We are currently witnessing the biggest mania of my career in the markets. Cryptocurrency fever is everywhere. Postmen and pensioners are buying. Google searches for the term “Bitcoin” exceeded those for "Beyonce," "Taylor Swift," and "Kim Kardashian" combined as the digital currency broke $10,000 in December (and then doubled in two weeks!).
This mania isn’t limited to the public. In the land where ‘greed is good’, professional speculators are also jumping on the bandwagon to capitalise on this unrivalled volatility and make some fast money. However, the widely anticipated launch of Bitcoin futures has only seen pithy trading volumes, suggesting that adoption by institutional investors remains tepid.
If you look beyond the hype, you begin to see the possible reasons for this. Firstly, the case for Bitcoin as a ‘safe haven’ is impinged by its sheer volatility (compared to say gold, which remains the traditional asset in a flight to safety). Secondly, authorities around the world are taking notice and are introducing punitive tax rules and regulations to curb speculation. Nowhere more so in China and South Korea, where the majority of cryptocurrency investors live (China has banned ‘Initial Coin Offerings’ and moved to restrict cryptocurrency mining, whilst South Korea is considering a trading ban).
The impact of this can be seen in the price of Bitcoin, which has retraced around 30% from a high of $20,000. Investors are beginning to question whether the rally may be over, including Mike Novogratz who was an early adopter of Bitcoin and scrapped his plans to launch a new hedge fund focused on it.
So despite the bulls claiming decentralisation of such currencies as a strength, governments are still ultimately in control. Whilst I suspect that they support the adoption of digital currency as a solution to tax evasion and their insurmountable budget deficits, I think that governments are more likely to create their own centralised version of Bitcoin.
Which brings me to the other cryptocurrencies, or ‘altcoins’ as they are known. The majority of these share a similar decentralised blockchain to Bitcoin, with Ripple being a notable exception. Ripple differs further to Bitcoin as there are only a fixed supply of tokens (think ‘coins’) in circulation and is emerging as the preferred crypto solution for a number of investment banks and companies including American Express for its faster settlement speeds and reduced settlement risk.
However, its not all good news for Ripple. Indeed, some cryptocurrency purists despise it as a ‘bankster coin’ going against the core philosophy of decentralisation and individual control. There may be some validity to this resistance, as it recently emerged that Ripple gateways can freeze – and effectively confiscate – a user’s funds at any time!
Undeterred, and amidst rumours that Ripple was going to be added to Coinbase (the largest crypto wallet in the US with over 15 million client accounts), Ripple went on to rally almost 1,000% in December.
In trading there’s a saying that the market doesn’t care about your opinion. And there’s another which reminds you that traders are not in the business of ‘being right’, they are in the business of ‘making money’. I bought Ripple on my personal account at $0.90, selling for $2.30 just 9 day later to bank a 150% profit, despite seeing the flaws in the bull case. However, I knew my reasons for getting in and getting out of the trade beforehand, whilst the ‘HODL’ crowd (who buy, and ‘Hold On For Dear Life’) watched it stall around $3 before before falling 50%. If this isn’t the purest form of speculation, then I don’t know what is.
And it isn’t just Ripple that has seen tremendous gains. The combined value of all ‘altcoins’ surged 250-fold in 2017, from $2 billion to $500 billion, as investor optimism reached new records.
So with all the hallmarks of a mania, is there any validity whatsoever to cryptocurrencies? At the time of writing, there are 1,408 of them competing on Coinbase, a popular reference site for investors. Many of these have at some stage been seen as the holy grail, before being condemned to the increasingly crowded crypto graveyard (including Auroracoin, which had a $1 billion market cap in 2014 and is now worth just $15 million – a 98.5% drop!). But there are still pockets of opportunity for focused investing in 2018.
One of the cryptocurrencies I am watching most closely is Ethereum. Without going into the specifics of this particular coin, from a trading perspective it tends to outperform as money rotates out of Bitcoin. Of course, it can still appreciate when the general crypto complex is rising (Bitcoin included). Until the dramatic overshoot in Ripple, Ethereum was the second largest crypto by market cap. Price is currently consolidating around $1250, though I am looking for a continuation towards $1500 with a further leg higher targeting $2000.
Another is Litecoin. Litecoin had been on my radar for a few months before I got long in late November around $95. It led the charge in alt coins until the addition of Bitcoin Cash to Coinbase took over the headlines before Christmas. I sold my original position around $270 when I rotated into Ripple and haven’t returned to Litecoin since. Going forward I expect the announcement that founder Charlie Lee has sold his entire holding to weigh on Litecoin, despite the otherwise encouraging news flow. It could be the one to surprise most in 2018.
Finally, my analysis wouldn’t be complete without a look at the chart of Bitcoin. From a technical perspective, I’m looking at 10,000 and 18,000 as key technical levels to confirm a breakout in either direction following the current consolidation. I’m not looking to buy Bitcoin unless it tests 8,000. This is still an important chart to watch for determining the likely rotation between the various altcoins, including my favourite trades in Ethereum and Litecoin.
I’ll conclude with a final quote which is another favourite of mine. It says, “there are old traders, and there are bold traders. But there are no old, bold traders.” For now, I am trading the first mania of my career with the foresight to ensure that it wont be my last. I hope for the sake of the investing public that they realise when to get out, before they get wiped out. The blockchain, not Bitcoin, is where the smart money will be made.
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This article was written 10th January for immediate publication by a third party. Whilst the some of the charts have since changed, the views expressed in the article remain valid and are in fact supported by the recent sell-off in crypto currencies.
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