Two months have passed — it’s time to look again at the major cryptos again!
Some financial markets are very well correlated.
The Dow and S&P, Gold and the Aussie Dollar, Copper and the Chilean Peso.
When one rises, the other generally rises in close affinity. Occasionally, the correlation breaks down. IG Group issued a profits warning way back in 2001 when a divergence appeared between the Dow and S&P, as they moved out of kilter for a rare time. IG hedged its Dow exposure in S&P futures. These were the far more liquid futures contract back then, so it made sense to hedge in the S&P. Over a couple of months the Dow outperformed the S&P and our hedging trades didn’t make as much money. Cue a profit warning. Luckily, nearly 20 years later the Dow and mini-Dow futures are very liquid (meaning that lots of them are traded in the underlying market), so the CFD industry isn’t susceptible to a similar hiccough from hedging one of the most popular markets for retail traders.
Anyways, what is the relevance of this to my 8-week update on Cryptos? Well, Dow & S&P, Gold & AUD, Copper & CLP are markets that move hand-in-hand with one another. If you were to ask a hundred people to name the first cryptocurrency, aside from Bitcoin, the majority would cite Ethereum, with Ripple probably the next one on people’s lips. One would reasonably expect them to follow not too dissimilar paths. However, a look at the below shows just how contrasting the fortunes of the three major cryptos has been in the four months since my first article warning of a bubble:
Ethereum had already rallied some 759 times (i.e. 75900%) in 2.5 years when I wrote about it four months ago in July! I hazarded that Bitcoin would avoid being part of an overall collapse of the bubble by dint of its sheer scale and reputation, but that others may not be so lucky. Ripple had already rallied a mind-blowing 63 times (6300%) in just 6 months.
As you can see from the above and the chart below there truly has been very little correlation. My predicted bubble-pricking has certainly failed to occur! Ripple is up 14%, or 42% annualised, whilst Ethereum has risen by 26%, which is over 100% on an annualised basis. Where on earth would a fund manager find such returns in a inflationary environment, let alone the historically low interest-rate world in which we live?! In ‘normal’ markets, this would be an impossibility. However, there is very little ‘normal’ about these major cryptos…
This chart resembles something my three year son would make in kindergarten. What is staggering to witness is the daily range in prices of the top three. Yes, you may have earned impressive returns, but no ‘normal’ fund manager would put up with the volatility. Ripple has moved up or down by more than 5% nearly one in every two days this year!
So whilst the comparative steam has come out of the lesser-traded major crpytos (Ethereum & Ripple), the most famous of all has charged ahead:
Yet, its last price stamp as I write this is $6,231 per Bitcoin, having been as low as $5,509 early this morning. On Wednesday afternoon, it hit $7,879. This means that it has actually fallen a staggering 30% from high to low in less than 100 hours, whilst it is now some 21% lower. Yet the overall feel of its chart above is of positivity and thoughts of “How I wish I had managed to predict its ascent!”
However, there will have been many thousands around the world with burnt fingers. Imagine buying earlier in the week, following all the hype and seeing Bitcoin fall this far so quickly.
Talk has been of today’s ‘fork’ in Bitcoin (where Bitcoin Gold would branch out from the existing Bitcoin blockchain). As I wrote a couple of months back, in August Bitcoin had defied Economics 101 in dramatic fashion when it last undertook said ‘fork.’ In essence, Bitcoin forked one way and Bitcoin Cash the other way. One would have expected both to drop owing to a doubling in supply. However, Bitcoin soared, whilst Bitcoin Cash languished around its launch price of $300.
My feeling is that those doing a small amount of research into Bitcoin will have read about how Bitcoin surged after the last fork and so decided to buy in advance of today’s ‘fork’ to be ahead of the herd and hope to enjoy the benefit of another post-fork surge.
And yet, it would appear that Bitcoin has done that all-too common punishment for speculators; namely, if a market move is too obvious, the opposite will actually come to pass.
Last week, I read an article about one of the world’s most successful venture capitalists, Tim Draper, stating that Bitcoin is certainly not a bubble. It then transpired that he owns 30,000 coins that he bought from the US Marshals Service in 2014! Can you imagine what would happen to a City analyst who owned nearly $200 Million of an asset and was singing its praises from the rooftops?! He’s not exactly going to be a naysayer is he?!
Anyways, the debate continues amongst Pelican traders as to whether Bitcoin can break in fresh highs and will Ethereum ever gain upward momentum again. Remember that when I first time I wrote about Bitcoin four months ago and how it had fallen 20% in a matter of days, it then rallied over 200%. Extrapolating the same size move again, we would have Bitcoin at $11,000 on Christmas Day. That would certainly make Mr Draper’s Christmas that bit more special!! But I don’t see it scaling such peaks that quickly, but one never know…
Whatever your view on Bitcoin or Ethereum, only within the Pelican network can you build your own discussion groups or seek out other groups where you can chat, see others’ positions, copy or even oppose trades, all within a unique FCA-regulated environment. We shall be expanding our range of cryptocurrencies in the coming weeks.
So, start your own debates today about any of our thousands of markets, whether amongst your friends, like-minded investors you discover within the Pelican network or with professional traders!
PS The move in Bitcoin Cash has been a bit fresh in recent days. Take a look at the below! Having done very little for four months, it’s gone totally crazy these past few days whilst its illustrious (original) cousin has turned over. Whatever next!?
