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Market Lab Report - Where's the Bottom?

Market Lab Report / Dr. K's Crypto-Corner

by Dr. Chris Kacher

The (R)Evolution Will Not Be Centralized™


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Bitcoin's Swan Song?

Short answer:  (if it doesnt show on your browser, it's an emoticon of a cat laughing so hard, he's crying). I don't have a book but one could say I'm talking my book because bitcoin is worth a lot more than when I first bought it at just over $10 in Jan-2013. So for the very few who remain skeptical, second and third order effects are often overlooked but that is where the big money is often made.

Not surprisingly, Bitcoin has officially died 380 times since its creation in 2009. https://99bitcoins.com/bitcoin-obituaries/ 

Its most recent death (not yet reported on the 99bitcoins site) is in the recent carnage which affected all markets including stocks, bonds, and precious metals reminiscent somewhat of the financial crisis of 2008 when even gold lost about 1/3 of its value in a few weeks. Of course, mainstream media jumped on the bandwagon to say bitcoin is no longer a safe haven asset, even though the same could then be said for gold both in the current selloff where it rapidly lost about -15% of its value and in 2008 when it lost 1/3 of its value.

While we always remind members to obey your stops, one can get stopped out on a intraday, swing, or position basis depending on their timeframe. Some may keep a core position if they believe the technology is here to stay. This core should represent capital one can afford to lose since there is no such thing as a sure thing. One could have bought and held a core position in AAPL, GOOGL, FB, and AMZN. Even with the recent carnage, AAPL stock is up nearly 80,000% since its IPO in 1980 and AMZN is up about 73,000% since its IPO in 1997. Stocks that resist downturns in markets are a sign of great strength. When the weight of the market comes off after markets put in major bottoms, these stocks are often the price performance leaders. AMZN and NFLX have somewhat resisted the downtrend in the markets, but any bounces are more likely dead cat bounces until major averages put in bottoms.


One could also have done this with bitcoin which is still up about 650,000,000% since its creation in 2009 ($1 to $6.5 mil based on its recent price of $6500). It has withstood two -94% corrections as well as a host of corrections exceeding -75%, only to come roaring back to new highs. Nothing in the history of speculation has achieved this. When bubbles blow apart, the asset is question is done. With bitcoin, those few who bought on my metric's major buy signals which were few and far between, either on material bounces off lows on record volume such as in Jan-2015 or on major base breakout price/volume strength in Jan-2013, May-2016, and Mar-2019, are sitting pretty. Even prettier are the ones who sold on the rare major sell signals such as in early 2014 and Jan-2018.


Bitcoin One-of-a-Kind?

One might ask what makes bitcoin different? Well, besides having no tangible value :P , its 'killer app' provides a decentralized, censorship-resistant framework which disrupts regulation and escapes every third party’s attempt to govern and control it. Bitcoin has no face, no body, no soul, no cognitive capability. It is the ultimate free market. It simultaneously exists nowhere and everywhere. It is an integral part of the internet. To destroy bitcoin would be to destroy the internet, mesh networks and all. It is sociologically trustless as it places trust in a cryptographically secure algorithm. It is immune to inflation thus its value cannot be degraded unlike major fiat currencies such as the dollar which is worth just a few percent of what it was worth a hundred years ago. Bitcoin is hardcoded to have 21 million bitcoin in existence by roughly 2140.

While bitcoin may not have any hard assets underlying its value, neither do peer-to-peer (p2p) file sharing platforms that have been plaguing the justice system since the 1990s. Both are built with code, are fully decentralized, and used by tens of millions of people. Governments such as the U.S., China, and Russia have been unable to stop the torrid growth in either technology despite outright bans at times. The keys that supercharge both technologies is borderless data exchange via p2p platforms such as Pirate's Bay, and borderless exchange of value via bitcoin, thus the intrinsic value in the form of utility in both is massive.

So while some can criticize those who consider bitcoin a transformative, game-changing technology, the facts speak for themselves. That said, I am not eyes wide shut about a different technology co-existing or even replacing bitcoin that offers similar advantages of p2p value transfer. But as always, it is best to watch the markets in real-time then decide accordingly. If and when such a technology emerges, I will adapt accordingly.

Obey Your Stops

The recent price/volume action in bitcoin should have stopped out all traders except for any who are holding onto a core position. Such core-positioned traders are typically sitting on massive profits since their buy points were often when bitcoin was still in the hundreds so they are playing from a position of psychological strength. Indeed, bitcoin and the best cryptocurrencies are bouncing hard.

But let's examine the recent sharp drop which was most likely due to a perfect storm of factors.

