Is the Next Cryptocurrency Bubble Around the Corner?

By Jeff Paul and Aaron Kesel

Cryptocurrency has been in a bear market for the last five months. How much longer will it last? When will the next wave of adoption begin?

The overall cryptocurrency market experienced incredible growth in 2017. Many observers called it a “bubble.” Yet, even after a significant 2018 correction, the value of the industry is still much larger and the new highs are much higher than in the previous “bubble.”

The market cap for the entire space went from $17.7B in January 2017 to over $800B in December 2017.

Cryptocurrency Market Cap Growth in 2017

At the time, many were warning that the bubble had inflated too quickly and was about to pop. Sure enough, a correction came in early 2018 and the market cap of all networks now sits around $340B, less than half of its 2017 peak, but dwarfing the lows of 2017.

The recent downturn is a small snapshot in time. Bitcoin Core (BTC) began 2017 at $1,000/BTC. Although the bubble carried Bitcoin to over $20,000 each, it currently sits at around $7,500/BTC after the correction, much higher than where it started.

This bubble-correction-higher-highs pattern in cryptocurrency has become a Bubble-O-Meter meme:

If you look closely at each event in the price meme above, you’ll see a repeating pattern. This market cycle is also so common that traders have mapped out the emotional roller coaster experienced during the cycle.

The cryptocurrency market appears to be at the end of this precise trading cycle, which seems to indicate that a new upswing may be imminent.

The price of Bitcoin has faced an unexpected downturn in May as Consensus 2018 did not provide enough enthusiasm for a bullish move in the cryptosphere. Cryptocurrency analyst Willy Woo thinks the virtual currency may only find its upside in Q3/Q4 2018 facing a dip as low as $5,500, while others remain optimistic of a coming bull run.

I think we are gonna go to $5500-5700 next, I can’t see $7000 holding. Most likely we’ll balance a bit, then we’ll slide through. Long timeframes here, looking into June for rough timing of this to play out at a best guess. /1 pic.twitter.com/pCN0N97vp6

— Willy “not giving away ETH/BTC” Woo (@woonomic) May 26, 2018

Bitcoin breached the [FIAT: $20,000] level in December after sharply declining and continuing on a downward trend.

Bitcoin stalled below the [FIAT: $10,000] mark in early May and has been steadily returning to the 2018 lows. Willy Woo, a BTC technical analyst with 62,500 followers on Twitter, is not very optimistic about where the market is heading. Woo expects the market to downswing towards [FIAT: $5500-$5700.]

“NVT Signal is still too high. We need more blockchain transactional activity to justify the current price, or the price to drop to reconcile the difference. To drive up transactional activity in a bear slide is very unlikely IMO,” Woo said, also referring to the extreme market moves. “Volatility is still too high. I’m looking for a sustained low band of volatility which tends to be a signal for the end of the detox and the next accumulation phase. It’s still got some time to ride down.”

Woo argues his $5,500-$5,700 prediction is further supported by a high Standard NVT and a Volume Profile cliff below [FIAT: $6,800.]

When I run the above scenarios against detoxing at a $6800-$7000 floor, it seems a very unlikely path we’ll play out at the $7000 level. This is given the time we need for NVT and volatility to baseline. (…) I don’t necessarily think we’ll fall through the 5000s… sure it’s a possibility but it doesn’t have to. It’s not a repeat, it’s not Mt Gox and Willybot pushing up price with faked orders, we aren’t detoxing from a scam bubble. Technically $5000s is a very strong support band.

The cryptocurrency market in 2018 is more mature compared to 2014 as there are no longer “a few whales randomly pushing things around anymore,” which provides a more reliable understanding of price based on fundamentals. Woo believes that BTC is not a market on the long-term frame. Instead, it is an adoption curve (climb, consolidation, climb, consolidation).

The analyst expects Bitcoin to steadily drop to [FIAT: $6,800] before plunging to $5,700, which should be followed by a leveling out of the drop and a flat zone. The next bullish momentum should come in Q3/Q4 2018, according to Woo.

