Bitcoin fever entering final stage

In April, 2013 I successfully predicted a severe correction in Bitcoins based on bubble principles. 7 months later, Bitcoin is at all-time highs once again. According to Elliot Wave Principle, market movements following the overall trend of that market occur in 5 waves: 3 impulsive waves with the trend and 2 corrective waves against the trend. Once the 5-waves are complete, a prolonged corrective period occurs where prices reverse the overall trend.

Take a look at the charts below (note that each successive chart is a magnification of the previous chart, as identified by the red dashed box in each larger chart). The first chart below shows lifetime price action. Note that prices have clearly moved in 5-waves. Interestingly, each wave formed it’s own mini-bubble:

1. The first wave ended in June, 2011, at $30. It was parabolic in nature, and corrected all the way down to $2 by Dec, 2012.
2. The third wave ended in April, 2013 at 266. Once again, it was parabolic in nature, and suffered an extremely sharp 80% decline in a few days. Then, prices moved sideways for a few months to finish correcting the excess.
3. Finally, the 5th wave is following the typical parabolic pattern. Buyers who entered the market near the end of Wave3 (in the $50-200 range) are all making a huge profit (5-10x). However, since we are nearing the end of the cycle, an imminent, long-term correction is about to begin. This will be a painful downtrend characterized by daily decrease in prices, with the occasional brief rally.

The second chart below shows 6 months starting around the Wave 4 low from the chart above. Note that the wave principle is fractal in nature, and Wave 5 of the larger trend breaks down into 5 subwaves (i thru v).

Finally, looking at the 10-day chart starting around the Wave iv low from the chart above, we see 5-waves unfolding once again. Drilling down through each successive chart indicates that at each time frame, we are in the 5th wave of the rally.

From the purely technical perspective of Elliot Wave analysis, the charts are showing a marked exhaustion of the 5-wave trend. While there is potentially a bit more upside left, I would predict that the trend is weeks, if not days away from expiring.

One other interesting point is the “personality” of the 5th wave. Elliot Waves have distinct characteristics since they reflect the mentality of the herd. In wave 5, “…The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top.” (Hint, hint, family and friends finally “seeing the light”). Furthermore, “Volume is often lower in wave five than in wave three” as you can see from the first chart. Finally, “…At the end of a major bull market, bears may very well be ridiculed…” as evidenced by yours truly.

Bitcoins may be a very useful medium of exchange and they may prove to be successful long term. But in the medium term, a market will always work in the same way: It will never go up forever, and it will always make sure to minimize real gains for investors by natural price corrections. Therefore, if you’re holding on to a nice profit in Bitcoins, it may be a wise time to sell the majority. You will have a chance to buy back at much reduced prices in the coming months.

Opps… down 80%, a week later

4,100% up in a year. Being the fastest bubble I’ve ever seen, it makes sense that bitcoin fell fast. But 80% in 7 days is even faster than I was expecting. Amazing!

GLD correction nearly over

Gold made headlines today dropping about 6%. I think this drop is more of a stop-run then a breakout because it happened so rapidly and on massive volume. Gold has bounced off the $1,500 level for a couple years now so it makes sense that it would drop below this level to knock out the weak hands.

From an Elliot Wave perspective, gold has been tracing out a nice 3-wave flat correction. Wave A is 3-waves, Wave B is 3-waves, and Wave C is 5-waves, making the drop to new lows appear as the start of a new downtrend. Furthermore, there is quite a bit of negative commentary about gold so we could be near a temporary low, and possibly a large swing low. Gold should recover and move back above $1,500 within the next month or two or else the downtrend could continue.

Silver vs NASDAQ vs Bitcoins

Here are three bubble charts for your review.

The first one, silver, rallied from $1/oz to $41/oz at the peak of the bubble in about 8 years, an annual growth rate of about 60%. Note that the metal subsequently lost about 90% of it’s value. Selling at any part during the bubble phase ($10-41) would have been prudent in the long run.

 

Here’s a more well-known, but less severe bubble. This second chart, the NASDAQ composite (internet bubble, anyone?) rallied from about 150 to 5000 in just over 20 years, an annual growth rate of 6-7% per year. Because the bubble was less severe than gold, the NASDAQ ended up losing only 80% of it’s value. However, once again, selling at any point in the bubble phase (2000-5000) would have been prudent in the longer run (i.e. you could have bought back at lower prices such as $1000).

 

Now, take a look at the Bitcoin bubble. It’s up from $5 to $210 (as of 4/9/13) in about one year for an annual growth rate of 4100% or so. As you’ve seen above, the more severe the rally, the more severe the decline, so I would not be surprised to see this drop 90-95% over the next few years. Therefore the strategy is this: if you’re up 100%, sell half you bitcoins to lock in your cost basis. The remaining bitcoins are pure profit, so even if bitcoins drop to $0, you haven’t lost any money. If they keep rallying, you can choose to sell a few to lock in profits.

The conclusion is clear: bitcoins are no less vulnerable to being a bubble than silver was in the 1970s and the NASDAQ was in 2000. The both had amazing fundamentals at the time, and they both crashed 80-90%. Fundamentals change, as well as investor perceptions.