All Financial Wisdom
Bitcoin Prolongs its Bullish Party Alone: A New Indicator Pointing to a Bubble
Despite many analysts increasingly sounding the alarm on an impending Bitcoin bubble, it continues on its seemingly unstoppable ascending price run. Moreover, several other cryptocurrencies are rising right along with it.
But all that glitters about the recent and ongoing revaluations of digital currency is not gold, and we may be witnessing how some investors are literally building castles out of thin air with no foundation.
Bitcoin eclipses the $6,000 price mark
Speaking of its unstoppable upward path, Bitcoin recently hit the $6,000 mark. A new milestone in the evolution of its contribution that culminates many weeks of promotions and a new revaluation of 50% in the last month. A month that has seen many potential big setbacks, that eventually dissipated and were pushed to the side as Bitcoin’s valuation bullied its way through.
Bitcoin enthusiasts preach throughout the blogosphere that Bitcoin is the best possible investment. Some brag openly of the analysts who warn of a bubble, and even affirm without hesitation (or caution) that Bitcoin in a few years will reach the $50,000 mark.
But the analysts with more experience in the market see the opposite in the recent revaluations of Bitcoin. For them, Bitcoin’s incrementally bullish trend only confirms the likelihood of a bubble not only in the wider cryptocurrency market, but specifically in Bitcoin.
The best advice is to avoid the gold rush
We have already exposed many times what the very definition of a bubble is. And again the crypto-currency enthusiasts will boast that they are making lots of money. In practice, only a few will (or will be lucky enough) to get out at the right time, before the bubble explodes.
Therefore, once again we insist that the best advice we can give you is to refrain entirely from participating in these gold rush fevers. The reality is that in the end, they are tremendously damaging to most investors, and you will typically have many more options to lose than to win.
A new crypto-market indicator also points to the bubble
But the truth is that you will not find many analysts with experience and wisdom who venture to predict what is the very peak of the foaming rise of an asset on whose bubble they warn. Actually, this would be very useful (and brave), but the error rate is quite high, since the market is volatile and even irrational in the short and medium term, and often unsustainable tendencies are maintained over time beyond logic. Never underestimate the ability of the market to extend its irrationality a little more.
However, having said that, and aware that it would be very important to be able to detect the maturity of a bubble. I will ask you to keep in mind that trying to detect the maturity of a bubble in Bitcoin, as in any other asset, is a very difficult and risky task.
That is why I hope people know how to value the boldness of this analysis, and forgive me for what is a bold (not pretentious) prediction. The motivation behind these lines is that your pockets, or the economy of a country, will not be blindsided and crippled in the event of a huge crash. Being on the alert implies that we will try to alleviate, as much as possible, the potential and harmful consequences of the different economic and market threats: today Bitcoin should be classified as one of those potential threats, (or until the clouds are dispersed).
But something has changed radically in recent weeks: a lonely Crypto-runner
But there has been one fundamental thing that has changed in the crypto-market. In my experience, it is a new trend that can be very significant, and that has led me to a new reasoning that would confirm the existence of a crypto-bubble.
The fact is that traditionally, when Bitcoin came up, practically all of the rest of the crypto-currencies followed faithfully. On the contrary, when Bitcoin went down, so did the rest of the digital coin ecosystem.
This correlation, that has faithfully continued for months and years has been broken. It has not been broken in sign, since the increases have happened in other digital currencies, but they have been very very timid, in contrast to the strong bullish aggressiveness that Bitcoin continues to exhibit. In fact, the rest of the digital currencies are not beating historic highs, and in many cases are quite far from them.
The fact is that in order to try to interpret this trend change in the correlation between crypto-currencies, we can try to analyze the ecosystem of investors behind them.
The theory elaborated on the crypto currency market, beyond the one already known by the markets
Those times in which only techies invested in Bitcoins, Ethers and in any other currency with future potential, have passed. Now, presumably the psychology of the crypto-market has been modified accordingly. The crypto-economy is mainstream now. Even the taxi driver recommends that you openly buy crypto-currencies now.
And of course, the crypto-economy is not exactly like the stock market. It is relatively easy psychologically. But technology is radically different. People are aware of their limitations in technical knowledge, and this leads them to have some caution.
But that caution only prevails when lesser known cryptocurrencies are ignored because many people do not understand all other aspects of crypto-currencies, such as smart contracts. So Main Street is very clear that “we must invest in the crypto-economy because it is the future” (typical phrase of bubble, by the way), but the only thing that they know of said crypto-economy is Bitcoin. Therefore, that’s where they put their money to participate in the party.
The public prefers to invest only in the names it knows, instead of all other currencies whose technological base, functionality, and contractual possibilities overwhelm and frighten them.
That Bitcoin continues to reach new highs, while the rest of the crypto-ecosystem has stopped doing so may be a new indicator of maturity of the crypto-bubble. It may indicate that the crypto currency fever has reached Main Street. And you already know what happens on Wall Street when this conjunction of factors coincide: the end of the bubble is approaching. The definitive date will depend on how much money will continue to enter, especially in a scarce asset, by design, such as Bitcoin.
Do not take this analysis as a prediction, but as a mere reflection of an analyst who follows the markets and the crypto-economy, in which I really see much future in the long run. And I say “mere reflection” because neither I nor anyone can tell you for sure what the market will do tomorrow or next week … although in a year or two, is another issue, because in the long term the markets tend to be much more rational.