6/22/2021 9:00am EST - Trading Lab Morning Email
In late-December 2017 I penned a blog titled "Drunk on Crypto" in which I captured the essence of the height of the 2017 crypto bubble.
"The absurdity of the evening reached its height when one of the attendees asked our expert if Ripple could really hit $100. I attempted to offer that if Ripple reached $100 it would mean its total market cap would be in the several trillion dollar area in an attempt to add some common sense to the discussion. Our expert quickly chimed in that Ripple could not only easily reach $100, but it could rise far above $100!!"
That was written when XRP (Ripple) was trading at almost $3.00 (today it is about $.55 and in the last year it has traded as low as $.17) and many of my friends were telling me about how Ripple was going to replace Bitcoin.
Cryptocurrency proceeded to enter a bear market in January 2018 (just as it reached peak euphoria) that lasted for roughly two years. I often looked back on my Drunk on Crypto blog post as an example of an extreme market euphoria that I might not see again.
Little did I know that 2021 would happen!
The stuff I have witnessed in the last six months is not only like nothing I have experienced in my lifetime, but it's like nothing I have even read about. The reckless risk taking, the widespread hubris, the exponentially multiplying pump & dumps, the number of outright frauds/scams, and all the celebrity promoters.
2021 has had it all, and I'm not even talking about the stock market. I'm talking about crypto.
Elon Musk relentlessly promoting a "dog coin", Dogecoin (DOGE), and making a Saturday Night Live appearance that ultimately marked a top at a nearly $100 billion market cap. The media was all over Doge because it made such a great story when it was going up. This excessive media coverage resulted in hundreds of thousands of retail investors getting sucked in during Dogecoin's parabolic blow-off run that culminated in Musk's SNL appearance.
Sometime in mid-May a friend of mine who has never bought a stock in her life told me that she had put $50,000 in Dogecoin. When I asked why, her answer was that it was fun and Musk would keep making it go up. I did everything I could to avoid rolling my eyes. When I asked her "what if he stops tweeting about Doge?", she didn't have an answer.
One of the key hallmarks of a bubble are that the bulls lose any fear of loss as they become absolutely 100% convinced that prices can only continue rising. And then prices stop rising, and the bullish faithful enter the denial stage:
This morning's email may very well mark a short term low in crypto, however, that is not the point. The above Dogecoin chart illustrates a parabolic blow-off top, followed by the classic distribution stage, and markdown stages of the market cycle. Dogecoin is in a stage 4 decline, and a little oversold countertrend bounce isn't going to change that. This is headed below $.10 in all likelihood.
Then we had Tom Brady "laser eyes" at Bitcoin $60,000....
Brady should probably stick to throwing footballs as his market timing skills could not be worse.
My point this morning is not to dunk on crypto. The point is that the madness of crowds never changes, it just looks a little different each time.
When your neighbor is telling you about what dog crypto he's buying, and then the mailman also agrees, and then three guys at the bar are saying the same thing, and then it's on TV, and then Tom Brady and Elon Musk are tweeting it......
Well, it's probably not the bottom, and it's probably really close to the top.
"What the wise do in the beginning, fools do in the end" ~ Warren Buffett
And so it is, and so it will forever be.
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