Guess What? Short Term Indicators Are Saying That Bitcoin Is Getting A Bit Frothy!
- 18-month ROC is literally off the charts
- Bitcoin and short- term momentum
- Comparing Bitcoin to the Bitcoin Trust
- Conclusion
- Links to videos on Bitcoin
18-month ROC is literally off the charts
There are two Bitcoin directly related vehicles that are available on the StockCharts platform. These are the NYSE Bitcoin Index ($NYXBT), which represents the daily US dollar value of one bitcoin. The other, is the Bitcoin Investment Trust (GBTC), which is an OTC listed fund giving easy access to investors to speculate in Bitcoin. According to Yahoo news the Trust is backed by roughly 0.92 bitcoin. Its problem, is that it trades at a healthy premium to the crypto currency. That premium is likely to seriously erode as more easily accessed vehicles, such as Bitcoin futures become available.
It is widely agreed this new asset class is in the bubble phase, but bubbles have a nasty way of expanding to a far larger level than generally expected. That’s why they are bubbles of course. Using an 18-month ROC as a benchmark, most long-term price gains have a habit of peaking between 180% and 200%. The record, is held by silver (see Chart 1), which reached over 500% in 1980.
Chart 1
Bitcoin is already at a new record, with an end of November reading in the NYSE Bitcoin Index not far off a staggering 2000%. The latest reading, as shown in Chart 2, is now over 2,200. The naysayers are undoubtedly correct, but are just as likely to be expensively early, as this market clearly has taken on a life of its own.
History tells us that the price peaks of unusually strong bull markets, are almost always associated with a genuine reversal in that 18-month ROC. If that principle holds true for Bitcoin, it means that in terms of time the peak may not be that far off. That’s because the ROC needs to feed off higher and higher prices, in order to maintain its rising trend.
Chart 2
Bitcoin short-term momentum
In the meantime, Chart 3 looks at the short-term trend in the form of the daily KST. The path of the price has been one of a sharp markup, followed by a rangebound correction, then another markup phase etc. On the face of it, these corrections look pretty benign. However, the speed of the advance masks their substantial drawdown. The one that developed in early 2017, for instance, took the price from $1087 down to $770, for a drop of 28%. KST reversals have provided some very good signals of impending corrections, but the November 2015 reversal warns that this is a guide, not a guarantee. Right now, the indicator is at a record level, telling us what we can already visualize…. the market is very overbought.
Chart 3
Comparing Bitcoin to the Bitcoin Trust
Sometimes we get a clue as to the behavior of one asset by referring to another. In this respect, Chart 4 compares the Bitcoin Index to the price of the Trust. Overall, as one might expect, their trajectories are similar. However, the chart shows that on some occasions, following a correction, it has been possible to observe a breakout in the Trust, which is then followed by a higher price in the Index.
Chart 4
One thing the Trust has going for it but the Index does not, is the availability of volume data. Chart 5 features the PVO, using the standard 12 and 26 parameters. Occasionally, it presents buy and sell signals. For example, every time the indicator has peaked from a reading at or above the red horizontal line, a top of some kind has been signaled. Two of the volume oversold reversals, flagged by the green arrows, represented a great buying opportunity. The red ellipses show that a couple of peaks developed when the PVO did not reach overbought status, but even so, a decline in activity followed. This is very much a market that only seems to rally when volume expands, so it will be worth monitoring the PVO in the period ahead, in order to spot a peak. That won’t necessarily translate to a lower Bitcoin price, but given the strong relationship between the two, will certainly increase the odds of a drop.
Chart 5
Chart 6 reflects the parabolic nature of the rise. Note, that the two previous peaks in the 25-day ROC were followed by a correction. That’s another indicator worth monitoring.
Chart 6
Conclusion
The shear speed of the advance, indicates that in terms of time, Bitcoin is very close to a peak of some kind. Whether that will be in intermediate top or “the” top is open to question.
Remembering back to the peak of the 1970’s gold mania it seemed that the final top in January 1980 was accompanied by some unusual events. For example, buyers were literally lining up at Canadian Banks and the price was being widely quoted in the nightly network news. I don’t remember the last time that happened. In effect, the bullish arguments were well understood by everyone, so there was no one left to buy. Crypto currencies do not seem to have reached such a level widespread acceptance yet. In this instance, the final top will likely be signaled by a different set of unusual characteristics. We don’t know what they will be, but when your friendly air hostess, carpenter or taxi driver become experts in blockchain, Bitcoin and other crypto currencies that would be a time to really get worried!
Come to think of it, two futures contracts have already been cleared for trading, one as early as next week. The NASDAQ is expected to launch another in the first quarter. Veteran traders have noticed that fresh listings in new markets are often associated with tops. Ask anyone who bought gold when it was first legalized in 1975 how that worked out for them!
For those interested, I have assembled a few links to videos on Bitcoin and its underlying technology. As one commentator put it when relating Bitcoin to the tech boom. The technology is in 1992 but the hype is at 2000… those comments were made when the price was below $4,000.
Links to videos on Bitcoin
https://www.youtube.com/watch?v=r43LhSUUGTQ
Basic video on blockchain and its uses and potential uses
https://www.youtube.com/watch?v=baJYhYsHkLM
How to build blockchain in 15 mins. Explains the idea of blockchain and how it can’t be changed. Boring stuff, but mercifully short. Explains the concept well.
https://www.youtube.com/watch?v=k53LUZxUF50&t=124s
Blockchain will change the way we think about trust.
https://www.youtube.com/watch?v=baHeVhAK7o0
This one is on Bitcoin but is the most practical I have seen after we get through the first child!
https://blockgeeks.com/guides/what-is-blockchain-technology/
Print article on Blockchain
https://www.youtube.com/watch?v=40ikEV6xGg4
Basic Stuff but uses some actual company examples incorporating blockchain
Bitcoin is similar to buying gold as an investment.---it goes up and down.
https://www.youtube.com/watch?v=SMEOKDVXlUo
Explains why blockchain is more than currency. Why, when compared to the internet, blockchain is at the 1992 stage in terms of technology but the hype is at the equivalent of 2000. Good stuff for those interested in separating their money from Wall Street. Arguably the most informative of these videos.
https://www.cryptocoinsnews.com/affects-bitcoin-price/
Things that affect the Bitcoin price
https://bitconnect.co/bitcoin-information/10/how-is-the-price-of-cryptocurrency-defined
More on causes of value changes
https://www.youtube.com/watch?v=uJOPpnJB4sI
Not so fast, as John MacAfee brings us back to reality.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.
