Memories of a Mania

[Gabi]

3 pages of people saying that Alonzo is wrong. This means that yes we are in a bubble.

[Blinken]

Bitcoin is not a stock. It does not have an intrinsic value. It is a medium of exchange, like the dollar and the Euro. The dollar and Euro have no instrinsic value either.

[Alonzo Ewing]

More musings on mania, specifically, the aftermath.

The peak is characterized by a very sharp, quick selloff.  This is followed by an equally swift rebound that gets close to, but does not reach the prior peak.

The NASDAQ peaked at 5100 in March 2000.  Two weeks later, it was at 3400.  Keep in mind, this is a trillion+ dollar capitalization index.  That's a drop of 33% in two weeks!  (Keep in mind that a bear market in stocks is defined as a 20% drop.)  What a drop like this does is to introduce a small amount of doubt.  It "turns" a certain segment of believers into non-believers.  This is the smart money.  They begin to look for a chance to get out. 

Less than 3 months later, the NASDAQ was back up to 4300.  At this secondary, lower peak, the psychology has a particular flavor.  There is a certain fraction of people who will simply not go back in and buy.  As mentioned before, these are the smart money.  But the majority of previous believers still believe in the bull market.  They think to themselves, "Well, looks like we're off to the races again.  The prior peak was at 5100.  In another month, we'll be at new highs!"  Problem is, the market can't get to new highs because the smart money is gone.  That fraction needed to buy back in to get to the prior peak is no longer around to bid up the price.

The disappointment usually results in another batch of people who stop believing.  This is the smart-but-not-super-smart money.

Generally the market eventually settles to lower number at a lower volatility.    This is characterized by tremendous indecision.  Is the "New Economy" story still true?  Is the bull still on?  Usually the market decides the answer by going lower.  This is when the "middle batch" of market participants leave.

The last phase is the low volatility death-by-a-thousand cuts bear market.  The price drop in absolute number isn't that much, but it feels like a lot longer because it's drawn out over a much longer period of time.  It's absolutely demoralizing and winnows out nearly everyone who participated in the prior exponential rise.  Eventually we reach capitulation.  The NASDAQ bottomed at 1200 in late 2002.  This is when the smart money starts to nibble again. 

------------------------

Having said that, I'll make an assessment and some predictions.  I entered a market sell order when Mt Gox was at 220 but it didn't get filled till a hour and half later at 150.  So I'm totally out other than my Bitfloor debt.  This is only my opinion.  Diverging opinions make a market.  And anyone who thinks a forum post can affect a billion dollar market is naive.

Anyway, the conversation today feels a lot like that secondary peak.  I believe the very smart money has left.  Yet the majority is still optimistic, most expecting the prior trend to resume.

I think the price will converge to a low-mid 100s price over a few weeks.  Then we'll have 12-24 months of a slow burn, possibly down to a price of $25-$50.

Disclaimer: I'm probably wrong, and anyone who uses my thoughts to guide their trading deserves to lose all of their money.

One more thing:  I still think Bitcoin is awesome. I think it will eventually reach thousands of dollars in price.  I hope it changes the world and creates a better civilization.

[Cryptoman]

I'm curious, what is your opinion on gold, and where do you see the "smart money" going next?  Gold to me seems to be in the "slow burn" phase, as you describe it.  Shall we all hop into equities and place our trust back in the central bankers and captains of industry?  Go for a ride on Bernanke's and Obama's magic carpet?

[Alonzo Ewing]

I do believe gold is in the late stages of a cyclical bear market (within a secular bull market).  I've put my long term money into physical gold at lower prices, and long term I'm very bullish.  I do think the late stages of this secular bull market in gold will look a lot like what we've just witnessed in Bitcoin.  

Sentiment is as low as it's ever been in gold by certain measures(1).  Anything can happen but I do believe we're much closer to the lows in gold than any high (which i think will eventually be 10,000-20,000).

I think stocks are a terrible place to be.  Despite what the media says, stocks are expensive by conservative measures.  They're also overbought.  This feels a lot like 2007 to me: it's nearly impossible to find a stock bear.

1. http://www.acting-man.com/?p=22540

I'm curious, what is your opinion on gold, and where do you see the "smart money" going next?  Gold to me seems to be in the "slow burn" phase, as you describe it.  Shall we all hop into equities and place our trust back in the central bankers and captains of industry?  Go for a ride on Bernanke's and Obama's magic carpet?

[SgtSpike]

Interesting words.  What you've said very closely matches the 2011 crash.  Whether it'll continue going down now or not, I don't know... it's a bit difficult for me to say.  There's still lots of new services being created, lots of new people waiting to be verified and buy in, lots of venture capital flowing in to Bitcoin companies, etc.  I don't think we're even close to the level of the dot-com crash, simply because even still, hardly anyone knows about Bitcoin.  I think in the long term, Bitcoin will definitely go higher than $266.  It has to, to become more useful.  Will we see a months-long slump before we get there?  Maybe...

[Maged]

This was cult-like behavior:  rather than believing someone who was bearish had analyzed the data and come to a different conclusion, and that perhaps you could learn from this person, the bear took on a moral quality.  He was a bad guy.  One might even say he was evil.  He's probably motivated purely by nefarious intent.  If he got enough people to disbelieve, those people would convince their friends, and the whole thing would snowball. 

We saw this effect on these very forums during the last mania. Bears were called trolls and silenced.

The sentiment now is not like that. There is much greed, yes, but there is also much fear. Greed might be stronger, but not much so.

...did you even read this thread?

Also, most of the arguments in this thread about how this isn't a bubble can be summarized in two words: "Because Bitcoin". That phrase means just as much in most situations as "because the internet" does - nothing at all.

