At The Armchair Trader we have been urging our readers to trade with real caution on crypto currencies. As an asset class, as a market, they are un-tested. We have been here before with the dot com stocks boom in 2000-2001. Out of this emerged such giants as Amazon and Google, but the list of companies that did not survive, and the investors who lost money in 2001, is a long one.

Bitcoin has been taking a hammering over the past few days, punishment we knew would be coming its way. One of the problems with Bitcoin is that it is seen as the flag bearer for crypto currencies everywhere. Many of its competitor currencies are simply not fit for purpose, as we suspect the market is going to find out with Tether. Problems within the crypto market will lead to selling of Bitcoin – unfairly, some Bitcoin fans might argue, but that is the penalty of being the flag bearer.

Bitcoin bubble will be test case for crypto market

“The crypto currency has stuck to the script outlined by market historians, who looked at prior market bubbles such as 17th century tulip bulbs and 20th century tech stocks,” says Russ Mould, Investment Director with stock broker AJ Bell.

The total loss on the more than 1000 crypto currencies out there since the beginning of January is more than $350 billion. Right now it looks like a classic bubble popping. But is it?

Possibly the biggest threat facing Bitcoin is that it could be regulated out of existence. Yet they have waved through the listing of Bitcoin futures on the CME. The news that Lloyds Bank is going to prohibit its credit card holders from using Bitcoin is not the end of the world either – the entire banking system is not going to try to ban their customers from buying Bitcoin.

Bitcoin is testing its long term trend line – i.e. where it should really be if it was enjoying good, long term growth. 18,000 was just a pipe dream and represented a rush into the currency by investors who were just reacting to news of the soaring price. Investors love a ‘get rich quick’ story. That long term trend line puts Bitcoin at about $7500-$8000.

“The next key support would be the 200 day moving average, currently around $6200 – if the price cruises beneath this level there is a chance of a major sell off that wipes out last year’s gains,” says Neil Wilson, Senior Market Analyst with ETX Capital.

After the Bitcoin bubble – will there be anything left?

The excitement around crypto currencies is wearing off. There are also too many of them out there, with hundreds fulfilling very little purpose other than being a ‘me too’ money making bid by characters with a technology background and little to no grasp of economics or financial markets. Currencies exist for a purpose – humans created them as a more effective replacement to bartering goods and services. For cryptocurrencies to succeed, there has to be a real world demand for them, an actual utility. Otherwise they will become nothing but giant Ponzi schemes.

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8th February 2018
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