm for them. Which brings up this credible idea: has the Teflon corporate elitism reached its zenith with the public now starting to push back sometimes violently?

And last week we saw a mini-French Revolution in their parliament. Can we say that the assassination is the start of the ‘deplorables/miserables’ own version of the seismic 18th Century French Revolution?

In other words, was that a shot that was heard around the world?

We see disdain for the public all the time with large organisations (including governments) – for example, where are the executive jail sentences for the Post Office sub-postmaster scandals that ruined so many lives in the UK? This has been going on since 1999 and still no charges for the top brass.

Two- tier doesn’t begin to describe it. The tweets some issued after the summer mini-riots received super-fast ‘justice’ with long jail sentences. If that fast track system can be efficiently enacted, why not for the Post Office and Fujitsu executives? I think we all know the answer to that one.

Meanwhile, back to the markets and with the turmoil in the French parliament, I spotted another contrarian opportunity in the France CAC 40 index. You can get my analysis when you join my VIP Traders Club here.