[antimattercrusader]

Well written post. Thanks!

Healthy skepticism is always important. Never invest more than you can afford to loose, especially in something as experimental as bitcoin.

That said - I for one am in long, and I will hold till the cows come home. I believe in the principal of bitcoin, and feel it's something humanity needs disparately, and in the end will see the current prices as cheap. However, my strategy since I bought in at $5 was to pay cash for a house or hold until I retire. Will I get my house? Or I will I get a retirement? That is the question in my mind.

[nrd525]

Great post.

20 years ago, I invested money in the Toronto Stock Exchange 300 index - thinking it was a broad index, only to have Nortel Networks be 25% (or more?) of the index - and then that stock ended up losing 99.5% of its value.

The mania is here.

The bitcoin surge/bubble does have the key difference where there is positive feedback.  The surge/bubble increases news stories which actually increases the user base and the value of bitcoin.  This is very different from tech stocks where the news bubble didn't increase value.

This means we're likely to get an even bigger bubble, and that the higher the bubble goes the stronger its support level will be when the bubble/surge collapses.

[Cryptoman]

Thanks for sharing your thoughts, Alonzo.  I see troubled waters ahead for the world's debt-based economies, so I'm not keen on investing in stocks either.  I do think we may temporarily see more upside to equities as inflation kicks in.  I may pick up more physical gold in the next few months if the price bottoms out.  As for Bitcoin, I've always viewed it more as a tool than an investment, so I'm not too worried about downside risk.  It will be interesting to see how Bitcoin, Ripple and Open Transactions work together (or independently) to rewire the world's financial infrastructure.  These are exciting and unpredictable times in which we live.

[Impaler]

I think the price will converge to a low-mid 100s price over a few weeks.  Then we'll have 12-24 months of a slow burn, possibly down to a price of $25-$50.

Disclaimer: I'm probably wrong, and anyone who uses my thoughts to guide their trading deserves to lose all of their money.

One more thing:  I still think Bitcoin is awesome. I think it will eventually reach thousands of dollars in price.  I hope it changes the world and creates a better civilization.

I'm broadly in agreement with that, I think we are seeing a repeat of July 2011 bubble and crash, ware we saw a loss of about half the peak price in the immediate aftermath, followed by a gradual decline to about 1/10th the peak over the next 5 months.  While that sounds terrible it was really only a rollback to what the price had been 1 month before the peak.  The same rollback today would but the value at 50 dollars.

[jubalix]

Oh no it dropped to over 105 from 266, after rising 1000%, and it bounced well......its all a storm in a teacup that will look like a blip on a curve in a years time

[damnek]

Oh no it dropped to over 105 from 266, after rising 1000%, and it bounced well......its all a storm in a teacup that will look like a blip on a curve in a years time

I advise you to read the OP another say 10 times. Let it sink in.

[jubalix]

Oh no it dropped to over 105 from 266, after rising 1000%, and it bounced well......its all a storm in a teacup that will look like a blip on a curve in a years time

I advise you to read the OP another say 10 times. Let it sink in.

Yeah, big diff is no Helicopter Ben Printing billions a day to bail out the companies.

he is doing that for me!

[damnek]

Oh no it dropped to over 105 from 266, after rising 1000%, and it bounced well......its all a storm in a teacup that will look like a blip on a curve in a years time

I advise you to read the OP another say 10 times. Let it sink in.

Yeah, big diff is no Helicopter Ben Printing billions a day to bail out the companies.

he is doing that for me!

You repeat the same narrative I've seen over and over on this forum.

[MashRinx]

Yet very few people actually made money on it.  Certainly not the average joe.  99% of those dot-com mania companies don't exist today.  One of the intents of my post is to say that, yes, something can be super-

I enjoyed your post, but this is false.  Thousands, perhaps tens of thousands of new millionaires were minted.  I personally know several who made a fortune during that time.  Some may have blown it afterwards, but that's another story.
...

Didn't Mark Cuban make a billion on some sports website and buy the Mavericks?

Cuban made a huge amount of money when he sold Broadcast.com to Yahoo and then timed the selling of his Yahoo stock very well, before the price crash.  Broadcast.com was not the first company he grew then sold though.  You can find on YouTube an interview of Cuban on Stern's show in Feb, and in that interview he goes into that a bit.  It's a good listen.

http://www.youtube.com/watch?v=Wl230QL_tSc

[Neverest]

Great post Alonzo, never mind the trolls and thanks for taking the time to share.
I was inside one of those companies, there was internal inflation as well. As most companies could no longer afford the astronomical salaries of new employees, they started promising stock options.
As you know, these are worth nothing as long as there is no stock, but people invested their time in those internal bubbles.

Comparing Bitcoin with the Internet and it's 'boom, crash and rise' is senseless, as at no point in time could you buy or invest in the Internet. Bitcoin's largest problem is the volatility, meaning it won't ever be accepted as a safe currency by merchants, as the risk is higher than their profit margins. We will need a very long period of stability and then fluctuations that are similar to teh current USD/EUR fluctuations. Anything more and it will fail.

One reason many people decide to buy (those people that should make you alert), is because now even in Europe the interest on savings accounts is lower than the inflation, so saving will cost you value at the moment. Then again, not as much as when buying something at $250 and selling it at $120..

[jubalix]

Oh no it dropped to over 105 from 266, after rising 1000%, and it bounced well......its all a storm in a teacup that will look like a blip on a curve in a years time

I advise you to read the OP another say 10 times. Let it sink in.

Yeah, big diff is no Helicopter Ben Printing billions a day to bail out the companies.

he is doing that for me!

You repeat the same narrative I've seen over and over on this forum.

no rebuttal, merely recital