Is This The Bottom? No? How About Now?

So now that the majority of crypto-currencies, including top dogs Bitcoin and Ethereum, have seen downturns of upwards of 65-75%, I think everyone can agree that prices were not just out over their skies but were, in fact, bubble-icious. If you first became involved in this space in December – eek! I'm sorry. But, fear not. Perhaps I can share a glimpse of some brighter days ahead!

Now that the price collapse of crypto has confirmed that the markets had ballooned to bubble proportions, I thought it would be fun to investigate how the price swings between Bitcoin and Ethereum compare to one of the markets that is most synonymous with “bubbles” from my lifetime: the Nasdaq of the late 90s and early 2000s. The Nasdaq differs from Bitcoin and Ethereum, of course, in that it is an index comprised of a large number of stocks whereas Bitcoin and Ethereum are singular “entities”. A case could therefore be made that, alone, Bitcoin and Ethereum are more representative of stocks. However, given that getting fiat into and out of the crypto markets at this time almost universally requires first acquiring either Bitcoin or Ethereum, and vice-versa to exit the crypto market, I don’t think that the mental gymnastics of presuming Bitcoin or Ethereum as representative of an overall indexed crypto-market are too extreme.

I don’t pretend to be a statistician, or to even play one on the interwebs, but the below graphs are a representation of the current state of the most recent crypto-bubble from mid-September, 2017, through today, as reflected in the prices of Ethereum and Bitcoin, compared to the Nasdaq bubble’s bottomed out cycle.

Figure 1 Ethereum vs. Nasdaq

Figure 2 Bitcoin vs. Nasdaq

While there’s no guarantee that the patterns will finish precisely as did the Nasdaq, I do find it interesting to see the similarities in the price action while at the same time, noting the extreme differences in time that it took for the Nasdaq bubble cycle to run it’s course as compared to the much more volatile crypto markets.

The graphs reveal just how similar the price patterns followed that of the Nasdaq cycle to their peak, and then even tracked very closely a good bit of the way down before a bit of a divergence developed with the crypto-market having a much larger re-inflation attempt before failing once again. Ethereum had a bigger pump than Bitcoin shown around the T1500-1600s in the graphs, but then fell apart before Bitcoin continued a comparatively much-more controlled grind down.

The charts above may make you shed some tears, especially if you entered anywhere from about T1000 on, but if that is the case, take heart. You can see just how close the price action is to completing the entirety of the cycle that the Nasdaq endured. At current levels and given how precipitously it has fallen over the last few weeks, Ethereum would have “only” another 13% to drop to reach the Nasdaq equivalent bottom, though Bitcoin would still have a little more than double that price decline remaining (about 27%). A Nasdaq equivalent bottoming-out would give Bitcoin a price right around $5000 and if the price action does follow the trend for Bitcoin, it will be interesting to see what transpires with Ethereum since Bitcoin would have to fall twice as quickly as Ethereum for both to finish the cycle at the same time:

1. Will Ethereum move down in lock-step with Bitcoin, over-shooting the Nasdaq bottom chart comparison?
2. Will the Bitcoin drop accelerate at a rate greater than Ethereum?
3. With Bitcoin acting as the de facto reserve currency of crypto, could Bitcoin never bottom fully as compared to the Nasdaq chart, leaving Ethereum to do so?
4. Or, could the market now decouple from the Nasdaq trend, spread it’s wings, and take it’s own path, either higher or lower?

Given that the charts have followed this closely with one another thus far in the cycle, I’m inclined to believe that one of the first 3 outcomes will be the path followed. This is by no means to suggest that number 4 could not be on the table as well, but for the purposes of what I find to be one of the more interesting aspects of the cycle, I’m going to proceed as if we do not find ourselves in that situation.

So with that assumption, the Nasdaq cycle began early in 1995 and bottomed out in September of 2002, lasting about 7 years, 8 months. Comparatively, the current crypto bubble cycle looks like it could be wrapping up in early-mid April, possibly around tax day in the United States, which makes a lot of sense given that many crypto investors likely found themselves having to liquidate assets to pay taxes on substantial gains they came into during 2017. Using a mid-September, 2017, start date for the crypto bubble cycle, would mean that this entire cycle ballooned and then deflated in about 7 months, or in only 7.5% of the time of the entire Nasdaq bubble life-cycle.

