I don’t like to talk about Bitcoin much, because most people don’t care about it and the people who do trade it act like they are in a cult and if you don’t tell them things that confirm their beliefs they will lash out at you. But over the past few days Bitcoin has done something that gives everyone a message, including someone like me who has no position in it and and no interest in ever trading it.
We have seen over the past few months a massive rally in Bitcoin that caused it to run up over 100% in only 30 days and five times in price over just a few months. Market moves that fast are rare and when they happen they cause new people to pile into the market in a manic manner towards the end of the move to be a part of the action. As you can see from this chart of Bitcoin and the 30-day price rate of change indicator at the top the last time it moved this fast in 30 days was way back in 2017 when it peaked before its last epic crash. It also got close to this level of upward price movement back in July of 2019 just before it peaked for over a year.
The reality is massive surges up that bring in waves of new buyers lead to epic tops and over the past three trading sessions Bitcoin fell 20% from its most recent high. That’s a big warning for Bitcoin people. I saw the Bitcoin drop of 2017 and you probably did too, but many people buying it and other crypto currencies are doing so for the first time in the past few months and are not familiar with how these things can go into an epic collapse from time to time.
Bitcoin has already fallen 20% in just the past three trading sessions and this is the type of wobbly action that it makes when it starts to top out. This wouldn’t matter to us not in it if it wasn’t for one other factor and that is the indicator at the bottom of this chart.
What this indicator is showing is the correlation of Bitcoin with the S&P 500. It’s at 0.82 and the correlation with the Nasdaq is over 0.90. This is important as a -1.0 reading would mean it trades completely opposite to the stock market whereas the closer the reading is to 1.00 the closer it trades with the US stock market.
People who push Bitcoin and crypto on to you claim that you should invest in it as a “safe haven” that can go up when the stock market drops and will one day replace the dollar. The reality is Bitcoin has displayed zero price correlation opposite with the US dollar in it entire existence, but instead is most closely correlated with the movements of the US stock market and the Nasdaq in particular than any other market or asset class in the world.
In other words Bitcoin trades as simply an amplified more volatile version of the US stock market. It does this because it is simply an instrument of speculation, like an options contract on Tesla or other fad favorite volatile stock.
In fact when the stock market has had corrections of simply 15-20% Bitcoin has completely crashed. Basically while some people increase their bets and take on more risk in the stock market by going on margin or piling into call options others by crypto currencies as way to speculate more and increase their risks by buying something extremely volatilite.
So this sudden recent rally in Bitcoin and then 20% instant drop off the high is a warning sign for us that the stock market itself may be getting more risky as it appears that the crypto run is now overbought and has exhausted itself. It is a sign that extreme speculation in the financial markets might be getting ready to experience a bout of profit taking – and when we have record margin debt in the stock market and recent signs of manic behavior, such as the WallStreetBet Gamestop story, then I think it is time to be extremely cautious on buying lots of new stocks for the moment.
The Bitcoin plunge is a warning sign for us.
I see no reason to make big buys until the next stock market correction plays out and in fact it might time for some people to take some money off of the table and for anyone prudent who may be on margin to get off of it immediately! I’m not saying the stock market is about to crash, but it can easily pull back at least 10% from a high and maybe even 20%. It dipped 20% in the Fall of 2018 and did so in 2015 too. Just about every single year there is at least one ten percent correction. I’m also not saying it has to happen right at this moment, but with everything happening there just aren’t great reasons to buy until it does happen. The time to have bought a lot of new stocks was last year, not now, and not when yields are rising and Bitcoin is dumping off of a high.
I was thinking that the stock market would not really have a correction until the second half of this year, with the volatility overall shrinking until then, but I could be wrong on this – it could correct earlier than I thought.
And either way there is no great reason to dive into a lot of new investments and stocks in the US stock market until it does happen. The Bitcoin dump is what happens when you buy things AFTER they have run-up for months without having a pullback. So buy AFTER corrections play out and not after giant rallies! Wait for the buy point to come to you, don’t force one now.
I did a new video in my series of education Stock Trading 101 videos. In this one I attempt to explain how the stock market really works to someone new to it. There are three simple patterns at play in any market and in this video I show you what they are and why they exist. Everything else you do in trading and even investing must derive from knowing this in order to work – strategies people use in the market must build off this in order to function or else one is just throwing money at things randomly.
To grab my book Strategic Stock Trading click here.
I started something new last week and that is I am opening up my daily morning posts at the bottom for comments. My goal is to make this a water cooler type spot where we can talk about the markets together and share ideas. Check it out. If you got any questions or comments just scroll on down to the bottom of this post. It’s fun. If you are reading this on a mobile phone it might just be a little box that says leave a comment that you need to click to read the comments (I’m trying a wordpress plugin today that loads the pages faster on mobile phones as more and more people are using phones and apps to do everything).
-Mike
