What The Crypto Crash & Stock Market Plunge Have In Common

Authored by Adam Taggart via PeakProsperity.com,

Only one thing matters in bubble markets: sentiment

Yesterday saw Jerome Powell sworn into office as the new Chairman of the Federal Reserve, replacing Janet Yellen. Looking at the sea of red across Monday's financial markets, Mr. Powell is very likely *not* having the sort of first day on the job he was hoping for...

Also having a rough start to the week is anyone with a long stock position or a cryptocurrency portfolio.

The Dow Jones closed down over 1,200 points today, building off of Friday's plunge of 666 points. The relentless ascension of stock prices has suddenly jolted into reverse, delivering the biggest 2-day drop stocks have seen in years.

But that's nothing compared to the bloodletting we're seeing in the cryptocurrency space. The price of Bitcoin just broke below $7,000 moments ago, now nearly two-thirds lower from its $19,500 high reached in mid-December. Other coins, like Ripple, are seeing losses of closer to 80% over the same time period. That's a tremendous amount of carnage in such a short window of time.

And while stocks and cryptos are very different asset classes, the underlying force driving their price corrections is the same -- a change in sentiment.

Both markets had entered bubble territory (stocks much longer ago than the cryptos), and once they did, their continued price action became dependent on sentiment much more so than any underlying fundaments.

The Anatomy Of A Price Bubble

History is quite clear on how bubble markets behave.

On the way up, a virtuous cycle is created where quick, outsized gains become the rationale that attracts more capital into the market, driving prices up further and even faster. A mania ensues where everyone who missed out on the earlier gains jumps in to buy regardless of the price, desperate not to be left behind (this is called fear of missing out, or "FOMO").

This mania produces a last, magnificent spike in price -- called a "blow-off" top -- which is then immediately followed by an equally sharp reversal. The reversal occurs because there are simply no remaining new desperate investors left to sell to. The marginal buyer has suddenly switched from the "greater fool" to the increasingly cautious investor.

Those sitting on early gains and looking to cash out near the top start selling. They don't mind dropping the price a bit to get out. So the price continues downwards, spooking more and more folks to start selling what they have. Suddenly, the virtuous cycle that drove prices to their zenith has now metastasized into a vicious cycle of selling, driving prices lower and lower as panicking investors give up on their dreams of easy riches and increasingly scramble to limit their mounting losses.

In the end, the market price retraces nearly all of the gains made, leaving a small cadre of now-rich early investors who managed to get out near the top, and a large despondent pool of 'everyone else'.

We've seen this same compressed bell-curve shape in every major asset bubble in financial history:

Phases of an asset price bubble

And we're seeing it play out in real-time now in both stocks and cryptos.

The Bursting Crypto Bubble

It's amazing how fast asset price bubbles can pop.

Just a month ago, the Internet was replete with articles proclaiming the new age of cryptocurrencies. Every day, fresh stories were circulated of individuals and companies making overnight fortunes on their crypto bets, shaking their heads at all the rubes who simply "didn't get" why It's different this time.

Here at PeakProsperity.com the demand for educational content on cryptocurrencies from our audience rose to a loud crescendo.

We did our best to provide answers as factually as we could through articles and webinars, though we tried very hard not to be seen as encouraging folks to pile in wantonly. A big reason for this is we're more experienced than most in identifying what asset bubbles look like.

After all, we *are* the ones who produced Chapter 17 of the The Crash Course: Understanding Asset Bubbles:

To us, the run-up in the cryptocurrencies seen over 2017 had all the classic hallmarks of an asset price bubble -- irrespective of the blockchain's potential to unlock tremendous long-term economic value. Prices had simply risen way too far way too fast. Which is why we issued a cautionary warning in early December that concluded:

So, if you've been feeling like the loser who missed the Bitcoin party bus, you've likely done yourself a favor by not buying in over the past few weeks. It is highly, highly likely for the reasons mentioned above that a painful downwards price correction is imminent. One that will end in tears for all the recent FOMO-driven panic buyers.

