Parabolic Coin

by Pater Tenebrarum, Acting Man:

The Crypto-Bubble – A Speculator’s Dream in Cyberspace

When writing an article about the recent move in bitcoin, one should probably not begin by preparing the chart images. Chances are one will have to do it all over again. It is a bit like ordering a cup of coffee in Weimar Germany in early November 1923. One had to pay for it right away, as a cup costing one wheelbarrow of Reichsmark may well end up costing two wheelbarrows of Reichsmark half an hour later. These days the question is how many wheelbarrows of US dollars one may need to pay for a bitcoin.

Is it real? (As our readers know, the nature of reality poses certain problems). When we started writing this, bitcoin had just moved up by more than $600 in one week to its then level of $2,400 – within a little more than a day it reached an interim peak of $2,760, then plunged to an interim low of around $1850 in just two trading days, only to rally to a new high of $2,930 over the next two weeks. Currently it trades at $2,750 (don’t hold it against us if these figures are no longer true by the time this post is published).

Naturally, the increasingly parabolic look of the bitcoin chart raises the question whether it represents a bubble, and if so, how large it will become. A good answer to the second part of the question is usually “larger than anyone thinks possible”. As to the first part, it may be fair to say that it has been in a bubble since shortly after its birth. At one point in 2009 the currency could be bought for 1/100 of 1 US cent (USD 0,0001). It rallied to 5 cents by 2010, which is quite a big move. We dimly remember a story about a pizza restaurant selling Margheritas for BTC 20,000 apiece at the time. In 2011 it reached a peak of $18.50 – and so on, and so forth.

In recent weeks we occasionally watched in mute fascination as bitcoin fluctuated in ranges of several hundred dollars in the space of a few hours. On May 22 it had a little dip just below the $2,000 mark to give everyone a good entry point. But would it really be worth it? What if the bubble was about to collapse? Three days later the courageous dip buyers were up by almost 40%. Given how overbought bitcoin looks, one would have thought it a good idea to take the money and run, but of course we have no idea how crazy things will still get before everybody really starts dialing 1-800-GETMEOUT.

Bitcoin, daily – at the time we copy/pasted this chart, it traded at $2,750. By the time we finish writing this post, it may be quite a bit lower or higher – maybe we should flip a bitcoin to decide which way it will go next – click to enlarge.

A competing crypto-currency by the name of Ethereum (what a name!) has gained more than 2,400% this year, rising from $10 in January to $258 in early June. The move from $80 to $258 took just three weeks. So yes, it is a bubble of sorts, with an almost Tulipomania-like air about it. It is a speculator’s dream in many ways – BTC and ETH are undoubtedly great trading sardines. What interests us though is why this is happening. What is driving it?

Fractal Patterns

One interesting thing about the chart of bitcoin is that it has a text-book Elliott wave shape (we have not labeled the chart, but it seems obvious to us that it lends itself to such labeling). This applies to the weekly chart shown further below as well and also to other time frames. Regardless of what one thinks of Elliott wave theory, price trends in financial markets definitely have fractal characteristics.

Empirically they consist of sequences of patterns that are recurring over and over again in every conceivable time frame, i.e., the same patterns (or rather, very similar patterns, such as for instance triangles) that form on daily, weekly or monthly charts, also form on one minute, ten minute and hourly charts. These patterns appear to reflect various stages in the evolution of market psychology within the time frames captured by these charts.

R.N. Elliott cataloged such recurring patterns in the stock market and tried to find out if they followed rules that could be defined and used for forecasts. Obviously such an endeavor is fraught with many difficulties. Particularly the validity of the theoretical framework that was created after the empirical identification of said patterns and the promulgation of the technical rules governing the Elliott wave principle seems questionable.

But that is not really what we want to discuss here. One doesn’t necessarily have to believe that the Elliott wave principle is valid or useful for making accurate market forecasts in order to recognize that its leading practitioners have gathered a number of useful empirical insights.

In this particular case we mention it mainly because typically, “textbook” Elliott wave patterns only emerge in markets with broad participation. Since these patterns reflect the predominant mood of market participants, or if you will, the “market mind”, recognizable shapes only tend to form in liquid markets with a large number of participants. While we cannot say what precisely the threshold is, i.e., at what point pure randomness is replaced with something that resembles a more orderly arrangement, the price chart itself conveys the information that the threshold has been crossed.

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