1) There was an excessive amount of exposure on margin and derivative cryptotrading platforms leading to a lack of liquidity on crypto spot exchanges as margin calls needed to be met. Brian McCabe, Head of Market Insights at Paxful, said, “Margin calls and investors losing money in equities and other higher-risk markets should lead to more people having to close positions in Bitcoin to reduce overall risk exposure.”

2) There was a cash squeeze across the board in global markets due to the fastest drop off peak prices in some stock and bond markets in history, thus bitcoin which is still a speculative asset had to be sold to meet various obligation in other markets (stocks, bonds, et al) spurred by the shutting down of economic activity, ie, a liquidity crisis drove the market collapse.

3) The PlusToken ponzi scheme scam absconded with over 1% of the bitcoin supply so some $219 million worth of bitcoin was dumped. Analysing PlusToken’s activities, it was reported on Saturday that some BTC 13,000 ($88 million) have been deposited to a mixer in the previous 24 hours, providing two feeder addresses. The two addresses combined show BTC 32,329 ($219 million) received. This amount was reportedly sold in the open market last week adding to bitcoin's drop in price. As youtube's Datadash reported the other day, such illicit schemes tend to not work orders but instead dump when aggressive selling hits the market. Datadash has the broadest listenership in the cryptospace at over 330,000 subscribers.

While GBTC is fairly liquid as it trades about $30-50 million a day, it is less liquid than actual bitcoin, but still, both vehicles can get pushed lower in a hurry if the orders are not worked. This is also true of big caps including the FAANG stocks. I remember Lee Freestone, one of the earliest traders for Bill O'Neil who ran a sizable sum, would exit positions without working them, just dumped his whole position at the market. Even big cap stocks would show fairly substantial drops in price when Lee would exit. Dan Morris used to show me charts where Lee exited. He said it was Lee's signature style of selling. Dan, being a day trader, would sometimes then try to time his buys the right time on Lee's selling to make quick profits on the rebound.  

Where's The Bottom?

Bitcoin is bouncing on decent volume as are some of the stronger cryptocompanies while stock markets and potentially precious metals remain in downtrends. Price/volume action in the S&P 500 and NASDAQ remains poor with most down days on higher volume compared to up days. While this is a sign of returning strength in bitcoin, whether bitcoin falls further or has put in a major bottom within a bull market that started in Dec-2018 when bitcoin reached a major low in the bear market that began in Dec-2017 will have to do with the headwinds vs. tailwinds. The most pronounced headwind will be panic selling similar to what we have seen when everything including stocks, precious metals, and so forth get hit hard. In 2008, over a period of panic selling days, everything fell through the floor. Should the situation with the coronavirus worsen, this could cause another wave of serious panic selling. The other headwind is connected since the worse things get in terms of infections, death rates, and lack of containment, the more quarantines and supply chain disruptions, thus the greater the damage to the global economy. Future reports on the global economy are likely to underestimate the extent of the damage as Germany's ZEW and New York Empire State Manufacturing reports have shown spurring further panic selling. It's important to keep in mind that we have not had a recession since 2008. Bitcoin and cryptocurrencies in general have never had to bear a recession since bitcoin was created in 2009 when stock and bond markets were fueled by QE1.

Countering all of this is super easy money via QE4, even lower interest rates, the low cost of oil, and tax benefits and incentives. This is all good for gold, bitcoin, and hard assets. The more the panic selling, the more oversold the markets, thus the price of the markets could rebound once the panic selling is over by means of markets having a better understanding of how bad things will get concerning the economy. Markets hate uncertainty.

The 50,000-foot view is that bitcoin and blockchain in its various forms are here to stay just like internet back in late 90s. Yes, most dot-coms went bust, and by 2001-2002, many were saying the internet is over. More recently with the current plunge in blockchain companies, most will go bust as I have written in prior reports. Bad business models abound in dot-coms and in blockchain, but the few companies with groundbreaking technologies will lead the way, much as AMZN, GOOGL, and FB have done in the internet space. So while I have been a supporter of blockchain technology since 2013, it is not without reason and careful observation of the facts as they play out. I would say the same for the internet back in the mid-1990s when I launched an early version of this site in 1995. Even some of the smartest could not see the potential of the internet at that time. In parallel, some of the most revered investors such as Warren Buffet who missed out on the dot-com boom in the 1990s because he could not see the internet's potential remain skeptics of blockchain.

As for the stock market, keep an eye out for decimated industry groups in the coming days and weeks. There are already several including airlines, gold miners, and logistics companies. While I believe odds favor at least a second wave of panic selling, potential bargains will eventually emerge in the coming weeks or perhaps months, depending. All crises eventually present stellar buying opportunities. 

The coming week's economic reports start with Monday's Chicago Fed national activity, a measure of economic activity in the 7th district. Expect surprising levels of weakness which could prompt a market gapping lower on Monday's open. Countering this would be any positive news on the corona containment front.



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