Here's why the worst of the bitcoin pullback might be still to come 4:09 PM ET Mon, 18 Sept 2017 | 01:01

Cryptocurrencies are the new red state/blue state divide in America. StockTwits

that there were as many messages on its service last week on bitcoin as its most popular ticker for the S&P 500. And popular opinion is split.

There's one incredibly passionate group that believes in cryptocurrencies as the future of all money. There's another equally passionate group that thinks they're essentially a hoax.

They've also always been highly volatile, but last week took that to a whole new level.

At the start of last week, the total market capitalization for all cryptocurrencies tracked on coinmarketcap.com was $150 billion.

Then Jamie Dimon, CEO of JPMorgan Chase, took the stage at CNBC's Delivering Alpha conference on Wednesday and called bitcoin a "fraud worse than tulip bulbs." That set off an enormous correction across all these digital currencies. At one point early Friday morning, the total market cap of all cryptocurrencies had contracted to $98 billion. Bitcoin itself — at the lows — had dropped 40 percent from its all-time highs. Yet, by later Friday, the total market cap of all cryptocurrencies had recovered to $120 billion. (It recovered even more over the weekend.)

Here are some guideposts to keep in mind going into this week:

No one bull or bear market is exactly like the other. Investors have a tendency to want to look through the lens of the most recent big declines (like 2008 or the dotcom bubble) to understand exactly what's going to happen in a crash that they see as potentially happening imminently. The truth is that there's almost never a one-to-one comparable correction. Therefore, we're not destined to see a three-year nuclear winter in cryptocurrencies just because that happened after the dot-com era. That said, there are some past similarities of pullbacks to watch for.

Investors have a tendency to want to look through the lens of the most recent big declines (like 2008 or the dotcom bubble) to understand exactly what's going to happen in a crash that they see as potentially happening imminently. The truth is that there's almost never a one-to-one comparable correction. Therefore, we're not destined to see a three-year nuclear winter in cryptocurrencies just because that happened after the dot-com era. That said, there are some past similarities of pullbacks to watch for. All declines usually come in waves. We all have psychological biases to want to believe that the worst is behind us. Last week was a big drop in value (after a huge run-up in price for most of 2017). Then we saw a strong spring back on Friday. Usually in big pullbacks, there are waves of selling. Each pullback washes out a whole new class of speculative investors. I suspect we will see more selling in the weeks ahead — no matter what happens this week. In the dot-com era, there was a crescendo of selling in the spring of 2000. By June, many felt like it was safe to sound the all-clear. Yet there were several more severe rounds of selling over the next 2 1/2 years.

We all have psychological biases to want to believe that the worst is behind us. Last week was a big drop in value (after a huge run-up in price for most of 2017). Then we saw a strong spring back on Friday. Usually in big pullbacks, there are waves of selling. Each pullback washes out a whole new class of speculative investors. I suspect we will see more selling in the weeks ahead — no matter what happens this week. In the dot-com era, there was a crescendo of selling in the spring of 2000. By June, many felt like it was safe to sound the all-clear. Yet there were several more severe rounds of selling over the next 2 1/2 years. Cryptocurrencies are real and a big threat to banks such as JPMorgan Chase. I took Dimon's comments with a grain of salt last week. Bitcoin and other cryptocurrencies are very disruptive to traditional banking. Yet they also offer big opportunities for them to reduce costs, increase liquidity and improve customer information. Chase itself as a bank is embracing many aspects of cryptos, including ethereum. These currencies have attracted many speculators and it's good to see some of them shaken out of the market. A bigger price correction will help do that. But — as anyone who has read some of my recent interviews here or heard some of my recent podcasts will know — the long-term future of cryptos is very bright. I still see tremendous opportunities ahead in the space.

I took Dimon's comments with a grain of salt last week. Bitcoin and other cryptocurrencies are very disruptive to traditional banking. Yet they also offer big opportunities for them to reduce costs, increase liquidity and improve customer information. Chase itself as a bank is embracing many aspects of cryptos, including ethereum. These currencies have attracted many speculators and it's good to see some of them shaken out of the market. A bigger price correction will help do that. But — as anyone who has read some of my recent interviews here or heard some of my recent podcasts will know — the long-term future of cryptos is very bright. I still see tremendous opportunities ahead in the space. This might not be the big correction. By the end of last week, many crypto-faithful — like Tim Draper — were tweeting that the current correction was causing the "deadwood" to leave the community, while the faithful would be rewarded.







But what if this isn't the big correction yet? It's quite possible last week's quick drop in price could be a head fake that sucks many more speculators in to "buy the dip" and temporarily pushes prices back up for several weeks or months.

By the end of last week, many crypto-faithful — like Tim Draper — were tweeting that the current correction was causing the "deadwood" to leave the community, while the faithful would be rewarded. But what if this isn't the big correction yet? It's quite possible last week's quick drop in price could be a head fake that sucks many more speculators in to "buy the dip" and temporarily pushes prices back up for several weeks or months. There's never one event that is the cause of a top in the market. Although people have been quick to point to specific events as triggering the drop in prices of cryptocurrencies (e.g., China's decision to ban new ICOs), you can almost never call a top or bottom in markets in the moment. Even with the benefit of hindsight, there is usually a cluster of events or conditions to point to.

Although people have been quick to point to specific events as triggering the drop in prices of cryptocurrencies (e.g., China's decision to ban new ICOs), you can almost never call a top or bottom in markets in the moment. Even with the benefit of hindsight, there is usually a cluster of events or conditions to point to. The "real" decline of all cryptocurrencies might be 80 to 90 percent from the top. Take a look at this recent chart on the magnitude of pullbacks in the price of bitcoin. That means, as sobering as last week's 40 percent pullback in bitcoin was from the highs, it might only have been half of what the final full reckoning will be.

The bottom line here is that I believe the future value of cryptocurrencies will continue to shine through and emerge. However, we might just be at the beginning of a much bigger pullback. Proceed with caution.

Commentary by Eric Jackson. Sign up for Eric's monthly Tech & Media Email. You can follow Eric on Twitter @ericjackson .