First off, we’d like to take just a minute to welcome all our new subscribers that have joined us this week. It’s great to have you. Welcome aboard.
In these Friday editorials, we generally wander a bit beyond the confines of our TradeStops tools and share my broader observations about what is happening in one or another market.
This week, I’m talking about the same thing…should you invest in bitcoin?
Bitcoin is a digital currency that was created in 2009. Unlike other currencies, bitcoin is not issued or backed by any government. There is no “physical” bitcoin. It is all stored in the cloud.
The excitement about bitcoin is due to its purely digital nature and it’s underlying blockchain technology. Those who say to invest in bitcoin and other cryptocurrencies suggest that it’s better than traditional currencies because fees for transactions around the world can be lowered, anonymity can be maintained, and that bitcoin is safe.
It’s true that the bitcoin network itself can’t be hacked, but the exchanges that trade bitcoin can and have been hacked. Three years ago, the largest exchange at the time was hacked and those with bitcoin holdings lost half a billion dollars.
But today, it’s as if it never happened. People are buying bitcoin as if it’s a safe investment. The mania is building. And the historical signs of mania are beginning to appear.
Prices have skyrocketed. Two months ago, the price to invest in bitcoin was around $1,000. Yesterday, the price opened at $2,287, got as high as $2,725 before closing at the $2,500 level.
The talk in the financial media and, more tellingly, in the general media is clear… invest in bitcoin. People are wildly predicting that bitcoin could move 100 times higher in price in the near future.
One ad I came across recently promoted potential investment returns from bitcoin of 0.21% per hour. That would turn $1 into over $9 billion in a year!
To those recently bit by the bitcoin bug, we offer here a more sober analysis.
Bitcoin triggered a new Stock State Indicator (SSI) Entry signal in late spring of 2016. In other words, it changed from red to green in TradeStops. Here’s the SSI chart on bitcoin. (Note that we’re not officially tracking bitcoin in TradeStops yet.)
The Volatility Quotient (VQ) for bitcoin is 35.3%. This means the normal volatility for bitcoin, at the $2,500 level is almost $900. If you hold bitcoin, it could move against you by $900 and still be within its normal range of volatility.
We were actually surprised that the VQ on bitcoin was only 35.3%. That’s on a par with the likes of Twitter (TWTR) and Royal Gold (RGLD). Bitcoin has settled down quite a bit from its truly wild days of yore … but even 35% is still what we regard as a high-risk investment.
There are other reasons to be cautious as well. Daily trading volume in bitcoin exceeded $50 million yesterday. We’ve highlighted all such instances with the red squares over the price line in the chart below.
Every time bitcoin trading volume has risen above this level in the past, prices have corrected sharply soon after.
Our proprietary time-cycle forecasts also suggest that we’re likely near a top for bitcoin prices. The path of least resistance is to the downside over the summer and into the last quarter of the year.
A technology colleague of mine who has been involved with bitcoin for a long time told me yesterday that friends and family are all of a sudden calling him out of the blue and asking him how they can get involved in bitcoin.
He shared with me the advice that he has been offering to them…
“Imagine all of the money that you have is sitting in one big pile in your house. Now decide how much of that pile you’d be willing to take out to your backyard barbecue and set aflame. That’s the maximum amount of money you should invest in bitcoin.”
That’s very sound advice.
TradeStops is all about helping investors and speculators make risk a friend rather than a foe. Assess your risk. Make your decision. Take a reasonable position. Honor your plan.
Many bitcoin investors seem to be throwing caution to the wind today. This weekend we’ll be putting some steaks on my backyard barbecue … not my money.
TradeSmith Team
