The crypto currency craze crashed quickly. It was only at the start of the year that star currency bitcoin was trending towards $20,000 per digital token. Now it’s back to $10,000, a surprising surge after dropping as low as $7,500 just last week. At that price, the digital token was down 65 percent from the peak—but also represented a price that would have looked attractive back around Thanksgiving.
I’ve been warning for some time that Bitcoin—and the broader cryptocurrency market— was in a clear, easy-to-identify bubble. I wasn’t alone either. That’s because prices made a clear parabolic move that you could easily track on a chart. The percentage gains simply started to outpace the previous month’s percentage gains as 2017 unfolded.
We saw a lot of insanity along the way. Numerous companies added phrases like “blockchain” to their name to capitalize on the craze, just like how many companies in the late 1990’s added “dotcom” to their name to entice investor interest.
A bitcoin conference in December really took the cake, however. They announced that they wouldn’t be accepting the digital “currency” on the grounds that the processing time and costs were rising too much.
No surprise there. It’s all part of being in a parabolic price movement that the warning signs pop up, but few are willing to do anything about.
In short, bitcoin, the best known crypto currency, was becoming too difficult to use as intended. That’s why I like the idea of cryptocurrencies, but not bitcoin.
Investors today might want to start looking at some of the other big players that seem to have learned from Bitcoin’s mistakes, like Litecoin or Ethereum. I bought both last year and took advantage of the parabolic move to cash out my original stake. I’m letting the rest ride.
And as long as any crypto can offer a cheaper means of transferring wealth than Bitcoin, I doubt their value will go entirely to zero.
But even though things look better, I wouldn’t be surprised if the space was still unwinding last year’s parabolic move. And just as one part of the parabola is great for those long the asset, the other part of the parabola is great for those shorting it (but terrible for those who went long).
What can investors do when something they own goes parabolic?
It can happen in a variety of assets, like precious metals in early 2011, the aforementioned dotcom companies in the 1990’s, and, in terms of price-to-wages, housing prices across the U.S. in the mid-2000’s. Some things are easier to do with some assets versus others. You probably don’t want to sell your home just based on the price—after all, you’ll still need somewhere to live. But selling off one sector of the stock market that’s really flying and going to cash isn’t a bad idea.
The best course of action would be to start selling in tranches at pre-set price points. In the case of crypto, I simply sold off a slice of my stake last year once the most recent tranche I had bought tripled in a month. For all the years I’ve been investing, I’m smart enough to know that I’m not smart enough to routinely find investment opportunities that triple in a month.
And if something’s moving that fast, it’s moving at a pace that I can’t understand the reason why. After all, if you were buying a piece of rental property that you felt was trading for 50 cents on the dollar and was worth twice as much, the valuation would take years to change. It wouldn’t happen in a short timespan of a few weeks. But that’s what happens in a bubble, when lots of capital tries to squeeze into just a few opportunities.
Parabolic price moves are pretty rare in the broad market. But they do happen often enough that recognizing them is crucial to your investment success. Nothing moves in a straight line, and a parabolic move isn’t sustainable.
How quickly parabolic pops get back to new highs can vary as well. The tech bubble deflated between 2000 and 2002 when stocks bottomed. But tech stocks, at least as measured by the Nasdaq index, didn’t hit new highs until about 2014. Many tech companies went entirely under, and the Nasdaq lost over 80 percent of its peak price. An 80-90 percent drop is typical after a parabolic move up.
Gold prices haven’t gone anywhere near the parabolic highs they hit in 2011, although the metal is now gradually moving off a low of $1,050 set in early 2016. The metal could see a sustainable rally over the next few years before its next parabolic move signifies a blow-off top. As a commodity, gold has never gone to zero, so that makes parabolic moves in the space less extreme, although clearly still possible.
Bitcoin went through a far smaller bubble and correction a few years back, and it took a few years for it to take off once again. Other cryptos will likely do the same, but at least the next rally won’t have as much silliness as companies embracing a concept—the blockchain—that their underlying business model doesn’t fit (like a certain tea company).
I don’t know what the future holds for the price of cryptocurrencies. But they do have a future, just as tech stocks, gold, and housing do as well. But that kind of price move on a chart should put a chill into any investor. No matter how good the news is, when a lot of money goes into a small space quickly, the gains look great, but they’ll be limited. And when money stops going in, to say nothing of it going out, watch out below.
A parabola is a sign that something is wrong with investors regarding an asset, and it’ll be sorted out in time. Your best move is to avoid it. If your wealth is caught up in one, use the opportunity to raise cash. Chances are you’ll have a chance to buy in more quickly within a few years or even months. And, yes, if you missed out on the crypto craze right now, half off the peak is a much better value proposition than a stock market that only went to a 10 percent discount from its peak.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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