The Recent Bitcoin Price Stumble Starts the Next Stage of The Boom-Bust Cycle

I hate to be the one to say I told you so when it comes to the volatile Bitcoin price, but, I told you so. That is, back in September I cautioned anybody who would listen that Bitcoin (and all other cryptocurrencies) were a lousy investment and would implode sooner or later.

Granted, the Bitcoin price today is still 300% higher than it was then, so clearly there was some money to be made with Bitcoin. On the flipside, with the Bitcoin price chart falling nearly 30% in less than two weeks, this sure looks like the inevitable unraveling of what was always a painfully flawed idea.

And yes, I’m confident the Bitcoin price, along with the rest of digital currency still has plenty more downside to go before all is said and done.

Not everyone agrees. Indeed, some traders are sticking with the cryptocurrency, planning to simply ride it out, while others are viewing the recent lull as a second chance to get into the trade. To that crowd, I say take a second to think.

Bitcoin Price Melts Down, Right on Cue

I suspect many fans and followers of the cryptocurrency craze aren’t veteran stock traders, and don’t fully appreciate just how telling a chart of any sort of investment can be. As someone who’s been in the market for a long, long time though (with plenty of gray hair to prove it) I can’t explain emphatically enough that all greed-driven manias work their way through the same boom-then-best cycle.

Bitcoin is only about a third of the way through the “bust” wave.

The abridged version of the usual cycle’s stages, as explained by RMB:

  1. Contempt (for a market, in general)
  2. Doubt and suspicion (“this is a fake breakout”)
  3. Caution (getting in, but only to follow the crowd)
  4. Confidence (finally fully believing in a rally)
  5. Enthusiasm (this is easy money)
  6. Greed and conviction (buying out of regret)
  7. Indifference (values aren’t the point)
  8. Dismissal (ignoring the budding meltdown)
  9. Denial (“the pullback isn’t a big deal”)
  10. Panic and contempt (the feeling of being “burned”)

In retrospect, we can look back and see this cycle has played out countless times before. This is the path the dot-com surge in the late 90s took, how housing crashed in 2008, how gold and oil have been whipsawed in recent years, etc.

More relevant to today, to ubiased eyes, we can see the cryptocurrency craze is somewhere around “dismissal” for most traders.

Oh, and just for the record, traders have been saying “this is different” since the dawn of time. It’s never different, because fear and greed always lead to the same bad conclusions.

Fatal Flaw with the Bitcoin Price

And what, pray tell, is so wrong with Bitcoin and other cryptocurrencies that will continue to pull the rug out from underneath their values? A lot of things, actually, though the one I underscored in September merits repeating. I explained at the time:

“While the number of Bitcoins that will ever be in circulation is capped, there’s absolutely nothing to prevent the creation of another cryptocurrency to bleed off at least some of that price-inflating demand for Bitcoin… Ethereum is one of those alternatives, though hardly the only one. Ripple, Litecoin, Dash, Monero, Bytecoin, Golem and Tether are just some of the several dozen cryptocurrencies that have come into existence not just after Bitcoin, but because of Bitcoin…”

Modest evidence of this reality has surfaced in the meantime. Specifically, Bitcoin’s previous dominance of the entire cryptocurrency has shrunk to less than half, as Bitcoin Cash, Litecoin, Ripple, Dash and all the rest have become more valuable, and better circulated.

The lack of limitation on the number of new digital currencies that can be created has already proven to be a problem for all of them. For any type of security or commodity to maintain some semblance of an intelligent value, there has to be a finite supply of it.

It’s a matter most fans of Bitcoin have chosen to ignore, or perhaps never considered in the first place.

Bottom Line for Bitcoin

Don’t read too much into observation. Bitcoin may well end up retaining some sort of value. Digital currencies are the future. For Bitcoin to hold its value though, it has to be the one and only digital currency on the planet.

At the minimum, Bitcoin has be the one and only one the global society decides to unofficially legitimize by using it and only it the way the world arbitrarily chose gold as a non-currency means of storing value; the supply of gold is finite as well.

That potential point in time is years down the road for Bitcoin though, and there’s a serious Bitcoin price adjustment downward due as we make our way into the “dismissal” and “denial” stages of the manic runup.

That being said, I still contend that Columbia University and Nobel Laureate Joseph Stigliz holds the best assessment of all that Bitcoin really is. He opined late last month:

“The value of a Bitcoin today is expectations of what the Bitcoin is going to be tomorrow.” He added, “If the government says ‘the reason Bitcoin is being used is circumvention,’ they could close it down at any moment, and then it collapses.”

Almost as if on cue, in response to a recent hack of a cryptocurrency exchange located there, South Korea threatened to crack down on anonymous trading of these digital currencies. Similar discussions are being hashed out in the United States.

Regulation won’t necessarily kill Bitcoin but it certainly won’t help the Bitcoin price. Moreover, it could be the last straw for this already-wobbly premise.

And that really is all that cryptocurrency is: a premise, and one with absolutely no rules, standards or organizational structure. That’s usually a recipe for trouble.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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