And now that time has shown this warning to have been prescient in both its accuracy and timeliness, we can clearly see that Bitcoin is following the classic price trajectory of the asset price bubble curve. The chart below compares Bitcoin's current price to that of several of history's most notorious bubbles:

Chart of Bitcoin vs other historical asset price bubbles

This chart (which is from Feb 2, so it doesn't capture Bitcoin's further decline below $7k) shows that Bitcoin is now about 2/3 of its way through the bubble life-cycle, and about half-way through its fall from its apex.

Projecting from the paths of previous bubbles, we shouldn't be surprised if Bitcoin's price ends up somewhere in the vicinity of $2,500-$3,000 by the time the dust settles.

Did The Stock Market Bubble Just "Pop"?

Despite the extreme drop in the stock market over the past two days, any sort of material bubble retracement has yet to begin -- which should give you an appreciation of how overstretched its current valuation is.

Look at this chart of the S&P 500 index. Today's height dwarfs those of the previous two bubbles the index has experienced this century.

The period from 2017 on sure looks like the acceleration seen during a blow-off top. If indeed so, does the 6% drop we've just seen over the past two trading days signify the turning point has now arrived?

Crazily, the carnage we've seen in the stock market over the past two days is just barely visible in this chart. If indeed the top is in and we begin retracing the classic bubble curve, the absolute value of the losses that will ensue will be gargantuan.

If the S&P only retraces down to the HIGHS of its previous two bubbles (around 1,500), it would need to fall over 43% from where it just closed today. And history suggests a full retracement would put the index closer to 750-1,000 -- at least two-thirds lower than its current valuation.

How Spooked Is The Herd?

As a reminder, bubbles are psychological phenomena. They are created when perception clouds judgment to the point where it concludes "Fundamentals don't matter". 

And they don't. At least, not while the mania phase is playing out.

But once the last manic buyer (the "greatest" fool) has joined the party, there's no one left to dupe. And as the meteoric price increase stops and then reverses, the herd becomes increasingly skittish until a full-blown stampede occurs.

We've been watching that stampede happen in the crypto space over the past 4 weeks. We may have just seen it start in the stock markets.

How much farther may prices fall from here? And how quickly?

History gives us a good guide for estimating, as we've done above. But the actual trajectory will be determined by how spooked the herd is.

For a market that has known no fear for nearly eight years now, a little panic can quickly escalate to an out-of-control selling frenzy.

Want proof? We saw it late today in the complete collapse in XIV, the inverse-VIX (i.e. short volatility) ETN that has been one of Wall Street's most crowded trades of late. It lost over 90% of its value at the market close:

The repercussions of this are going to send seismic shockwaves through the markets as a tsunami of margin calls erupts. A cascading wave of sell-orders that pushes the market further into the red at an accelerating pace from here is a real possibility that can not be dismissed at this point.

Those concerned about what may happen next should read our premium report Is This It? issued over the past weekend.

In it, we examine the congregating perfect storm of crash triggers -- rising interest rates, a fast-weakening dollar, a sudden return of volatility to the markets after a decade of absence, rising oil prices -- and calculate whether the S&P's sudden 6% rout is the start of a 2008-style market melt-down (or worse).

Make no mistake: these are sick, distorted, deformed and liquidity-addicted bubble markets. They've gotten entirely too dependent on continued largess from the central banks.

That is now ending.

After so many years of such extreme market manipulation finally gives way, the coming losses will be staggeringly enormous. 

The chief concern of any prudent investor right now should be: How do I avoid being collateral damage in the coming reckoning?

Click here to read 'Is This It?', Part 2 of this report (free executive summary, enrollment required for full access)

Comments

TheWholeYearInn nidaar Tue, 02/06/2018 - 11:57 Permalink

What HODLing cash has done for you (since March 2009 S&P low).

 

USD =  about the same

RBOB Gasoline = (was 1.00, now 1.82) price you pay for gas

1lb of pasta = (was around $1.11 a box, now around $1.33) price you pay to eat

BTC = pennies then, $7k now (after ATH) (everybody's 'I told u so' whipping boy now).

