The cryptocurrency market finished in the red again as another month went to the bears. Many are of course wondering if we saw the high for the market last December and that it’s all downhill from here.
Some even worry about market manipulation that is keeping prices down. These are typical concerns in a bear market, but there is more evidence that the market is getting itself ready for the next bull market. Our job is to get ready for it.
On the question of manipulation, some of you might have seen an article in the Wall Street Journal, published Sunday, July 1st that was authored by Andy Kessler from the University of Texas.
He believes bitcoin was manipulated higher into the December 2017 high because of the “stable” coin Tether, which is backed by the U.S. dollar.
Tether’s value is approximately $2.5 billion yet there is no proof that it is actually backed by an equal amount in dollars. Kessler’s argument is that the creation of Tether (printing money) pushed Bitcoin higher.
Volatility, not bubbles
However, Kessler’s argument fails in multiple ways.
Kessler argues the Bitcoin bubble is like so many previous bubbles and he joins the chorus of people claiming Bitcoin will now head to zero. But Kessler’s argument fails when we compare Bitcoin’s rise to previous bubbles, such as the Dutch Tulip Mania in 1636-1637 or even the dot.com bubble.
The first problem with Kessler’s argument is that it doesn’t explain Bitcoin’s cyclical “bubbles.” In 2011 bitcoin collapsed from $32 down to $2 (a 94% decline). In the 2013 bubble, bitcoin peaked at $230 and then dropped to $70 (down 70%).
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In the 2014 bubble, bitcoin ran up to $1,200 and then lost 85%, bottoming at $173. The 2017 bubble peaked near $20,000 and has so far dropped to $5,800 for a loss of 71%.
Bitcoin has been declared dead hundreds of times, especially after each “bubble” peak. The difference between Bitcoin’s bubbles and ones like the Tulip Mania is that each bubble peak has been shortly followed by another bubble peak.
No other previously identified bubble was followed by a series of higher highs and higher lows as we’ve seen for Bitcoin. This tells us we simply have a volatile price pattern, not bubbles.
This is a key difference and one that tells us to stick with the long-term potential for higher prices.
Cryptocurrencies are a new paradigm and the smart money has recognized the upside potential. In the first half of 2018, venture capitalists have already invested more money into cryptocurrencies and blockchain technologies behind the companies, coins and tokens than in all of 2017.
As a comparison, when the dot.com bubble popped and the Nasdaq dropped 90%, so too did venture capital investment. We’re seeing just the opposite after this year’s price correction and VC investment in 2018 is expected to be four times what was seen in 2017.
That’s not the kind of reaction one would expect following a popped bubble.