Trading Lesson: Do Fundamentals Drive Bitcoin? Are You Kidding Me?

11/08/2017 10:20 am EST

Focus: CURRENCIES

Avi Gilburt, Esq

Founder, ElliottWaveTrader.net

We analyze it objectively using Elliott Wave analysis. This has kept us on the right side the bitcoin market, taking profit at key long-term Fibonacci targets, so we have funds to benefit during deep corrections, write Avi Gilburt and Ryan Wilday of ElliottWaveTrader.net.

Is of bitcoin (BTC) worth over $6600?  Well, that is the price traders are bidding higher for it when this article was written.

Every MBA student is taught many means of evaluating or valuing securities. Discounted cash-flow and capital asset pricing models are a couple of valuation methods. Moreover, fundamental oriented stock traders tend to use ratios like price to sales, price to earnings or price to book to value stocks.

Do any of these methods apply to bitcoin, or any cryptocurrency for that matter? Well, if you attempt to apply any of the above-mentioned methods, you are missing values to insert to your formula, as assets, earnings, cash-flow don’t exist. So, basically, you’re out of luck.


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What about using a means of valuing traditional currency? Balance of payments, interest rate differentials, and current accounts of sovereigns are all methods we read about. Again, they are all useless here.

In our previous article, we briefly described, in layman’s terms, the technology underlying cryptocurrency. And then, how to trade cryptos safely.

Let’s move to behavioral economics. Does bitcoin have utility, that somewhat esoteric concept that gives an asset or good a value? Ryan thinks so and could give a long talk on the issues blockchain can solve, but that is subjective.

Therefore, we propose to you that since there is no means by which to value bitcoin, or any cryptocurrency, it is possibly the most purely sentiment-driven market in existence. While participants may give subjective reasons for its value, there is no valuation model in wide acceptance. There are attempts, but even if accepted, would they work? Probably not.

While there is no objective means of valuing cryptocurrency, there is no shortage of bubble calls and claims that the crypto mania is akin to the Dutch tulip mania of 1636-7. And, likewise, there is no shortage of calls that bitcoin will one day be astronomical in value, including John MacAfee’s claim it will reach $500K or he’ll make a violent spectacle of himself on TV. Yet he uses subjective arguments to make this claim.

So, how does one trade something purely sentiment-driven, with no means to valuation? Elliott Wave analysis, coupled with our Fibonacci Pinball method, provides reliable objective price ranges, targets and supports for sentiment-driven markets.

Let’s back up a second and look at the history of bitcoin and its already tremendous boom and bust cycles. We’ve color coded past corrections with red, signifying 80%+ price corrections. Orange signifies 50-79% corrections, and yellow are corrections that are 25-49%.

chart 1

Therefore, if history is a guide, those calling for bitcoin to see six and seven figures in the future should expect brutal corrections. In fact, the normal correction in bitcoin makes an equity bear market look like child’s play.  Likewise, those calling for the bitcoin bubble to pop should not assume that if bitcoin gets a 90% haircut it is the beginning of its demise.

Booms and busts in any market are normal, but those in crypto are particularly volatile, and you should expect it to happen again. The question is when?

Everyday retail investors would do well to avoid these large drops, which can sometimes be prolonged. Likewise, they would do well to take profit at times of high risk to lock in gains.

Our short-term outlook

While the media has been full of discussions regarding bitcoin bubbles, and crypto-tulips, we’ve been looking higher and see $14,000 plus over the next few months provided the September 15 low holds. We can even make an argument for extensions to just over $20,000. But before we see five figures, we are looking for an interim top in the $6700-$7200 region. This will give us an entry point in the $4000-$5000 region. But, please remember that these are general guidelines, whereas we look for more specific targets in real time as we analyze the market through the day.

chart 2

It should be no surprise for those who track sentiment that a market can rally while bubble talk fills the news. At the same time, the masses are slowly adopting bitcoin, and new crypto investors are born every day. Some of the latest rumors include Amazon accepting bitcoin, and Apple and Google building crypto payment systems into their browsers.

Speculation is building upon expected mass adoption even while the bubble callers warn.

Who is right? We could care less.

Rather, we try not to be participants in sentiment but analyze it objectively, using Elliott Wave analysis, with which we measure that sentiment with objective price measures. And, so far, this has kept us on the right side the bitcoin market, taking profit at key long-term Fibonacci targets, so we have funds to benefit during those inevitable deep corrections.

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