“Paul, what do you think of bitcoin?”
If you read my last article on bitcoin, you know that I believe bitcoin is real. However, the current mania for it looks unsustainable.
Now, bitcoin fans and owners are going to disagree with me. After all, how can you really argue with their success?
On December 31, 2016, you could buy a bitcoin for $968.23. At its high on November 8, 2017, it was at $7,879.06. That’s a gain of 714% in under a year! Astonishing, incredible and mind-boggling gains.
In other words, when it comes to the real bottom line — making money through gains — bitcoin owners have been right.
However, bitcoin has suddenly lost its mojo.
A Sharp Pullback in Bitcoin’s Price
On Friday, the digital currency suddenly sold off and is now at $6,692.26. Then over the weekend, bitcoin lost more ground until it was down by nearly a third from its peak.
Now you might be thinking. Should you jump in now?
A Bad Reaction to Good News
Personally, I’d stay out and the reason why lies in what has unfolded over the last few weeks.
First, there was a fight between two groups over what the original bitcoin should be.
One group wants bitcoin to be a store of value like gold. The other wants bitcoin to be liquid and accepted around the world like cash.
This fight was to be resolved by splitting bitcoin. One version of bitcoin was going to be the store of value, while the other would be more liquid like cash.
Then suddenly on Friday, the split was called off. Bitcoin prices dropped on the news.
That came as a surprise to me. After all, no split means fewer bitcoin. And in the way I look at markets, fewer bitcoin means more scarcity and higher prices.
Instead, bitcoin continued to plummet through the weekend. And through the writing of this commentary, the cryptocurrency continues to be incredibly volatile.
I can tell you that this sequence of a rapid decline in bitcoin following what should have been seen as good news is always a bad sign in my experience.
The negative reaction usually indicates that the people who are buying bitcoin are full up. By that I mean that they no longer have more money to commit to buying. The lack of new buyers to keep pushing the currency higher leaves it vulnerable to a pullback.
If this is right, what you’re going to see over the next weeks and months is a continuing decline in the bitcoin price.
Running Out of Buyers
Now, that’s a different way of analyzing bitcoin. Most analysis that I read are about the system of how bitcoin should be produced, maintain, etc.
For me, when I look at any investment, the only thing that truly matters to me are two things:
First, I look to see if the price of an investment is going up.
Second, I look to see if the upward price trend is going to continue.
This is the essence of my GoingUpness system that I use to determine if I should buy anything.
And when I look at bitcoin today, it’s no longer going up. And worse, the pattern of price collapse following what is good news is indication that there aren’t enough people left who want to pay higher prices for bitcoin to keep it going up.
Bottom line: Bitcoin fails my GoingUpness system test. I think you should avoid it right now.
Now, even though I expect bitcoin price to fall, I believe bitcoin acceptance and liquidity will increase.
In time, when it’s more widely accepted, more liquid and less volatile, I believe it’ll go up and make new highs again.
Editor, Profits Unlimited