One year after the peak, what lessons can investors draw from Bitcoin’s collapse?

“It is almost a year to the day (18 Dec’ 17) since Bitcoin peaked at $18,941, for a market value of $328 billion but the euphoria of 12 months ago has long since faded. After another failed rally, Bitcoin has almost halved again since the start of September to leave the cryptocurrency at $3,493, just above where it was in August 2017, before the mania took hold,” says Russ Mould, AJ Bell Investment Director.

“This brutal bear market looks like so many that we have seen before across a wide range of asset classes. A succession of rallies have tempted true believers and speculators alike to hold on, or even dive in again, only for those surges to become vicious bear traps, leaving holders of the cryptocurrency facing deeper and deeper losses.

“Since last December’s peak, Bitcoin has forged five major rallies but to no avail. Each one has ended with a lower high than the prior attempt and each one has then given way to a new price low.

Source: Refinitiv data

“This cruel pattern also developed when the technology, media and telecoms bubble burst in early 2000. On that occasion, America’s technology-laden NASDAQ index attempted multiple rallies but at least eight of them failed and dragged investors deeper into the mire before the benchmark bottomed in March 2003 after a top-to-bottom loss of 75% (which compares to the 82% fall already seen in Bitcoin).

“Note also that NASDAQ peaked in March 2000 and it only recaptured that closing all-time high of 5,049 in April 2015. Even if Bitcoin is over the worst, it may be a long road for those who piled in near the top.

“This all begs the question of what is the next potential portfolio pitfall that awaits investors.

“Applying Sir John Templeton’s maxim that ‘Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria’ then the most dangerous areas could potentially be where investors are already heavily exposed and hopes are highest. Perhaps this means the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet – which have already slipped into bear market territory.

“The FAANGs’ aggregate market cap peaked at $3.5 trillion in September and has since slipped to $2.7 trillion – 21% below the high and just 5% higher than a year ago, despite the acres of positive commentary they have received during the interim. The chart of their combined market caps also shows a succession of failed minor rallies, characterised by that killer sequence of lower highs and lower lows.

Source: Refinitiv data

“The good news for bulls of these stocks is that the last low in November was marginally higher than its predecessor.

“If that breaks the run of dips that could be a good sign for FAANG fans, as it may break that historically ominous run of failed recoveries.

“All eyes will be on both the US Federal Reserve – whose drive to increase interest rates and withdraw Quantitative Easing has done so much to dampen risk appetite – and the companies’ next set of quarterly results in January, when they will need to provide further strong growth in sales, profits and above all cash flow to help to justify what is still a mighty aggregate market valuation.”

These articles are for information purposes only and are not a personal recommendation or advice.