However, a group of researchers at The Crypto Fam have drawn a link to BTC’s price manipulation, suggesting that the arrival of institutional trading allowed investors to dump oversized holdings of digital currency to sway the markets.

According to a new theory, it is no coincidence that Bitcoin’s long unwind began on Dec. 17th, the same day that Bitcoin futures were launched. Over the next several months, the Bitcoin-dollar exchange rate would fall from a high near $20,000 to a low of $5,980.

The researchers believe the rapid decline was aided by futures trading, which allows traders to short the market much more easily.

Each downward move follows a similar pattern: (1) a fake-out dump, (2) a failed rally and (3) a major dump. Each leg down is driven by lower selling volume with each drop less severe than the previous.

The compelling study was presented this week in a series of tweets by The Crypto Fam, which describes itself as “a community of crypto enthusiasts bridging the gaps.” The group’s stated goal, according to its website, is to “make crypto not so cryptic.”

In describing the pattern, the researchers concluded that “the bear market is running out of gas” because their supply of Bitcoin has declined since the pump finished on Dec. 17th.

This is a very simplified explanation of how markets work. A great deal of the total BTC supply is not traded. Some is lost forever in idle or forgotten wallets. Other Bitcoin is hodled by strong hands who never sell. This gives market makers greater power with their share of BTC.

Recently, the U.S. Justice Department stated it had opened a criminal probe into whether traders are manipulating the price of Bitcoin and other digital currencies through wash trading and spoofing.

Another trader who for a while now has been calling market manipulation a cause of Bitcoin’s fluctuations has been vindicated by this investigation. Ronnie Moas, a stock picker who has turned his attention towards cryptocurrencies as well, believes the Bitcoin price is being manipulated, Coin Telegraph reported.

I always mention manipulation, and regulation. When we broke below [FIAT: $9,000, $8,000 and $7,000], I said the price was being manipulated. The government is starting to crack down on this right now.

Moas goes on to explain how easy it is to manipulate the Bitcoin market, as long as a person, or group, has large sums of money:

If you have $2 bln, you want a diversified portfolio, and for me diversified is a $200,000 position, but there can be a position that is $200 mln, because you want 10 percent of your money in Bitcoin. But you don’t want to pay $20,000 for a Bitcoin, so what you do — and you can call it a Whale, a cartel, a shark, a consortium, a trading group — you dump $20, $30, $40 million dollars on the market, and create selling pressure. People see those orders on the books, and they jump in front of them, because they are afraid you are going to move and shake the market down, and this feeds off itself.

The technical analysts then kick in with their sell signals, and there is panic and capitulation, and when the market capitulates, those people quietly come back in and buy five to ten times what they dumped for pennies on the dollar.

Whether the price of Bitcoin is being manipulated or not currently bears remaining focused on the [FIAT: $6,500] range.

Despite the steady decline in Bitcoin prices, the network hashrate continues to increase astronomically. Because of this, market analyst Naeem Aslam believes the trend implies an upcoming price increase in Q3. Aslam is of the opinion that market analysis does not take Bitcoin fundamentals like hashrate into account, Bitcoinist reported.

THE OTHER FACTORS:

Bitcoin closed below its 50-week moving average (MA) – an important long-term support that hasn’t been breached since 2015. In the short term, Bitcoin may plunge or surge again. But long term is where the real value could be much higher for BTC and other leading cryptocurrencies.

The next Bitcoin halvening, where the block reward issued to miners goes from 12.5 BTC to 6.25 BTC, occurs in about 2 years.  While the Bitcoin price has climbed ahead of both halving events, the price has gone on to moon shortly after.

If we look back at two other halvenings in Bitcoin’s history we can see a correlation in the price increasing afterwards; and why wouldn’t it when Bitcoin becomes more scarce to mine because the supply is starting to run out? Bitcoin was meant to last for a certain period of time; after that miners stop earning because there is no more Bitcoin to reward them with once all Bitcoin has been distributed. At that point, whoever wants Bitcoin will have to go to an exchange.

For example, 12 months after the first Bitcoin halving event in November 2012, the Bitcoin price reached what was at the time an all-time high of $1,000.

