About a century later, almost the same scenes: the boy who washes cars on my street told me he wants to buy cryptocurrencies. He asked me to explain advantages or disadvantages among Bitcoin, Ethereum, Litecoin... He knew the names. He didn’t ask for investment advice, just to know the differences, if any. Similarly, three housewives chatted in a supermarket aisle about how much crypto prices could go up. Not to mention the daily advertising on social networks or the Internet that suggests huge profits with minimal investments.
When taxi drivers and shoeshine boys tell you what to buy…
In 1929, Joe Kennedy, the patriarch of the famous family saga, decided to sell, alarmed because the beggar to whom he gave coins spoke about stocks, and so the shoeshine boy and the taxi driver. Kennedy did it on time. The historic crash came and then the great depression.
What is it extrapolated to? Some voices are already warning of the risks of the Bitcoin boom: "enthusiasm −the ebullience, even− may be the biggest current risk of cryptocurrencies", declared CoinShares's chief analyst. While strategists have also warned of the unsustainable rally, others serious commentators, even analysts, are still calling to buy.
What is supporting the price increase? The frenzy, the euphoria, the cryptocurrency mania, all this skyrocketed the price. Acceptance announcements (from Paypal, Visa and others), investment banks' decisions to open channels to meet demand, as well as massive purchases of Bitcoin by corporations such as Tesla, or the inclusion of Ethereum in CME, have contributed to impressive appreciation.
Between good news, high risks
It is more than a year since the impressive advance of cryptocurrencies began. Bitcoin accumulated more than 1,100% and Ethereum almost 1,900%. Is this sustainable? There are factors that favor the continuation of the rise but others that represent high risk.
- Factors favoring the rise:
- Without the spectacular of January or February, the good news continues to flow. The greater news, new price records.
- The approval of Purpose Bitcoin ETF, "BTCC", in February by Canadian authorities intensified pressure on Securities and Exchange Commission to relax the rules. SEC had rejected two ETF attempts. The study period to decide on Grayscale’s application is in progress; if approved it, another bullish boost would come.
- This acceptance would imply taking a step forward. It would open possibility and put additional pressure on the use of Bitcoin (and others) in more kind of activities.
- Some unavoidable risks:
- The other cryptocurrencies benefit from the news or transactional advances of Bitcoin. A problem or bad news about one would have a ripple effect on others.
- Cryptocurrency open interest in CME amounted to around $ 3,13 billion, as of April 1. 94,5% was Bitcoin futures and 5.5%, Ethereum. The number of contracts is altered according to price: higher price, higher open interest. The volume climbed at the beginning of the year, when the price reached $ 40,000; it went down with first take profit, increased when the price rose to $ 55,000 and has fallen consistently even though the price extended the increase to $ 60,000. So, futures market is indicating exhaustion.
- According to CME Group, 75% of the mining (Bitcoin production) is in China while 59% of world trading is in US dollars. We already know the differences and misgivings of the US government with respect to that of China.
- Cryptocurrencies are not money, assets, or securities but high speculation products. No country accepts them formally. A word in the negative sense by US government could cause the crash. The authorities have been reluctant to give hints about what they will do and do not seem in a hurry to decide. Even if they will do something.
- Presumably, SEC would reject Grayscale's attempt. If they do not approve it, disappointment would follow and probably a big loss. The chairman of the FED highlighted several discouraging points about cryptocurrencies. Secretary Yellen had expressed some negative comments before, somewhat less forceful. But not the final words. The pressures are derived from the frenzy caused by the tremendous boost in prices, basically. If prices fell like in 2018, pressures on authorities would diminish.
- From a year to date, price growth has not responded to technical criteria, except for a few times. If it were for technical analysis, it would be said that now the tumble is more feasible.
Technicals do not explain ebullience
There are no indicators, patterns or signals that are worth it. Therefore, Bitcoin pullbacks since March 2020 have not been enough to break the RSI midline (see the slanted arrows). It only did so in September, at the beginning of the accumulation period from which it skyrocketed. Each of those contacts with the midline occurred when it stumbled to the 20-day moving average, after being overbought (see the green crests above RSI upper line). It has also not dropped below the 50-day moving average. Not even in January, when the biggest adjustment took place (see three vertical arrows). But now we see worrisome new symptoms of fall. May be bigger than the previous ones which would mean that it finally crossed that middle line and was in the oversold zone: 1st and 2nd tentative supports are US$ 50,000 and $40,000, respectively.
The indicators warn us of a new downfall formation:
- See MACD: after the third smaller hill the formation of a fourth peak appears to have failed. None of the three hills was completed at its base, none fell to the median dividing line. While the price recovered to new highs, each hill was lower, so this fourth can reach the midline and move to the lower zone. This would occur at the time the RSI breaks through its own midline and the price falls finally below the 50-day moving average. RSI gradually rises less and falls more and, after 3 occasions of profuse overbought, it indicates fatigue.
- Volume has decreased and has stabilized; it has not had in March those big jumps observed between November and February during the amazing ascent phase (see volume area). In fact, in the absence of spectacular news, volume jumps have been gradually lower since the last week of February.
- The influence of market risk. Like a year ago, when Wall Street began to recover, then climbed, favoring the crypto mania, so now, if the market falls, Bitcoin would also fall.
But nothing about Bitcoin is normal. Formations and technical indicators have suggested a drop at other times. The more corporations accept it or create mechanisms to facilitate its use (transfers, bitcoin rewards, investment funds, etc.), the greater the possibility that the rally will persist. Although the innovations do not benefit the economy, not even a large number of users. Acceptance decisions favor cryptocurrency holders… until the big players decide to take profits or governments put things straight. Could it hold the levels, like the times before? Yes, of course. With more spectacular news −acceptance, business, or investments− from large firms. Not just big hike forecasts.
From secret code to popular investment, enthusiasm prevails and rises. The coffee ladies bought on the top, up $ 55,000. That was the price range when the carwash boy could have bought it. I saw him go by happily. He raised his thumb as if to say, "I did it". Who was his counterpart, broker or intermediary? That is the other problem.
Column by Arturo Rueda
Arturo Rueda has over 30 years of experience in the financial sector. He is the author of the book "Para Entender la Bolsa". He worked as Senior Director at Fitch Mexico, and previously he was responsible for Derivatives at Afore Invercap. He can be reached at email@example.com