Bitcoin down over the weekend, slide fed fears that it may be “the mother of all bubbles.”
While little exists intrinsically to judge the actual value of a digitized currency, comparing bitcoin with the previous shows’ high-momentum assets shows how heated its rally has become — and why it’s vulnerable to swoons like Monday’s.
Last week, bitcoin managed to trade 179% above its average price during the previous 200 days, three times higher the Nasdaq 100 ever got on the heyday of the dot-com bubble. The digital coin was up 120% for the last 20 sessions, a rate of return is three times the best profit that the tech-heavy equities gauge ever saw.
“If we’re just to compare it apples to apples with other commodities, it feels like a huge bubble, and you could say it’s crazy expensive,” said Mike Bailey, director research, FBB Capital Partners. “I can’t get involved in something with those kinds of technicals.”
Bitcoin fell as much as 20% on Monday and was down 16% to $33,440. Bank of America strategists led by Michael Hartnett say bitcoin’s rally is one thing, along with recent trends in the initial public offering and particular purpose acquisition company markets, that makes investor behaviour look speculative at the moment.
The digital asset’s 900% advance since 2018 has been so swift that it dwarfs all other boom cycles in financial investments during the last 50 years, from gold’s rally in the late 1970s to the Nikkei 225’s surge in the 1980s to the Nasdaq 100’s run in the 1990s.
Bitcoin’s velocity is approximately two times as intense as the next most significant market froth episode — the Chinese stocks’ spike in the early 2000s.
It “blows the doors off prior bubbles,” the strategists wrote in a Friday note, asking whether bitcoin is “the Mother-of-all-bubbles.”
Many worry 300% rally previous year that persisted into 2021 until last Monday is untethered from reason and fundamentals and is fueled by vast swathes of fiscal and monetary stimulus sloshing around at a time while global economies are still dealing with the fallout from the pandemic.
Up 38% this year through Friday, bitcoin had its best start to a year since 2012, when it surged over 60% over the first eight days. Scott Minerd, a chief investment officer with Guggenheim Investments, who recently said the coin could be worth as much as $400,000, wrote in a tweet that it was “time to take some money off the table.”
It’s the type of thing so many investors have been eyeing warily in a market that’s been laden with speculative mania, having dizzying trends in the initial public offerings space and the resurgence in cryptocurrencies ensuing worries that a comeuppance could be due.
Bitcoin’s weekend action-fueled those concerns. Since March, the digital asset slid as much as 26% over Sunday and Monday in the most significant two-day drop.
Still, bitcoin’s fans argue that its recent rally isn’t comparable to its other euphoric stretches, like the one in 2017 that ultimately resulted in a considerable sell-off the next year. Many argue that the asset has matured with the early entry of institutional investors who have taken a greater interest as the bitcoin rallied to record after record. Besides, they say, it is increasingly seen as a legitimate hedge against dollar weakness and inflation risk.
“Here you’ve got both fear and greed driving that baby to the moon,” said Bryce Doty, portfolio manager at Sit Fixed Income Advisors. “That does qualify as frothy.”
Other technical signals also suggested a worrying trend. Bitcoin’s drop over the weekend triggered a sell signal according to the GTI Global Strength Indicator, that measures upward and downward movements of successive closing prices. Therefore, the coin’s 20-day moving average has far offered a support level throughout its uptrend, though bitcoin remains overbought.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, says there are good reasons for believing in bitcoin but, to him, it’s a question of whether it constitutes an excellent place to allocate capital. His team isn’t currently apportioning money toward it, but it would view that as a speculative bet rather than as a store of value if it did.
“Bitcoin is in the early stages of its move,” he said. “Whether we are already in a bubble or whether we are in the process of forming one will only be known in hindsight, but we think it will be similar to previous bubbles we have seen in the past.”