Figure 1. The Bitcoin Bubble — a study of Bitcoin by Grant Cause based on a 2008 Model of Economic Bubbles published by Dr. Jean-Paul Rodrigue, Dept. of Global Studies and Geography, Hofstra University https://people.hofstra.edu/Jean-paul_Rodrigue/

Hi, my name is Grant. I Day Trade Bitcoin and other Cryptocurrencies. So, as you can imagine, I have a keen interest in the economic cycles in which Cryptocurrency operates. I have been involved in the blockchain and cryptocurrencies since their inception back in 2008 when Satoshi Nakamoto first published his paper on the subject. At first I was a passive observer intrigued by the social and economic impact such a digital asset class may have and later as the technology developed further, I became an active participant investing in and now day trading cryptocurrency.

I have an IT professional services consulting background. During this time I had also been following the work of Dr. Jean-Paul Rodrigue, from the Department of Global Studies & Geography at Hofstra University and his research on business cycles and was thinking how it can be directly applied to Bitcoin’s economic lifecycle. Back in 2008 Dr. Rodrigue modelled the phases of an economic bubble, using hundreds of years of economic data as the basis of his study. I believe that Bitcoin is following that same economic bubble model and have created Figure 1 above to illustrate that point.

Unless you have been living under a rock somewhere you are likely to have at least heard of Bitcoin. Bitcoin is a new age digital asset whose value is based solely on supply and demand. As a digital asset it has no intrinsic physical structure or value. It is only worth what people are willing to pay for it. In much the same way as many commodities like Gold or Silver, the difference being that those are tangible goods, whereas Bitcoin exists only on the blockchain. However, that difference aside, Bitcoin still follows the same market paradigms and patterns of many commodities, including their economics. During the economic cycle most commodities in their lifecycle will experience an economic “Bubble”. Bitcoin is no different and this article will explore that phenomenon.

Bitcoin belongs to a digital asset class known as cryptocurrency. Cryptocurrency is a digital currency based on cryptographic algorithms built on a technology known as the “Blockchain”. The blockchain acts as a register of asset classes storing transactions against these digital assets, like a ledger of record. That ledger is shared in a decentralised network of computers worldwide by anyone who participates in the network. It was originally described in a paper by Satoshi Nakamoto back in 2008 and later developed into computer software first released in 2009.

Since that time Bitcoin, and the blockchain technology behind it, have become a worldwide sensation with Bitcoin achieving at its peak in December 2017 a total market capitalisation of approx. $330 billion and $20,000 per coin.

So lets take a look at Dr. Rodrigue’s model of an economic bubble. As you can see the phases he has mapped out describe the lifecycle of the economic bubble. From initial “Take off” through to the “Return to the mean”.

Source: https://en.wikipedia.org/wiki/Jean-Paul_Rodrigue

Lets now review each of the phases Dr. Rodrigue described in his model and compare them to Bitcoin’s economic lifecycle to-date:

Stealth Phase

This phase describes how the so called “Smart Money” invest in a stock or commodity based on its fundamentals and potential for long term growth. These investors look at the big picture taking a long term view, they can appreciate the potential opportunity the new stock or commodity represents. They see its benefits and its potential to achieve substantial financial gains for them in the future. At the same time they also realise it represents a substantial risk to them as it is unproven in the market, so they must weigh up the risk/reward ratio to determine the size of the position they will take.

Bitcoin on the other hand was a direct reaction to the 2008 Global financial crisis. During the Global Financial Crisis of 2008 the major banks, brokers and the regulators failed the people so badly that governments worldwide had to step in and spend billions of dollars in bailouts. It was the taxpayers who ultimately had to pay for this in order to save their countries economies.

People became disenfranchised with the global financial system as a whole and were looking for an alternative. As a result, Blockchain technology was created, based on Satoshi Nakamoto’s original paper, which didn’t rely on the banks, brokers or any other institutional oversight.

“The Blockchain”, as it later became known, created new forms of assets that could be invested in and traded over the internet. These new assets came to be known as cryptocurrency or digital currency. Bitcoin was the first such asset. Now the term Bitcoin is being used in a generic fashion to refer to cryptocurrencies in general.

Bitcoin was taken up by slew of early adopters, mostly technology savvy people, who saw its potential for social and economic reform and became advocates for the new technology. These people formed a community of like-minded individuals who were disenfranchised with the instability of the global financial system and were seeking to grow their wealth through alternative investment strategies like cryptocurrency.

This digital currency started to be adopted widely and could be traded for goods and services online. The first such transaction has now become infamous in the folklore of the cryptocurrency community and its date May 22nd, 2010 is now remembered as “Bitcoin Pizza Day”. A developer named Laszlo Hanyecz is credited with making the first Bitcoin transaction ever. At the time Bitcoin was worth approx. USD$0.08 when he posted this message on the Bitcoin Forum:

Source: https://bitcointalk.org/index.php?topic=137.0

By May 22, 2017 those pizzas were worth approx. USD$85,360,325.

