Bitcoin Bubble Finally Bursts

I have written two articles about Bitcoin in recent months. The first,last December, concluded that "there are definitely some cracks appearing (in the technical structure), but a shrinking consensus of evidence continues to point to an uptrend." Thesecond, entitled "Has the Bitcoin Bubble Burst", noted things had continued to deteriorate, but the puzzle still had some missing pieces. Yesterday's drop completed the puzzle and met the benchmarks I laid out. It seems to me the technical evidence now proves beyond a reasonable doubt that the Bitcoin bubble has indeed burst. Since this is such an important technical event, I'll quickly recap the negative evidence that was available last month and wrap up with the updated benchmark violations.

Bitcoin Momentum

It's my belief that markets are driven by one thing and one thing only: the attitude of market participants to the emerging fundamentals. That psychology can be monitored using sentiment indicators, but these are principally related to short-term market movements and are not available for all markets. On the other hand, momentum indicators, such as a rate of change, can be applied to any data set and time frame and reflects psychological mood swings just as accurately.

One technique that helps identify bubble peaks involves the observation of an 18-month ROC to see when, following a lengthy advance, it reaches the 200% level and then reverses. A reading north of 200% is important because it indicates a doubling in price over a period of a year and a half. Research shows that this is a very rare occurrence. For example, the very volatile copper price has only achieved it once, in the 1970s. The S&P has never touched 200%, not even in 1929. The highest peak for any commodity, currency or stock market (not stocks) that I have ever observed was 500% for silver in 1980. My studies, covering 30+ examples spread over centuries of data, indicate that, after the ROC peaks above 200%, it has taken an average of 20 years to regain the bubble high, as shown in Table 1.

Genuine bubbles, as defined by this approach, take many years to form, as they need to be preceded by a multi-year advance extending at least four years, subsequently culminating in a 200% 18-month ROC reading. That means that the 2017 Bitcoin record breaking 2,000% peak, being preceded by only 2-3-years of publicly recorded data, is not long enough to establish a bubble path. It falls more in the category of what we call a momentum thrust, which comes off a major bottom rather than capping a multi-year advance. Momentum thrusts are therefore very bullish long-term.

Chart 1 shows that the ROC bottomed in 2020. The two 2021 highs clocked in at a remarkable 600%. They only look subdued in the chart because of the record-high 2017 reading. Note also that both price and momentum are below their respective MAs. More important is the fact that the ROC has recently dropped below its up trendline, thereby confirming beyond a reasonable doubt that a momentum reversal has taken place.

Recent Price Action

Chart 2 shows that the price dropped below its 600-day MA in late April. The arrows show that, up until last week, the series of rising peaks and troughs was still intact. However, Monday's action took out the January low around $35,000, thereby confirming that a series of declining peaks and troughs is now underway.

Chart 3 tells us that Bitcoin is now experiencing a trend of under-performance against commodities and stocks. Both relationships have recently broken down from important tops. Prior to that, Bitcoin was outperforming just about everything else.

Finally, Chart 4 indicates the price has now completed a head-and-shoulders top with a minimum ultimate downside objective of $22,000. Interestingly, a double objective count indicates substantial support in the area of the 2019 and 2020 rally highs, just below $12,000. To be clear, this is not meant as a prediction, but more as a statement of possibilities.

The price has already sunk from a $68,000 high to a recent $30,000. That's an awfully large drop. However, in the history of punctured bubbles, it's not that much. The price will undoubtedly continue to zig and zag and a relief rally is overdue. However, with easy money no longer available, watch out below, as there are likely to be a substantial number of Warren Buffet's naked and fraudulent swimmers yet to be exposed.

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 Groupof Walnut Creek or its affiliates.