The Big Short @ BitCoin!

The biggest asset bubble of our times is about to blow-off

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”  ― Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

And men are as mad now, as they used to be centuries back. Nothing has changed — fear and greed still rules the roost and fuels market bubbles and crashes. The Dutch Republic in the 1630s experienced the first recorded speculative bubble in history. At the peak of the bubble, allegedly a single Tulip bulb was sold for over 12 acres of land, and there are stories of people selling their houses to buy one. In early February 1637, the bubble burst, and within a few months, the price was back to its original levels. This, is without doubt one of the most widely used examples when people talk about asset bubbles, thanks to both the ‘obvious’ absurdity of selling your house for a flower and the huge, rapid price change in the goods concerned.

The BitCoin Bubble — This Time it’s worse.

But Shane Oliver, an economist at Australia’s AMP Capital, said bitcoin’s meteoric rise isn’t quite like any previous bubbles he’s seen before. “Bitcoin leaves them for dead.”

His would be a wise voice to heed, as the recent BitCoin price move has all the has all the classic ingredients of a bubble . It has an alluring story, as all bubbles do. But its true value remains a mystery. Mr Weese of the Bitcoin Association of Hong Kong recently mentioned that “People have always been saying that this is one of these things that can go between $0 and $1 million per coin”. Hmm, 1 Million dollars? Seriously? Someone thinks that?

And guess what, in terms of multiples of starting price, the BitCoin bubble has already surpassed the tulip mania to a great degree. Its official, this is the biggest financial bubble of all times

BitCoin bubble as compared to the rest

Anatomy of a Bubble — BitCoin meets all the requirements

Source: Psychology of Asset Bubbles

Technically a Bubble has multiple phases — stealth, awareness, mania, blowoff. Stealth phase is the initial phases of a new asset class coming into existence with only a small community backing it. This is where smart (and informed) money put in their initial bets. In the awareness phase, the big buys start getting interested and institutional investors (mutual funds, hedge funds, pension funds) come in and join the party. Towards the end of the phase, the media joins the party and puts fuel to fire. This marks the beginning of the Mania phase. With media attention comes speculative involvements and a lot of newly enthused buyers whose buying becomes a self fulfilling cycle driving prices up continuously. The peak of the mania phase is marked by a near vertical rise in prices with many investors ready to get their hands on the asset at any available price. This is the phase where the smart money exits positions slowly. And then comes the inevitable blow-off phase — since everyone is already a buyer and there is no body else left to buy. The decline in price will start off slow and there might even be a small pullback after an initial selloff. But the sell off speeds up again and in turn kicks off a self-fulfilling prophecy of fear which leads t o panic selling. The availability of shortable futures instruments against that asset would only worsen the situation as smart money would start taking the opposite side of the bets with leveraged positions. In 1636, cash-settled futures were introduced in the tulip market, and guess what — soon after in early 637, the market crashed.

And Now Look at the BitCoin Charts…

Bitcon Price chart — the bubble has just burst!

The Bitcoin charts are an almost textbook replica of the exact anatomy of an asset bubble. It is staring us right in the face for anyone who would care to see! Bitcoin reached its lifetime high at around 17th December 2017 — that is also the day on which CME, the world’s largest futures exchange, launched its own bitcoin futures contract making it easier for institutional money to short the contract. A sell-of ensued and prices corrected quite a bit to create a base support level for the pullback at around 16,200$ levels. The ensuing relief rally created a bull-trap which made naive investors believe that the up-move is re-starting after a correction. However, the prices failed to take out the December 17th high of around 19,213$ — it only reached till 17,085$ thus creating a lower low. Prices have since plunged back below the bull-trap support of 16,200$ convincingly and at the time of writing this article is trading well below that level.

Guess what — it’s a SHORT! Anyway you look at it, there is no long trade in BitCoin currently. For those who thought prices of BitCoin would keep going up till the birds come home ..well, think again! Long investors should take profits of the table right away and reduce your risks.

And for the traders who were waiting for the perfect BitCoin setup (the one on which a movie would be made in the future).. well, it’s time to head to the CME Futures contracts and open up the shorts.