Just a few short months ago, at the end of 2017, Bitcoin and the digital currency asset class were all the rage. In what was possibly the greatest bull market of all time in an asset class, the returns over the course of last year were staggering on a percentage basis. There were a host of newly minted Bitcoin billionaires and more than a handful of millionaires from the ascent of the cryptocurrencies. As in all bull markets, proponents of the digital currencies offered justification for the spectacular gains and projected that the markets were nowhere near a top. Instead, many predicted that the returns of 2017 were only the beginning and it would not be long before Bitcoin topped the $50,000 level and many of the other tokens in the asset class would go along for a continued ride. Meanwhile, many detractors of the asset class faded into the background, but some still expressed that, if available, they would love to buy put options on the entire asset class.
In late 2017, the market capitalization of all digital currencies rose above the $800-billion mark, and it seems like the $1 trillion milestone would be conquered like a hot knife through butter. However, in 2018 market sentiment shifted and since the beginning of this year, the high flying world of cryptocurrencies has turned into a falling knife, shredding many of the latecomers to pieces when it comes to losses on their holdings.
December 2017 fades in the market’s rearview mirror
In December 2017, while the price of Bitcoin and other digital currencies were still the talk of the world, the CBOE and CME rolled out futures contracts on the digital currencies. In hindsight, the ability to short the cryptocurrencies may have sown the seeds of its price destruction late last year. The futures contracts began trading when Bitcoin was near its high.
As the chart highlights, the leader of the digital currency pack has declined from highs of $19,343.04 on December 26 to its current level at $6720.35 on June 19. The highs came around the time that the CBOE and CME introduced futures contracts that allowed market participants to short Bitcoin.
Throughout 2018, Bitcoin, Ethereum, Litecoin, Ripple and most of the other tokens have experienced significant declines. Technical support for Bitcoin is around the $6300 level, and as of June 18, the price was not that far above that level which could be ominous for the asset class.
High-profile detractors licking their chops
While Bitcoin was moving from $1000 to over $19000 in 2017, many high-profile people in the world of finance were more than dubious about the new asset class that was capturing the attention of market participants all over the world. While supporters were proven correct last year, the Chairman of JPMorgan Chase (NYSE:JPM), Jamie Dimon, dismissed the asset class as a fraud. Warren Buffett, the legendary investor, said that the move in Bitcoin was a bubble that surpassed tulip bulbs in the 1600s and that if you could buy put options on the entire asset class, he would jump at the opportunity. Bitcoin and the world of digital currencies challenge the status quo when it comes to money and banking. There are no two better representatives of that status quo than Dimon and Buffett.
This year, at his annual meeting in Omaha, Nebraska, Buffett said that digital currencies are “financial rat poison.” His partner, Charlie Munger, the 94-year partner of the Oracle of Omaha, who is never shy about his opinion on matters, equated trading Bitcoin and its crypto cousins with trading “turds.”
The decline in the asset class over the course of 2018 has likely cemented their views and provide validation for their comments in 2017 and 2018.
Near lows, and holding on for dear life
When it comes to the fundamentals for Bitcoin, many market analysts believe that the production cost is a function of the electricity and computing costs for mining the coin in the cyber world. There are so many conflicting opinions when it comes to this topic. Commodities all have a production cost, and the Commodities Futures Trading Commission defined Bitcoin and the other cryptos as commodities. However, they are so much more than the raw materials that companies extract from the crust of the earth or grow in arable soil where climate makes it possible for them to thrive. If cryptos are commodities, then production cost is a significant issue when it comes to an understanding of their price cycle. However, if they are currencies, the analysis becomes more complicated. The cost of printing a dollar bill or euro note has little or nothing to do with their values; rather it is the full faith and credit of the governments and monetary authorities that give value to the legal tender. Therefore, fundamental analysis is a challenge when it comes to an understanding of the value of these tokens. Technical analysis is the study of herd behavior, and price pattern offer significant clues as to where buyers and…