Now, just for giggles, I wanted to see what could happen next, if crypto were to continue to follow what transpired following the Nasdaq bubble deflation. Well; good news! 1 year following the bottom of the Nasdaq bubble, it’s price had recovered a decent amount and was up 65% off of the bottom. In a little over 15 months, the price was as high as 87% off of the bottom. Assuming that the crypto market continued moving at the same accelerated pace as has it’s bubble cycle, and using Bitcoin $5k as a bottom price, in about 4 weeks, we would see Bitcoin rebound to $8,250, and to over $9,300 in roughly 5 weeks.

By extending the relationship out further, unfortunately we will see, however, that the quick price recovery of the Nasdaq immediately stagnated after the 15 month run and all told, took over 12 and a half years, into 2015, before recovering fully to the bubble high set in 2000. Again assuming a consistent accelerated crypto pace, this would translate into Bitcoin rebounding to match it’s bubble high in the $19,000s in a little less than a year’s time, around the end of March, 2019. All told, a much more rosy proposition than the Nasdaq’s lost decade plus.

From the reclaimed bubble high through today, the Nasdaq, over the course of the next three plus years, has risen by an additional 39%. Taking our crypto-speed time machine, this would put Bitcoin at close to $27,000 by end of June, 2019, resulting in gains of 300% from current levels and over 450% from the hypothesized low around $5,000. Pretty incredible given all of the carnage that has transpired early in 2018.

Now, a possible caveat to such a dramatic price rise is that the next time that we reach the $20k levels and above, it may require that the market be more appropriately valued at those levels. When the Nasdaq was entering it’s bubble growth phase, I recall that page-views, eyeballs, and clicks were all the rage driving the speculation, but not actual business fundamentals such as earnings growth and corporate debt levels. Not much of a surprise in retrospect then that the balloon ultimately popped. Following the deflation, the Nasdaq growth rate has much more closely followed the actual business successes of the companies it tracked, which have actually been very spectacular.

The current crypto landscape feels a lot like that time to me, with white-papers and subreddits pumping the virtues of every coin, even when the fundamentals of some of those coins will never warrant the investments they have already received, will never fulfill the white-paper promises claimed, and will inevitably leave only vaporware behind. In order to recoup and surpass prior highs, it seems inevitable that Vitalik Buterin’s expectations of 2018 being the year of action will need to delivered on:

“It will be the year where all of the ideas around scalability, Plasma, proof-of-stake, and privacy that we have painstakingly worked on and refined over the last four years are finally going to turn into real, live working code …”

Should that statement ring true, then actual real world adoption and use cases other than speculation should begin to lend credibility to the technologies, in turn validating higher prices.

So, what do I think? Well, firstly, you should not take any of this as financial advice. Investing is risky. You should do your own research, rely on your own financial professionals, and invest in ideas and ventures that you understand and believe in. Given that disclaimer:

Is it likely that the price action takes place exactly as “projected” above? Probably not. That said, a bottom in the crypto markets will be made eventually, and should it follow the course of the Nasdaq bubble, that bottom could be imminent.
And, all else being equal, risk-reward is much better when buying into something that has just had a 70% price reduction vs. a 500% increase, even if it doesn't feel that way.

Is it possible that many (but by no means all) of the blockchain projects actually do achieve their stated goals and missions, lending to real world value and therefore creating fundamental value in the underlying tokens? Absolutely.

So, if you have been HODL’ing on the way down, furiously trying to obtain capital to deploy, or just sitting on the sidelines watching to see how things play out, it’s starting to appear that an opportune time is presenting itself wherein we could begin seeing real value begin to have an opportunity to start to be priced in. I’m keeping my eyes peeled for prices that I consider to be good entry points, and feel free to let me know where you see us going from here.