The 2016 halvening heralded 2017’s bull run which peaked in December 2017 when Bitcoin’s price reached $20,000 briefly before entering a bear market and since entering a downtrend market awaiting the next bull run. But perhaps the price just followed the increased hash power?

Since then BTC has fallen sharply back — but auspiciously you will notice that the same thing happened after the 2012 halvening and subsequently a moon thereafter, with the Bitcoin price falling as low as $200 per coin (significantly higher than the previous low) before accelerating in the lead-up to the 2016 halvening.

Bitcoin hit sub-$8,000 for the first time since mid-April on Friday last week, far below its previous summer peak of $9,826.

All these are factors that most cryptocurrency market analysts don’t look at, because they aren’t factors in traditional economic Wall St. or Main Street markets; but when the halvening happens and the price dips and skyrockets will Bitcoin be a bubble or the first financial instrument that introduced cryptocurrency to the world in 2009? There are thousands of cryptocurrencies, while trading pairs mostly consist of BCH, ETH, LTC and BTC for most altcoins.

BTC has been likened to digital gold because it has a fixed supply just short of 21 million. Then there is the factor of an estimated 1 million Bitcoin permanently lost. So how much will a whole Bitcoin be worth when the supply runs out? No one knows when Bitcoin and the cryptocurrency industry will complete its growth cycle with estimates around 2140 for the last Bitcoin but it certainly seems like the big bubble is yet to come!

Another key factor to keep in mind is that the infrastructure to on-board new cryptocurrency adoption keeps expanding. This has seemingly sped up the market cycles for cryptocurrency. The next wave of adoption will come from institutional money which has been waiting for vehicles to invest securely in the space. Businesses like Coinbase, Gemini, Circle and others have been building enterprise platforms to handle big money from Wall Street and perhaps even nations.

In 2017, the crypto markets swung $500B in a matter of months. That’s a testament to the improved infrastructure. What can happen in the second half of 2018 into early 2019 when hedge funds can invest safely into cryptocurrencies? What happens when struggling nations begin adding it to their foreign currency reserves?

Despite the falling markets towards the end of May, BitMex CEO Arthur Hayes has predicted Bitcoin will be at “$50,000 by the end of the year.” He’s not the only one banking on the [FIAT: $50,000] prediction. Speaking in January at the World Economic Forum in Davos, experienced cryptocurrency fund manager, Jeet Singh, also predicted that the price of Bitcoin will go as high as $50,000.

If that’s not enough, last month the executive director of the Bitcoin foundation, Llew Claasen, made a bold statement to reassure Bitcoin believers that the cryptocurrency is on the right track – specifically, on track to reach the $40,000 mark. Claasen further added that 90% of the altcoin cryptocurrencies on the markets will fall and turn out to be scams.

He further expressed that before Bitcoin saw those heights there would be a significant amount of volatility, which we are experiencing now.

There are even investors who see the potential of BTC reaching such heights by the end of the year. An unnamed investor or investors purchased a series of options contracts worth nearly $1 million. The contracts, sold on the LedgerX derivatives exchange, are “calls” that give the owner the right to pay $50,000 by late next year to purchase the number one popular digital currency, Wall Street Journal reported.

Turns out those anonymous investors weren’t very anonymous after all, and those who made the bet were cryptocurrency hedge fund BlockTower Capital, according to Business Insider. It’s one of the best-known hedge funds in the crypto space and is run by Ari Paul and former vice president at Goldman Sachs, Matthew Goetz.

In summary, the cryptocurrency bubble of 2017 still appears to be correcting, but the bottom may be near. Market cycles for cryptocurrency seem to be accelerating faster than traditional financial markets, and the full growth cycle for the industry has yet to play out. The next cryptocurrency bubble could begin as early as the second half of 2018 and will likely build up to an overall market cap much larger than previous highs in 2019-2020.

Bitcoin is currently trading at [FIAT: $7,546.73] according to Coin Market Cap at the time of this report.

Disclaimers: This is not financial advice. Both authors own cryptocurrency. 

Jeff Paul is the editor for Counter Markets newsletter and co-founder of CoinText.  Aaron Kesel writes for Activist Post and is Director of Content for Coinivore.