The Bitcoin Bubble – has it burst?

I’m sure, like me, you have noticed an avalanche of references to Bitcoin and other cryptocurrencies in the MSM in recent days.  Yes, the coverage has been pretty steady as Bitcoin moved above the $4,000 level in mid-August.  But since then, the manic excitement has mushroomed (in a nuclear explosion sense).  It seems the word has spread even to today’s equivalent of the shoeshine boys.

That’s not too surprising – since January Bitcoin has appreciated by over 400%, and must be the best performing asset on the board.  Trading at pennies a few years ago, this has to be the greatest bubble of all time – far exceeding Tulipomania of the 17th Century.

Fortune magazine is a stalwart of the MSM and over the years has featured many major articles on current trends in business and finance.  What struck me was the current issue carries a major article on blockchains and the Bitcoin phenomenon.  The author interviews many (mostly very young) men (they are mostly men) working in the crypto sector and to a man, they exude super confidence in the growth prospects.

And in a travel magazine, no less, there is a super bullish article on Bitcoin and what a great ‘investment’ it is.

I’m sure this is repeated across many other outlets.  Yes folks, Bitcoin is super hot.  Buy then now – before they hit $5,000, $10,000 and even $50,000!  The siren call is bursting my eardrums.  But just as those first sirens lured sailors to their death, are the Bitcoin Bulls repeating this pattern?

There is little doubt that cryptocurrencies represent the leading edge of manic bullish sentiment towards the bright new future.  Bitcoins are hugely disruptive (needing no central or commercial bank to transact), are transformative (swapping dollars for code!) and thus appeal to our disgust with the banking system that was fostered during the disastrous Credit Crunch ten years ago.  The soil is fertile for crypto!  Take back control!

But have we reached Peak Bitcoin?  The MSM Headline Indicator is flashing red alert!

I see financial assets in three broad levels of risk.  At low risk are bonds (fixed income), then at the middle level are equities (backed by company earnings), then at the highest risk is Bitcoin (and all the other almost 200 and counting cryptocurrencies (backed by nothing).

The latter have zero intrinsic valuation, while the other two have at least partial.  The emergence of Bitcoin I see as the last hurrah of the Great Asset Mania that now dominates Western economies.  It is the ultimate speculative market that is coming at the end of the bull market that has lasted since the 1930s after the Wall Street Crash.

I would venture that if economies were not reasonably healthy and without the money-printing of QE, Bitcoin would not get off the ground.  Sentiment would be against it. Valuations  would be far lower and there would be widespread skepticism of its future.  It is because sentiment towards the future remains bullish that it can flourish.  You can see the same phenomenon in the acceptance of the future in electric vehicles.

In a post a few weeks ago, I showed the Bitcoin chart and pointed to the beautiful five-wave pattern that I said indicated the market is in the final thrust up and when it tops out (likely after an exponential rise), the corrective decline will be severe.  And last week’s action – and especially yesterday’s – has raised the odds that a major high is in at the 1 September $4925 level.

Note that the high has fallen a little way short of the  much-touted round-number $5,000 forecast.   I have commented on this before – many times markets just miss hitting major round-number targets – and this is a prime example.

Here is the weekly chart updated:

How’s that for a rocket?  Wave 3 is long and strong and wave 4 is a normal A-B-C.  Wave 5 is an explosive exponential move with two breakaway gaps.  On this chart, it is not clear that the wave 5 top has been reached, so let’s look at this wave on the daily chart to look for clues – and we have plenty!

Not only do I have a beautiful wedge (or ending diagonal) but there is a textbook five up on a strong momentum divergence!  This is about as perfect a pattern as you will find in any chart.  Just admire the accurate touch points especially on waves 2 and 4, as well as the final wave 5 of 5 on the upper line.

And with yesterday’s close beneath the lower line, odds are now strong that the down trend has started and we could be in a wave 3 down to much lower levels.  My main target is the start of the wedge at the $2,000 area with lower potential.  My first major target is the first gap at the $2,800 – $3,000 area.

If this transpires, I can think of all sorts of news items that could accompany the lows from a major hack to a banning by the Feds (China leads the way here), or even a rival crypto to emerge.  Currently, Bitcoin has a major problem with security.  As the final sentence in the Fortune article says: “Your cryptowealth is as safe as can be – until you want to actually use it”.

Dr Copper takes a hit

In a recent post, I showed how Dr Copper was leading the charge higher in stocks.  But yesterday, the ascent was stopped in its tracks:

On my last post, I believed we were in wave 3 of 5 and action since has firmed up my confidence in this count.  With yesterday’s plunge, we are heading for wave 4 down (hopefully in an A-B-C) which could turn around the 29 cent area where I shall be looking for a new long trade.

I anticipated this topping at the 31.70 area and advised VIP Traders Club members to take some profits there.  My target at the 33 cent area remains for the final wave 5 high.

Despite Harvey, Irma and Trump – are US stocks headed higher next week?

I have been warning against taking major positions since early August when the Dow made its all-time high.  That is because I figured the market was about to enter a fourth wave down – and fourth waves can be a traders’ graveyard.  Short term volatility is high and whipsaws lurk everywhere.  But with yesterday’s action in the Dow and S&P, I believe we are set for a move up in a strong third of fifth wave.

Here is the 4-hr chart

You can see the huge up/down sequences that reveal a quite complex Elliott wave pattern.  The blue lines are my long-term tramlines that have held the trading channel for many months.  If we see a push above the minor pink trendline early next week, that will confirm my wave 3 call and if so, the market should push up strongly.