Bigger Picture

I don’t know when the Cryptocurrency top happens, but I know why it does.

Futures launches were discounted.

WHERE WE ARE…
CBOE launched futures on Bitcoin two weeks ago. CME launched its contract one week later. Bitcoin had already been in a rally, often turning exponential and occasionally crashing. The most impressive stretch came in anticipation of the futures launch. A 4-day 24% drop from 7,800 to 5,900 had recovered to attack 20,000 into the CBOE launch.

Futures. Professionals. Price discovery. Bitcoin promptly dropped 31% to 13,500. All of which was recovered into the CME launch. More professionals. More price discovery. Another drop. Bigger, much bigger… 47% to 10,400.

Dual spikes seldom hold.

That morning as the decline was breaking under 14,000, I noted during my morning Market Tour that the leg’s low would be a 10,000 handle. That was Friday. Its reaction reached 16,000 Saturday afternoon. And I would have loved to sell what I had bought Friday morning (above 11,000 by the time I could act). But Bitcoin purchase settlement runs much slower than Bitcoin trends, which is now in a reversal to 13,700.

The CBOE-CME launches formed a “double top.” The pattern all but requires eventually being retested, if not also broken by the previous trend resuming. That’s after probing under their interim low is done — everything before that having been noise. Meanwhile, the decline has been bouncing on spikes, which don’t form durable bottoms, projecting to potentially lower lows with an 8,000-handle. That next low would be more difficult to recover, let alone to resume the rally, since this pattern would have created a massive supply overhang. That said, bouncing above 15,700 would start to suggest a bigger bounce is developing, perhaps even a new rally leg.

WHERE WE ARE…
It’s not fair to call Bitcoin a bubble. Not unless also calling it a series of bubbles. In the singular, “bubble” implies a finality that Bitcoin has eluded. Each individual bubble is the natural process of over-saturating the currently available supply of buyers. Usually, buyers would be considered demand, and Bitcoin the supply. However, the inverse better explains Bitcoin’s behavior. The normal supply:demand equation isn’t invalid,

TRTC got a little ahead of itself.

it doesn’t fully characterize Bitcoin’s relationship to the investment marketplace.

We’ve seen this before, most recently with the Cannabis sector. I was the first professional technical analyst following the sector in late 2013 when its several dozen pink sheet and OTC stocks had already doubled and tripled from near nothingness. Many would go on to double and triple again, and those were the under-performers. The gains were produced not by corporate results, but by exponentially rising demand for their stock. Exponentially rising prices attract attention, and more demand feeds the vicious circle for more price rises.

Investors weren’t motivated by a desire to own shares in companies having no revenue growth, of which most had none at all. Generally, buyers weren’t typical investors. A not insignificant portion were seasoned traders,

VAPE fooled ’em twice.

but many more buyers could call Cannabis stocks their first stock purchase. Many of the first-timers were so fortunate to be so early to such a substantial rally because they shared another trait in common. They were the product’s customer base.

Sound familiar? With very few exceptions, Cannabis stocks were penny stocks, if not sub-penny stocks. The general investor marketplace didn’t seek out these issues. Rather, Cannabis stocks were seeking out new buyers. I wouldn’t dare say they were wrong, but I also wouldn’t call them prepared. I went on record during the first week of April 2014 to call a top for the sector, and the words seemed like gibberish to many. Few seemed to accept that trends could end, and far fewer seemed to have any experience with that natural occurrence.

Along the way up many new companies began trading shares in the Cannabis sector. This continued during a good portion of the way down, too, as deals were already in the works. Which brings us back to Bitcoin. Which is still better known than other “Cryptocurrencies” Ethereum and Litecoin, but not much. All of which are better known than Iota, Monero, and Dash. And I’ll wager that more than two-thirds of their buyers can’t define “Blockchain,”most of whom don’t care.

Big name investors announcing new funds for Crypto investment add dimensions to the process that the Cannabis sector’s penny stocks never could. The new funds ARE the liquidity that penny stocks couldn’t provide. But that won’t change the sector’s general direction, and may slow the process of letting the currencies make their bottoms. Bitcoin’s current pullback / plunge is a not-unique reminder that the ultimate scalability is irrelevant, when compared to the pace of each interim adoptive leg. Those interim legs are interrupted by organic checks-and-balances that contain growth’s pace, while rewarding earlier adopters, and punishing late believers.

GWPH outperformed, for a reason.

WHERE WE’RE GOING…
Most of the questions I had posed before futures launched have been answered. I suspected that the derivative would both siphon serious and institutional Bitcoin buyers, while also diverting speculative activity to other Cryptocurrencies. They’re all down now, but “altcoins” such as Ethereum and Litecoin continued their rallies. We got to see a trading halt when Bitcoin had plunged Friday morning. Whether or not the cause, the plunge did stop. And now we’ve seen how Bitcoin behaves while futures don’t trade during the weekend. Very volatile.

About that halt, though. This is not a new device. We have decades of experience to infer that halts create artificial extremes, eventually retested if not also broken. Bitcoin et al have bounced considerably since Friday morning, also known as a correction. Even if the bounce were to get bigger, I suspect it will only be temporary. Drawing from experience with the Cannabis sector, I think we can also equate Bitcoin to GW Pharmaceuticals (GWPH), one of a handful of blue-chip players in the sector. It participated to some degree and duration with the sector’s decline, but held up well. Many of the other players are still getting shaken out.

We’re also going to see how tax enforcement affects the sector. Enforcement, and deferral. My suspicion is that futures have been sold in many cases to hedge exposure while deferring a taxable sale until next year. Next year, as in midnight January 1. Tax reform forecloses on the option of converting Bitcoin tax-free into other alt-coins. All of which applies to the U.S. and all of which foreign participants are aware — and have stepped back themselves from buying ahead of the selling pressure.

Perhaps the Christmas break will end with Bitcoin futures re-opening limit down or limit up. Then we’ll get to see whether that contributes to frenzy in that direction. Meanwhile, I’ve added daily coverage of Cryptocurrencies to my daily Market Tour and Market Wrap recordings, as well as reviewing interesting action intraday in the chaRTroom. That coverage will be expanded in 2018… Enjoy!