The House of Pain - Jump Around

Crypto Twitter is a madhouse, and the diagnosis is as clear as day. The markets are a dumpster fire. With Bitcoin briefly dropping to $5,800 yesterday, all validation gained in the latter half of 2017 are now hanging in the balance. A community that was once glued together with immutable ledgers is now on the cusp of imploding in the wake of possibly more capitulation.

Which has everyone wondering: what’s next? Will the market rise? Will it fall, only to break old highs? Or is this the end of Bitcoin as we know it?

Playing with numbers

As a preface - anyone who claims that they know where the market is headed with certainty should not be trusted. But, that doesn’t mean folks can’t consider the probable outcome given past events and existing market conditions. That’s what I'll be laying out here.

The past: There are two notable “pops” that come to mind. One occurred in April 2013 - call it Bubble #1 - when Bitcoin dropped from $260 to $45, a roughly 82% drop that led to new all time highs of ~$1,160, 228 days later.

That spawned the Dark Ages of 2014 - Bubble #2 - a nearly 20-month bear market that experienced a contraction of 87%, with Bitcoin ultimately bottoming at roughly $151. According to Bitstamp exchange data, that January 2015 floor is ~41% lower than the peak speculation phase of April 2013. Relatedly, that’s about a 226% increase from the floor of Bubble #1.





Applying past to present

Bitcoin’s 2017 rally - Bubble #3 - was lambasted by critics as a self-fulfilling prophecy. The notion that investors could simply hold an asset while greater fools drove the price up was destined to unravel. Well, it certainly has, but what if history repeats itself - to precision?

In other words: What future price(s) of Bitcoin would result in identical percentage changes that were seen between Bubble #1 and Bubble #2?

Drop from previous peak: A 41% drop from Bubble #2’s ~$1,160 high would lead to a Bubble #3 floor of ~$685.

A 41% drop from Bubble #2’s ~$1,160 high would lead to a Bubble #3 floor of ~$685. Increase from previous floor: A 226% increase from Bubble #2’s ~$151 floor would lead to a Bubble #3 floor of ~$495.





Plugging the percentages:Drop from all-time-high: An 87% drop from Bubble #3’s ~$19,650 high would lead to a Bubble #3 floor of ~$2,480.

And get this: Another 630 day bear-market from January’s peak would end in… September 2019.





Revisiting the fundamentals

For anyone who missed Friday’s Daily Bit, feel free to poke through it here. Here’s the gist:

There’s a growing apprehension that ICO & private market valuations are too high.

The majority of blockchain projects won’t succeed without the proper scaling solutions.

Token velocity, stablecoins, and atomic swaps could render most utility tokens obsolete.

Overhanging regulation and outstanding custodial upgrades are keeping institutional investments out of the market.

Plus, there’s the fact that: (1) Bitcoin will need to punch through several resistance levels in order to revisit all time highs, and (2) uneducated investors no longer view Bitcoin as a ‘get rich quick’ scheme, they view it as a ‘lose all your money scheme’, which I expect would reduce FOMO during the next bull market.

Bringing it all together

From a technical perspective, "Bubble #3" has similar characteristics to the prior two, yet is of a greater magnitude and still requires a considerable drop to replicate what has unfolded in the past. Bitcoin is ~17% away from an ~87% contraction from all-time-highs, which would require a ~60% decline from current price levels.

I think the determining factor as to whether the bubble pattern ultimately plays out for a third time will come down to (1) the composition of existing market participants, and (2) the impact that digitization has on market psychology. Speculators are more prone to capitulate with further contractions, and the fact that this is arguably the first financial bubble playing out across the globe in real-time could potentially result in (1) a deeper pattern influenced by widespread fear, or (2) a shallower completion influenced by widespread greed.

From a fundamental perspective, most items seem to point towards a much needed recovery period. A pullback in ICO and private market valuations could prompt venture capital to target different industries for capital investment. Additionally, the dependence that blockchain projects have on scalability solutions and the time it will take for those measures to come to fruition leaves most projects as pipe dreams until further notice. Smart money is patient, and I don't expect them to be committing capital to projects until the proper infrastructure is laid out.

The duration of the 2014 bear market is almost poetic. It will be months until both institutional-grade custodial solutions and government legislations are fully introduced. While I remain optimistic about the future of tokenized securities and select store of value cryptoassets, I understand the importance of "building periods" and the benefits that such phases can bring to the industry as a whole.

I'm beyond fascinated by this industry and am looking forward to seeing how these variables, among others, will influence future market movements.

If anyone has thoughts about the industry that they would like to share, please feel free to either leave a comment below or send me a message.