by Vadim Pokhlebkin
Updated: January 17, 2018
As you take in the news that Bitcoin just dropped "below $10,000 with $36 billion of value wiped off in a day..." (CNBC, Jan. 17), it's worth taking a brief look at how we got here.
"Wild" only begins to describe Bitcoin's price action. Less than 12 months ago, it traded as low as $1200. By early December, it hit a high of $19,891 -- on the CBOE, Bitcoin futures topped $20,000.
Side note: Who could have thought that something called a "digital currency" that first appeared in 2009 and was widely available for 1 cent (and no one cared!) eight years later would be going for $20,000 a pop? It's the wildest financial craze of our time. Wait, scratch that -- it's the wildest financial craze ever, because Bitcoin is up not 100%, not 1000%, not even 10,000%. Since inception, Bitcoin is up 32,000,000%. Yes, thirty-two MILLION percent.
Yet, by December 22, Bitcoin crashed to $10,400. It wasn't entirely unexpected. The day before, Elliott Prechter, Head of Computer Analysis at Elliott Wave International, told Newsmax this:
Elliott Prechter: I Wouldn't Touch Bitcoin, Risk of Collapse Too Big
Thursday, 21 Dec 2017 10:38 AM
"We provided the first financial publication in the world that discussed bitcoin when it traded at 6 cents in 2010. Amidst obscurity, skepticism and disinterest, we explained the currency and said it had great potential," says Prechter, who left Seattle and Microsoft in early 2011 to help start an algorithmic hedge fund in Las Vegas.
Today, however, he says if you aren't already in the game when it comes to bitcoin, you might be better off sitting this one out.
"Bitcoin had great potential in 2010, but not in 2018. With today's elevated prices, manic psychology and weak fundamentals, I wouldn't touch it. The risk that it could collapse is too great."
Prechter says bitcoin could prove to be as fragile as a flower, or more specifically a tulip, comparing the bitcoin phenomena to the 1600s tulip mania in the Netherlands.
After the December crash, Bitcoin rebounded as high as $17000 -- only to swing down again, trading in the $10,000 range. What's behind these wild gyrations?
Analysts seeking "rational" explanations are looking in the wrong places. The right answer is investor psychology. The same CNBC article we quoted above gets at the heart of the matter, saying that the latest bout of Bitcoin market panic
"...lead the herd to sell with no other justification than fear..."
Fear and greed among the herd are what's driving cryptocurrencies' volatility. In other words, what's driving these trends is investor collective psychology.
And nothing helps you track and forecast market psychology like Elliott waves.
In our nearly 40 years in the business, we applied Elliott waves to hundreds of different markets -- some mainstream, some exotic. When we first studied cryptocurrency charts, we again discovered familiar price patterns. To understand why, you must first know what Elliott waves are.
Each price move on a chart -- or "wave," as well call them -- shows you shifts in the collective psychology of market participants. These bullish/bearish shifts aren't random, but patterned: 5 waves in the direction of the larger trend and 3 waves against it. Once you establish where in this pattern a market is, you can forecast with confidence where prices should go next.
That's it, whether you're looking at the Dow, crude oil -- or Bitcoin and Ethereum.
You might think that in extremely emotional markets like cryptos Elliott waves may lose effectiveness. Yet as a rule, the more emotional the market is, the clearer the wave patterns become.
Whenever a brand-new technology emerges, it often attracts a lot of investor interest. We saw it with the internet in the late 1990s. We're seeing it today with Bitcoin. Both have been described as bubbles. The internet survived, and thrived. Blockchain technology behind cryptocurrencies holds much promise, as well. So, despite the tremendous volatility, it may be too soon to write off cryptos as a class.
To help you prepare for what's next, we put together a free report, "Bitcoin: The Greatest Bubble of All Time" that gives you our latest thoughts.
Read it now, free -- and see what market psychology suggests for cryptos next.