Source: https://twitter.com/bitcoin_pizza

Thus Bitcoin had achieved real value in people’s eyes. You could now trade it for actual goods and services. The rest is history.

Awareness Phase

People tend to follow the “Smart Money” — so where they invest, so do others. Over time investors start to see there is momentum building around a particular stock or commodity and begin investing. Traditionally, according to the model, this is where the Institutional investors get in, those large financial institutions and super funds.

However this was not true for Bitcoin. They came much later in the lifecycle. This was primarily because of the lack of a regulatory framework around which institutional investors could build their portfolios. That is now changing with regulators, albeit late to the party, starting to get their acts together and get their heads around the blockchain and cryptocurrencies.

In the case of Bitcoin it was the general public who adopted Bitcoin early on in its lifecycle. These investors were your generation X and Y. People who were used to technology having grown up with it. They saw Bitcoin as the next logical step for money as the world moves faster and faster towards a digital economy.

It is at this point where my model of the Bitcoin Bubble differs from Dr. Rodrigue’s Economic Bubble model:

Source: The Bitcoin Bubble — a study of Bitcoin by Grant Cause based on a 2008 Model of Economic Bubbles published by Dr. Jean-Paul Rodrigue, Dept. of Global Studies and Geography, Hofstra University https://people.hofstra.edu/Jean-paul_Rodrigue/

Many of these investors started looking at Bitcoin as an alternative investment strategy after the 2008 Global Financial Crisis so were naturally risk adverse. The moment some FUD (Fear Uncertainty and Doubt) was spread by the media about cryptocurrency (due to illegal activity that was done early on in its lifecycle), these investors panicked and sold off their holdings. Some of this first sell off was due to the more savvy investors taking profits, but much of this was driven by FUD. More savvy investors took that initial sell off as a signal to buy in order to increase their positions.

Mania Phase

At this point in the Bitcoin lifecycle, media attention was starting to peak and both FUD and FOMO (Fear of Missing Out) was spreading far and wide. Surprisingly, FOMO gripped the public more than the FUD and people started to invest heavily despite the media’s FUD, which went against everyone’s expectations.

The price of Bitcoin began to rise sharply flowing through the Enthusiasm, Greed and Delusion stages as more and more less experienced investors got involved in the media driven mania surrounding Bitcoin. Finally in Dec, 2017 Bitcoin hit its peak.

We only need to look at Bitcoin’s Market cap to see the strength of this mania. Market capitalisation is calculated by multiplying the total number of Bitcoins in circulation (approx. 21 million) by the Bitcoin price. The most widely used index of market capitalisations is CoinMarketCap dot com and according to their records, the Bitcoin market capitalisation increased from approximately 1 billion U.S. dollars at the end of the second quarter of 2013 to approximately 116 billion U.S. dollars at the end of the first quarter of 2018. This chart says it all:

Source: https://coinmarketcap.com/currencies/bitcoin/historical-data/?start=20130428&end=20180331

The general public start to take note of the media and hype around Bitcoin. With Bitcoin prices soaring, it appears to be the “opportunity of a lifetime”, FOMO kicks in as people start to see vast paper fortunes being made overnight. Their enthusiasm now knows no bounds.

As the Bitcoin price drives ever higher it appears they “Just can’t lose” and to quote the vernacular, “It’s a No Brainer. If he can make money on this, why can’t I?” becomes their catch-cry and greed sets in.

The general public invest heavily in Bitcoin despite being completely new to investing and lacking little-to-any knowledge of “The Blockchain” and cryptocurrencies in general. Their frenzy is such that they may be investing with borrowed money or worse still their life savings or dipping into their superannuation funds. This of course is a bad move. People are letting emotion sweep them away as they get caught up in the hype around Bitcoin.

Unfortunately during these heady times, the unscrupulous amongst us start to take advantage of the general public and Bitcoin scams become abundant. Others with self interest in mind also take advantage of the general public and do everything they can to keep the hype going. Regulators struggle to keep up with the blockchain technology and cryptocurrencies and are late to the game, trying to patch together a regulatory framework on the fly, at the expense of the general public who are being ripped off by these unscrupulous people.

As for the Smart Money, the more savvy investors, well, they can’t believe their luck when this buying frenzy hits. It forces the price of Bitcoin higher and higher, so they start to sell off their positions, taking profits as the price goes ever skyward. They can see the coming bubble and having sold off their positions, they will now wait to pick up Bitcoin at record lows, increasing on their original positions, when the bubble bursts.

The Blow Off Phase

Now the bubble is set to burst. As prices rise to the point where the market can no longer sustain them, along comes the defining moment for the Bubble, some negative rumours or news starts to circulate about Bitcoin and cryptocurrencies in general. People confident in their investments with little to back that, shrug this off- apparently in denial.