 

All those 'smarty pants who held dearly to their cash this past decade

 

In reply to by nidaar

CJgipper lloll Tue, 02/06/2018 - 12:42 Permalink

Here's what it ALL has in common:

 

FED slowing the printing and raising interest rates.  That's it.  That's what EVERYTHING has in common right now.  If easy money is ending, then EVERYTHING is overinflated.  And that's what they are ALL reacting to - stocks, bonds, crypto, etc.

In reply to by lloll

Bay of Pigs HRClinton Tue, 02/06/2018 - 11:48 Permalink

I think most here inderstand CB’s and made that observation well before the CC run even began.

It’s interesting how the Fonestar Brigade goes absolutely silent when BTC gets monkey hammered isn’t it? Nobody pointing out the $5K handle breached overnight either. It appears we haven’t seen a BTFD moment yet have we?

In reply to by HRClinton

pods Bay of Pigs Tue, 02/06/2018 - 12:02 Permalink

Well, not that I am in the BTC brigade (I'm in the slightly different CC brigade) but many have pointed out that BTC has enjoyed a good monkey hammering after a rise. The chart from yesterday had several big runs, followed by 60-70% crashes.  So this might not really even spook them that much right now.

I do think this last run had something different in it though, public exposure. Not just the internets, but shoe shine boys, Hollywood, MSM, etc.  So that could have led more dumb money in, which would not really appreciate the cyclical monkey hammering that BTC tends to produce.  So this one might actually be the one that breaks the cycle.

Myself, I am liking this beatdown. The rising tide this past month has lifted a LOT of turds with the coins/tech that has a real chance to change things. So now even the good tech is splattered with shit from all the turds.  Talking about Monero, Zec/Zcl, maybe Eth but that one has some issues with where it is going (PoW vs PoS etc).  There are some real possibles here that can eliminate the issues with BTC, and move forward the tech of blockchain adoptioin.  I still think that PoW coins that are ASIC resistant have the best shot, as ASICs can centralize control and turn off many who see CC as a decentralized system.

There are some real opportunities with this tech in how things operate. Just have to wait for the has beens and never weres to fall by the wayside.  When P2P exchanges become commonplace, things can get rather interesting.  As of now, the market is so small that a big influx of $$ can really distort it.  (This is where the market cap numbers make zero sense. CC has a "huge" MC, but in reality, the flow isn't anywhere near that, so the market can be swung for a lot less than many think)

I am actually curious whether Foney actually had his $$ where his mouth was. He could be a very well off individual right now.

pods

In reply to by Bay of Pigs

TheWholeYearInn pods Tue, 02/06/2018 - 12:34 Permalink

@pods

 

I referenced BTC above, but I'm not really a BTC person either (I prefer ETH). Nevertheless, what people how have never played around with any of this need to understand is that BTC & ETH are, for now, the lion's share of the conversion from fiat to crypto (and back). In that respect, BTC still operates as a proxy.

 

One thing I've been dying to see is how cryptos would respond to a wipe out in the S&P. It's really hard to say we got any clear answers, but I will say this. It was about 3PM where cryptos seemed to have found a temporary bottom. They rallied hard for about an hour, then when the VIX blew up, down they went again.

 

Thing is, by about 10:30 this morning, BTC & ETH had pretty much recovered the levels from 4PM yesterday (and have since seen a little profit taking, but nothing horrible). S&P & Dow? not that different.

 

 

In reply to by pods

The_merovingian pods Tue, 02/06/2018 - 13:09 Permalink

As for stocks, there is a floor for Bitcoin. We are close to the average cost for miners. Those who have not liquidated their coins will start to hodl until the price recovers, taking out much of the supply side. Some call it the mining cycle. Remember, every transaction needs a counterpart, when all the sellers have left, price will stabilize and a new bull run/bubble will form. Slow at first as miners reduce their stocks, then faster as new entrants increase the demand again.

 

In reply to by pods

HRClinton pods Tue, 02/06/2018 - 21:25 Permalink

+1 for a quality post, pods.

Back in 2013, I asked Foneystar to sell me some BTC, but he could not. He lived in Vancouver, and I suspect he was a Chinese Canadian. He claimed to know lots of BTC people, but could not put me in touch with any of them to buy some.

That told me all I needed to know about Foneystar.

