Could This Be A Double Top In Bitcoin?

By November 23, 2021DeFi
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Summary

  • The sudden rush into bitcoin means we have reached some type of mania phase that is ripe for a shakeout - a big one.
  • Bitcoin has declined many times by 80-plus percent in the past and come back. That does not mean that it will always miraculously re-inflate.
  • The Fed is tapering, and this should create a correction in risk assets, of which bitcoin is a part.
Investment And Finance Concept - Bitcoin Symbol Sitting On Yellow Financial Graph Background
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I have had multiple investors ask me lately if putting money in bitcoin is a good idea. I think the sudden rush into bitcoin means we have reached some type of mania phase that is ripe for a shakeout - a big one.

Investing is about rising cash flows when dealing with equities, and falling or rising interest rates with bonds. But there are no cash flows with bitcoins. The vast majority of retail investors that buy bitcoins do not buy it in order to transact with the coins. They buy it because it is - or shall we say, was - going up.

Blockchain technology may offer superior and cost-effective ways to move money across borders, but no central bank (or government) in their right mind will give up control of its banking system. The Chinese banned bitcoin in 2017, then let their crypto miners operate for another four years, and now they are rooting out the mining of bitcoin. The Chinese are not stupid. I think they see a mania here, and also a threat to their economic stability that can be rather dangerous. Many other big countries have banned it.

BitStamp Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Bitcoin has declined many times by 80-plus percent in the past and come back. That does not mean that it will always miraculously re-inflate. The price of bitcoin made a marginal new high this past spring with the launch of the bitcoin futures ETF. Now it has fallen again from its peak of $67,707 on November 8.

The Fed is tapering, and this should create a correction in risk assets, of which bitcoin is a part. The more the Fed tapers, the more volatility we should see in both stocks and bonds - and yes, bitcoin, too.

I would take a decline below $46,000 (the 200-day moving average) to be a yellow flag and a decline below the spring low of $28,500 to be a completed massive double top which points to a decline to below $10,000, which incidentally would match many of the multiple 80%+ declines in its storied history.

Another sign of a massive top in the middle of a mania is the Matt Damon commercial now being run on CNBC for crypto.com. There he seizes the day, Roman style (“carpe diem”), and concludes that fortune favors the brave (“fortis Fortuna adiuvat”). That’s a lot of Roman wisdom in the same crypto commercial, including the invocation of the Roman goddess of luck, Fortuna.

If this crypto bubble bursts, which I think it will shortly, there won’t be any Roman gods or goddesses that will step in to do anything about it, including Dame Fortuna herself.

Have You Seen the Euro Lately?

The euro is doing exactly what it needs to be doing as the Fed taper begins. I have a vague idea of when the ECB taper will start - possibly in March 2022 - but the Europeans seem to be behind in the tapering game and are likely to be behind on any rate hikes. With interest rate differentials increasing in favor of the dollar when it comes to 10-year government bonds, more of this downdraft in the euro is likely.

Euro-USD Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If there are no more COVID scares in Europe (of the Austria kind), the interest rate differential should move in favor of the dollar and we should see further dollar appreciation. It would make sense that with multiple vaccines and treatments now available, COVID will wind down, holiday spikes notwithstanding.

The eurozone economy has generally been slower growing over the years, and the ECB has been more reluctant to delve into unorthodox policies like QE, even though they ended up being more aggressive with their QE than the Fed, relative to the size of the eurozone economy. I think it is likely that the ECB keeps moving more slowly than the Fed to taper and ultimately tighten at some point in the future.

In theory, tapering means less infusion of electronic dollars into the system and, by definition, higher volatility, with lots more ups and downs for the stock market but with an upside bias if the economy keeps normalizing. We are about to find out “how theory meets reality” shortly.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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