The price of a Bitcoin is just over $4,000 as I write. About a year ago it was knocking on the door of $20,000. It got that high from almost nowhere very quickly, but looking at the chart it seems clear that the price shot up in a speculative bubble. Now, the price has topped and broken down, and the big danger for speculators who buy Bitcoin now is that they could be suffering from what ace US trader Mark Minervini calls ‘broken leader syndrome’.
He reckons it works like this: speculators who didn’t buy a dynamic market leader as it emerged and before it shot for the stars suddenly get interested in it after it has topped and the price has fallen back. They are buying because they think it is cheaper then and will shoot back up. But guess what, it probably won’t. They are actually buying a broken leader that won’t work anymore.
Stage analysis
Minervini has a great way of analysing growth stocks and anything else you can plot on a chart – such as Bitcoin. He reckons prices cycle through four stages, and if you look at price charts you can see the phenomenon occurring over and over again. Stage one is the neglect phase, which is where Bitcoin languished before it took off. Stage two is the advancing or accumulation phase, which is where Bitcoin shot for the moon and almost touched $20,000. Stage three is the topping phase which is usually characterised by volatility that precedes stage four, which is the declining phase or capitulation, which is marked by a relentless decline in the price and an unwinding of almost all previous speculator gains (if you haven’t sold by then).
Now, it is possible that Bitcoin will move through the stages again, but my bet is that it has had its day in the sun. It was only in March 2017 that the price was below $1,000 dollars and measured in just three figures. I think it’s heading back there again to complete the round trip, and then the petrol in the tank will run out forever.
A basket full of bad apples
The interesting thing is that the price charts of most of the other cryptocurrencies look similar to that of Bitcoin, so I’d apply the same stage analysis to them. Ether, Ripple, Litecoin, Stellar and others, they all look the same and they’ve clearly all suffered from the same kind of speculative bubble. In betting parlance, I think the whole cryptocurrency hand looks like a busted flush.
This is what I’d do now. If I held any cryptocurrency I would sell because I think the ‘asset’ class is going lower and will stay there. I would cut my losses if I had losses and take my profits if I had profits. Then, I would forget about cryptocurrencies completely and chalk the whole sorry episode up as a 21st century occurrence similar to the Dutch tulip mania in the 17thCentury. Finally, I’d find out as much as I could about shares and invest in companies with real assets. A good place to start is right here on the Motley Fool.