As Bitcoin – and cryptocurrency as a whole – gains momentum, there is a growing craze around this new financial technology that leaves even the biggest historical economic bubbles in its shadow. With even Wall Street experts now forecasting enormous growth for Bitcoin, one financial analyst goes against the grain and warns of an imminent crash for cryptocurrencies based on the Elliot Wave Principle.
Historical Economic Bubbles
Perhaps the earliest instance of a financial bubble recorded by man, the Tulip Mania was a period in the 1630s in Holland where an exponential increase in the purchase of tulips by investors saw their prices skyrocket. With the rarest tulip bulbs turning into status symbols, speculation drove the prices of the bulbs so high that they were traded on Dutch stock exchanges.
At its peak, the worth of some bulbs was more than the cost of a luxury home or even as much as six times the annual income of the average worker. It all came crashing down in 1637, however, and people began to panic sell when the prices dropped by 99% leaving many people bankrupt.
Several other hopeful asset bubbles have been burst over the years, as well, such as Japan’s real estate bubble, the stock market bubble, the Dotcom bubble, and the U.S. housing bubble. Although the technology behind each of these bubbles had been significantly improved and advanced, none of them could survive the human mindset and psychology which has made no progress and still succumbs to the same pitfalls.
The Elliot Wave Theorist
Famous technical analyst Robert Prechter is credited with increasing the popularity of the Elliot Wave Principle after he brilliantly used it to predict the 1987 crash of the stock market as well as the cessation of the 90s bull market. He started a newsletter in 1979 called The Elliot Wave Theorist and his son Elliot continued his work further.
The Elliot Wave Principle, simply put, is a method of analysis to determine future performance of an asset in the market. Most notably, the occurrence of a fifth wave indicates a looming downwards spiral as all bull cycles span only five waves, after which there is a price correction that spans three cycles.
Elliot wrote about Bitcoin in his father’s newspaper back in 2010 when barely anyone had heard about the fledgling cryptocurrency, let alone invested in it. Its price has since risen from $.06 to a record high of $3025 in the 7 years.
— The Wolf (@WolfOfPoloniex) July 19, 2017
Last Thursday, Elliot, a financial analyst himself now, wrote in his father’s newsletter:
A bearish trifecta – the Elliott wave pattern, optimistic psychology, and even fundamentals in the form of blockchain bottlenecks – will lead to the collapse of today’s crypto-mania.
Bitcoin has started making the much dreaded fifth wave in the Elliot Wave model, and if history were to repeat itself, this could spell disaster for digital currencies in the near future. The mathematical model leads Elliot to believe that the more newly formed cryptocurrencies, of which there are over 800 different kinds, will face the brunt of this crash.
Bitcoin’s success gave birth to a lot of alternative cryptocurrencies, better known as ‘altcoins’, that were ‘pump and dump’ schemes rather than currencies built on a sound technological foundation with a long term view. In the midst of all the hype surrounding digital currencies, the role of such time-tested models that predict market performance cannot be understated. The use of these models is imperative to provide a balanced approach to counter the whirlwind of optimism that currently engulfs the relatively new world of cryptocurrencies.
Cryptocurrencies in the Long Run
Although both Bitcoin has been facing problems due to scalability issues, the BIP91 agreement seems to have at least temporarily prevented a Bitcoin blockchain split. The price of Bitcoin has soared to a monthly high of over $2900 and Wall Street experts have predicted that the cryptocurrency’s value is likely to increase dramatically in the near future. Bitcoin’s current position in many ways parallels with of the Dotcom bubble which was poised to shine just as brightly but crashed instead.
To avoid a similar crash, Bitcoin’s transaction fees need to be reduced as it is debilitating the effectiveness and value of transactions in this digital currency. The recent craze around ICOs needs to be monitored as well to avoid abuse of cryptocurrencies. Further, the lack of regulations regarding cryptocurrencies has resulted in a lot of price manipulation through the dumping of Ethereum and other coins.
There needs to be a framework built so that these cryptocurrencies are looked at from a broader perspective of replacing the banking system and fiat currencies, rather than just the short-term perspective of a get-rich-quick scheme. If they can be used to automate the legal and banking industries, cryptocurrencies have the potential to go down in history as revolutionary; if they burn out like other financial bubbles, cryptocurrencies will be labeled as just another mindless ‘mania’.
What do you think about the Elliot Wave Principle? Do you think the model’s prediction of an incoming crash has strong roots? How can the crypto-community come together to navigate through this time and potentially avoid a disaster? Let us know in the comments below.
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