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.