On April 13th 2021, we timed the top of Cryptocurrencies almost to the day in an article titled THE END OF CRYPTOS.
In this article making the case that cryptocurrencies in their current format would never replace real currencies as a medium of exchange, that they would be gradually made useless by the deployment of Central Bank Backed Digital currencies, that their use would be made trackable, taxable and criminalised and that they would ultimately fade into oblivion as one of the most damaging investment bubbles of all times.
Yesterday was another landmark event in the life of Cryptos in general and Bitcoins in particular. On the day where they became officially a legal tender in El Salvador, the first and only country to adopt them as a legal currency, they collapsed, marking what is potentially a significant lower top from a technical analysis standpoint.
El Salvador’s attempt to reply Bitcoins as a legal mean of payment is a patent failure, and the huge volatility incurred on that day makes it even less and less probable that they will be adopted by individuals and corporations there.
It is also a lesson for the rest of the world and confirms our analysis that the real revolution will be the introduction of State backed digital currencies, using or not the blockchain technology.
Form a fundamental point of view, nothing has changed…
Bitcoins and the other forms of similar coins are in essence a piece of code with limited supply and potentially unlimited demand with no intrinsic value, way too much volatility to price any good or service for trading, and a speculative asset where the constant imbalance between supply and demand makes it too volatile for any investor to stomach.
Granted the hype and the social media, coupled with extreme liquidity and fera of missing out have driven many investors t what was essentially an obscure and anonymous mean of payment over the past decade, leading large investment banks and fund managers to consider it as an asset class in the past couple of years.
In an equation where supply is limited, these inflows have driven their prices to dizzying heights, but the laws of behavioural analysis are still very prevalent, which makes this potential lower top an decisive moment for the future course of their prices.
What are Lower Tops ?
In technical analysis, transitions between rising and falling trends are often signaled by price patterns.
When a price pattern signals a change in trend direction, it is known as a reversal pattern.
These patterns signify periods where either the bulls or the bears have run out of steam. The established trend will pause and then head in a new direction as new energy emerges from the other side (bull or bear).
One of the most common reversal pattern after an established uptrend is called a double top, whereby after a first top and a major correction, another attempt at the previous high fails and sellers take over.
When the pattern is made of a lower top, the. the reversal characteristics of the pattern is even more established.
These patterns are simply the illustration of the change in supply and demand.
Double tops and lower tops are actually indicating that all those who failed to take their profits at the previous top and suffered unrealised losses since the previous top are real to step in and cash out before it is too late for them.
In the latest rally since August we had been expecting and warning about the high probability that a lower top would be in the making in cryptos.
And it is ironic and mots telling that it was marked by the first attempt by country to use Bitcoins as legal tender.
Are we there ?
Looking at the Bloomberg Galaxy Crypto Index, the pattern is clear. Yesterday’s price action was the most volatile, global and damaging price action of the entire bull market, save for the April June bear phase.
Note on the left had side of the chart how the 2017 bull market also led to a lower top confirming the unfolding of a lasting bear market.
Looking at Bitcoins, the picture is clear as well. By failing to hold above the all-important 50’000 level, the August September rally has now ended , breaking the bullish psychology.
Investors holding Bitcoins now will be hesitant to buy more while they will be more and more willing to sell if the coin rallies back up. A continuation of the weakness will actually amplify the selling pressure.
There is no real catalyst on the horizon to buy, apart from sheer dogmatism, and the road to a new high is becoming more arduous. Interesting to note that in the past couple of weeks, press and social media talks of Bitcoins at 100’000 were increasing, and were all based on “technical analysis “. Well, Technical Analysis is juts sending a very different picture and if the 2017 – 2019 picture – see the lower top there again – is to be trusted, the next target for Bitcoins is not 100’000 but rather 15’000.
Commonality is an important element of technical analysis. If all the components of a given asset class are all turning at the same time, the significance of the reversal for the asset class as a whole is confirmed..
ETHEREUMS and most other cryptos turned violently at the same time and the same day…
demonstrating that the issue is not Bitcoins in El Salvador, but truly a sea-change shift in markets psychology.
Granted, one single trading day is not enough to make definitive conclusions, but reversals are reversals and the red lights have started flashing.
Unless we rally back quickly above 50’000 on Bitcoins and 4’000 on Ethers, the next move is down, and it will be a sharp one.
Is there something bigger to it ?
Cryptos have been a child post of the Powell Manias, a useless piece of code with no intrinsic value attracting massive speculative money driving its price form zero to 60’000 US dollars. Future generations will look back saying what went through the mind of the investors of our times, in exactly the way we look at the investors who drove Tulip Bulbs to an investment class back then in Amsterdam…
Speculative Bubble and investment manias tend to burst in waves … Meme stocks, Cryptos, Tesla, Archegos, with the biggest and remaining one being the US tech mega caps…
They also tend to be good markers of investors Psychology when it comes to the mood towards Risk-on or Risk -off …
After a spectacular and uninterrupted rally in US equities athta saw the major indexes rise for seven consecutive months, recording all-time high after all-time highs, some of the US major financial houses including Goldman Sachs and Citicorp are warning investors to take chips off the table, and the growing risks of a correction.
We had been anticipating a 2021 correction that we expected to take place in June / July, but it did not materialise then despite the back-up in yields, the resurgence of inflation and the pervasive presence of the COVID variants that is nw taking its toll on Asian economies.
Could the sharp sell-off in the Crypto space herald the beginning of a period of risk off mood ?
Time will tell, but but with the sharp breakdown in bond prices despite a slowing economy and the best of all worlds in terms of corporate earnings behind us, this is probably not the time to be chasing US equities higher…
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