Is Bitcoin in a bubble?

At the time of writing this article (December 7th, 2017), Bitcoin has launched to more than $19,500. This is less than 24 hours after Bitcoin reached $12,000 and was able to trade above it. What is significant about all of these monstrous moves is that Bitcoin has peaked more than 300% in the last 60 days. This rise has not been limited to only Bitcoin. Ethereum as well has had some major value growth in the same period. However, Bitcoin is the focus of the media and news outside of the cryptosphere.

A common complaint and concern investors and others have about Bitcoin is that it may be in a bubble. Whether you are watching CNBC, Fox Business, Bloomberg, etc, you consistently hear warning signs about Bitcoin and relating it’s rise to the Dot Com bubble in the early 2000’s or the Dutch Tulip bubble in the 1600s.

The above image shows the NQ (Nasdaq Futures Contract) and the formation of the Dot Com bubble in early 2000.

  1. Displacement – something new and exciting.
  2. Boom – acceleration as more and more people get into the market/instrument.
  3. Euphoria – mindboggling movements to the upside with no particular reason, the risk is not even considered, just constant and consistent buying.
  4. Profit Taking – institutions and veteran traders have been scaling out slowly, selling higher and higher to new entrants.
  5. Panic – slow down in volume to the upside, and dramatic and massive selloffs, people are just wanting to get rid of the pain of holding their positions hoping prices will recover, complete crash to the downside.

A great many correlations can be made between the chart of the NQ and the Bitcoin chart. If we observe the price action and momentum from October, 2017 to December, 2017 we can see how similar that bubble structure is in place.

So what phase are we in with Bitcoin? It appears clear that we are in a bubble. We are certainly in a very heavy parabolic move that doesn’t seem to stop. What is interesting about this rise is the very advanced nature of the rise. When bubbles form in markets, separate equities, sectors or industries, the volume is very consistent and growing with some drop offs near the short distribution areas. Bitcoin is entirely different. Bitcoin has shows some very advanced structure that indicates expert traders and institutions are involved. Nearly every single correction or pullback has been met with massive volume. Any sign of a cheaper price of Bitcoin has signaled continued buying.

If you are involved in the cryptosphere already as trader and/or investor, then this kind of movement is not new to you. Those of us who have been involved in cryptocurrencies for great than a few months know now that there is definite evidence for Bitcoin being in a euphoria phase. There is such increased discussion on social media and on regular news media about Bitcoin, that many feel they are missing the boat.

However, there is a lot of fundamental reasons for why this increase in price may not be done. While a dramatic rise in a bubble is often difficult to understand and can be without and supportive logic or reason, Bitcoin is not in that situation. The two largest derivatives markets in the world, the CME (Chicago Mercantile Exchange) and the CBOE (Chicago Board Options Exchange), have announced futures contracts for Bitcoin and eventually, Ethereum as well. And the CBOE announced that they will be begin trading a futures contract of Bitcoin starting on Sunday, December 10th 2017 at 6 PM CST.

For investors, a futures contract all but legitimizes Bitcoin as not only a speculative instrument, but a investment vehicle as well. Bitcoin is no longer just a fad when it has a futures contract. Cryptocurrencies are no longer just a phase when Bitcoin and Ethereum have futures contracts. This kind of news draws in many value and growth investors who may have been monitoring Bitcoin, but have not yet entered the market. If the theory of price and volume holds true, and volume precedes price, then there is a high probability of even further price increases in Bitcoin. So while we do not know how high Bitcoin will go, we do know it is here to stay.

But for traders and investors who still believe that Bitcoin is in a bubble, we need to observe Bitcoin when it was trading at $400 and then moved to $1200. During this time, Bitcoin (mainly within it’s community) was often considered to be in a bubble. But was it? Let’s look.

Humans, like the markets, repeat themselves over and over. Since the short beginning and life cycle of Bitcoin it has been called out as being in a bubble multiple times. Since it’s short beginning, Bitcoin has lost 80% of it’s value five times, but it was still bought up and prices increased. Bitcoin is definitely a buy the dip market and there are no signs of it slowing down. On the contrary, it has all the signs of its price increasing.