In reply to by pods

putaipan T-NUTZ Tue, 02/06/2018 - 16:15 Permalink

speaking of no idea....

coiners/no coiners - neither of you have a clue what is really up.

i can't believe the rabbit hole i have jumped into in the last two days...

unflippingf*ckingbelievable!!!!!

 

put on your tin foil body suit if you are ready.

 

remember the fitbit military base finding geek from last week?

(if you don't, you are'nt sentient. it was everywhere. npr to fox, infowars to msnbc. it was covered everywhere)

didn't mention the bedroom geek by name tho'....

and down the rabbit hole you go.

 

it's not the only thing he found.

try- project paperclip to cern artificial intellingence by way of vegas slot machine crypto mining through kushner funded palentier software ending up in the mouth of sophia, the first cyber citizen of saudi arabia...

that's right folks - crypto's are A.I. food !

tyler's? can you hear me tylers?

 

in case you think this is a wee bit much , may i qoute the chairmans' opening remarks, opening paragraph, opening impact of said blockchain technologies-

 

 

1

WRITTEN TESTIMONY OF J. CHRISTOPHER GIANCARLO CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION BEFORE THE SENATE BANKING COMMITTEE WASHINGTON, D.C. FEBRUARY 6, 2018 Introduction: Virtual Currency

Thank you, Chairman Crapo, At the outset, I would like to note that this hearing is timely, even fortuitous. Emerging financial technologies broadly are taking us into a new chapter of economic history. They are impacting trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer. They include machine learning and artificial intelligence. 

 

TYLERRRRRR !!!!!!!!!

In reply to by T-NUTZ

pizzedoff Looney Tue, 02/06/2018 - 12:29 Permalink

Since bitcoin was 10.00 in 2013 and the Dow was 15,000 Which one has done better?

Dow Up 70% Bitcoin up 70,000% Hmmm seems bitcoin has a way to fall!? LOLOLOLZZZ it could fall to 100.00 and still have beaten the dow! by 30%

In reply to by Looney

HRClinton WIZARD OF OOZER Tue, 02/06/2018 - 11:46 Permalink

No, fear & stupidity were the Means.

The Fuel was QE, that created all these bubbles.

The Stock bubble was a bubble of fiat flowing into stocks.

The CC explosion was a Flight Of Capital -- from (a) Crony Capitalism, to (b) Free Enterprise* Capitalism.

* Complete with genuine Price Discovery and criminal scammers, that all new Frontiers attract, since 10,000 yrs ago.

In reply to by WIZARD OF OOZER

Blankfuck Tue, 02/06/2018 - 11:34 Permalink

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Al Huxley Tue, 02/06/2018 - 11:35 Permalink

Both based on make believe stories, both set up to strip-mine wealth from the American middle class desperate for a way to preserve a lifestyle that's been slowly stolen from them over the past 40 years for the benefit of the 'new nobility'?

HRClinton BitchesBetterR… Tue, 02/06/2018 - 12:13 Permalink

The CC crowd is a diverse mix from all over the planet, with several layers of Objectives:

1. Wealth preservation. A Flight of own Capital, by leaving the Fiat Economy for the Parallel Economy.

2. Wealth growth, via influx of new Fiat driving up CC valuations.

3. Wealth preservation, via 'minimal' taxation by the Fiat System. "Going Galt".

The Kabal/CB have shown all the classic moves that were predicted:

1. First (when you're insignificant) they ignore you.

2. Then (when they become aware of you as a pesky nuisance), they ridicule you.

3. Then (when you've grown into a viable threat), they attack you and insert players to take over.

4. Finally, they either control you (if their 5th Column succeeded in the Coup/Takeover), or they join you (as a last resort).

In reply to by BitchesBetterR…

Rich Monk Tue, 02/06/2018 - 11:39 Permalink

What people are finally coming to grips with is that the "Markets" in every area of Finance, have always been rigged, controlled, manipulated, and a fraud!

. . . _ _ _ . . . Tue, 02/06/2018 - 11:41 Permalink

TYLERZ!!

URL:Mal. threat detected on bubble-phases1.jpg at amarketplaceofideas.com and coinhive.com with JS:Miner-C [Trj]
I can't see these links so it might be in one of the ads.