FUD begins to flood the news services, the price of Bitcoin begins to drop for the first time in years. The price of Bitcoin drops further, investors particularly the “Bullish” investors see this as an opportunity to increase their positions in Bitcoin and start to buy, raising the price of Bitcoin as they do. It seems all is well and there is a “Return to Normal”.

Then more FUD floods the news services and social media. At this point the general public, gripped by fear, start to panic and sell off their holdings. Unfortunately for them, based on when they got in on the Bitcoin lifecycle, it is likely they are selling at a loss.

That moment occurred in January, 2018 on what has now gone down in cryptocurrency folklore as “Black Tuesday”. Just a year prior to this, Bitcoin was valued at around USD$1,000. By the end of the year, Bitcoin had reached more than UDS$20,000, bringing other major cryptocurrencies like Ripple and Ethereum along for the ride. That all changed on Tuesday, January 16th, 2018. Bitcoin and other cryptocurrencies recorded 24-hour losses of 15% to 20% or more. By the beginning of February, 2018 Bitcoins price had dropped to below USD$6,000.

The Bitcoin market collapsed in capitulation to storms of FUD about it. Vast fortunes and lifetime savings disappear overnight. With many people seeing the writing on the wall, buyers for these bargains start to dry up. Many people are left holding Bitcoin and other cryptocurrencies that are now worth a small fraction of what they originally paid for them, some people who leveraged their positions heavily may even go bankrupt. Suddenly that “opportunity of a lifetime” has lost its lustre.

Interestingly enough, just days before the crash, Warren Buffet, the chairman and CEO of Berkshire Hathaway, and the world’s third richest man with an estimated net worth of $US87.2 billion ($111 billion), gave a television interview on the 10th January, 2018. In that interview he said:

“In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending,” and “When it happens or how or anything else, I don’t know.”

Market confidence in Bitcoin and cryptocurrencies falls to all time lows.

The Return to Normal

Now the Smart Money again steps in. Like vultures waiting for their prey, they swoop, picking up bargains at rock bottom prices as they devour what is left of the rotting Bitcoin carcass.

Up until now the larger Institutional Investors and the Regulators have been viewing Bitcoin with a cautious eye. Many large investment firms warning people of the impending bubble. Regulators warning people of the speculative nature of Bitcoin, and taking on the many scammers, preventing them from trading by taking them to court.

Institutional Investors and regulators are finally able to start to take a genuine interest in Bitcoin. Not because of the bargains but because Bitcoin now has “form”. Recently these investment firms and regulators have started making positive statements about the virtues of the Blockchain technology and looking at cryptocurrency in a new light.

The blockchain technology was in its infancy back in 2009. The technology has continued to evolve over the years and as it did, it developed a loyal fan base which grew. As the general public became aware of it, it became widely accepted in the market as a new means of dealing with digital assets and many millions of transactions have taken place. It is now a proven technology.

After the Bitcoin crash, its weaknesses had became apparent, but at the same time the cryptocurrencies economics were following known economic patterns.

Game changing technology has now been developed like the recently launched “Lightning Network” making Bitcoin a more viable platform for institutional investors.

You now have a mature Bitcoin market that has been through a full market cycle. The general public are aware of Bitcoin. Regulators finally stepping in to create robust regulatory frameworks and laws to protect them. There is now an emerging Bitcoin futures market that promises to legitimise the market and provide hedge fund possibilities for the first time ever in the history of Bitcoin.

These are all attractive signals to institutional investors who are looking to shape their future cryptocurrency investments as they embrace the blockchain technology. With the institutional investors fully onboard, the sheer weight of superannuation funds will come into the Bitcoin marketplace again, spurring on the growth of the Bitcoin marketplace.

A return to a Bull market is now being predicted by many Bitcoin pundits, likely to take place late in the 3rd Quarter of 2018.

At the time of writing Bitcoin has regained some of its losses and is heading towards the USD$10,000 mark-currently sitting at USD$9,460.

Bitcoin is starting to come of age and on the path to “Return to Normal”.

Disclaimer: All investment carries risk and you must take ownership of your day trading / cryptocurrency investments. Day Trading cryptocurrency carries a high level of risk, and is not suitable for all investors. The possibility exists that you could lose some or all of your investment capital and therefore you should not invest money that you cannot afford to lose. No representation is being made that any trading methodology will or is likely to achieve profits similar to those which may have been described here. Also past performance of any trading methodology or investment is not necessarily indicative or a guarantee guarantee of future results. The information in this article does not constitute financial advice. The author is not a licensed financial advisor and does not and will not provide financial advice. Any information presented is strictly for educational purposes only and should not be construed as investment advice or an offer to buy or sell securities. You should be aware of all risks associated with day trading / investing in cryptocurrency and should seek professional financial advice from an independent, competent, licensed accountant or other financial advisor.




SOURCE