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!
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.
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.