Is bitcoin bubble really 'just about to burst'?

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Is bitcoin bubble really 'just about to burst'?

Plus ├ža change. We are back where we were last week, with bitcoin again hovering at $8,200, a support level we've identified previously.

A lot has happened in between though, with bitcoin buried by a welter of bad news, where the fallout from the fate of the "weak hands" who had their fingers badly burnt in the implosion of last year's rocketing market, continues to hang over the price action.

As we have been at pains to point out, failed attempts to get back above $11,500 would be bearish and now, with $8,000 support under threat again, $5,500 could be the next destination if the current support breaks, as we have been suggesting this year.

Bitcoin is currently trading at $8,183 on the CoinDesk bitcoin price index, with Ethereum at $602, off 11% and 15%, respectively, for the week.

Returning to our two favourite technical indicators - the 50-day and 200-day simple moving averages - a "death cross" is approaching where the 50-day (red line) moves below the 200-day (blue line). In our chart below you can see even more clearly how critical that is when the trend line for support (dashed purple) is added - it is shouting "lower, lower" too. We are using a log chart that compares percentage change with previous time segment.

Source: tradingview.com               Past performance is not a guide to future performance

Google bans crypto ads

This week's battering was turbo-charged by Google revealing it is banning crypto advertising from June, although its main target was CFDs, spread betting and spot forex. Its ban is likely to hit crypto much harder than other high-risk markets because of the role played by digital in fanning interest in the nascent asset classes.

The ban is comprehensive, explicitly highlighting Initial Coin Offerings (ICOs), exchanges and wallets for attention.

Google's change in policy follows the lead of Facebook, which banned crypto ads in January. Together, the two companies pretty much own online advertising and their crypto-unfriendliness could act to suck the air of interest out of the industry, although the falling price is probably the most important factor in the regard. Searches on Google for bitcoin have slumped at roughly the same rate as the fall in transactions on the network.

Allianz Global Investors, the insurance and fund management group, added to the crypto pain with a repeat of the no intrinsic value line and no yield either, interpreting the current price retracement as the death pangs of a failed currency.

Head of global economics and strategy at Allianz, Stefan Hofrichter, reckons "its intrinsic value must be zero" and that bitcoin "ticks all of the boxes" of a classic bubble and is "one that is probably just about to burst". You don't get much more bearish than that.

Christine Lagarde, the International Monetary Fund boss, also weighed in, saying crypto represented a "potentially major new vehicle for money laundering and the financing of terrorism" and that the financial authorities would have to "fight fire with fire".

However, Lagarde was not all negative. "We can harness the potential of crypto-assets while ensuring that they never become a haven for illegal activity or a source of financial vulnerability," she added.

At the same time as Lagarde was invoking her fire fight, the US Congress House of Representatives financial services subcommittee held a hearing on cryptocurrencies, and the tenor of remarks was a mix of scepticism and concern.

US Congressional hearing berates crypto industry

"Cryptocurrencies are a crock" declared Brad Sherman. He was particularly harsh about ICOs: "They stole the intellectual property and trademark of legitimate investing and applied it to a fixed, fraudulent gambling scheme of no social benefit."

There are many scams in the ICO space. One of the latest, allegedly, is Viuly.com, which is a clone of the legitimate decentralised video project called View.ly. Regulation is urgently required, and it is the legitimate players that are being harmed and tarnished by the fraudsters.

Chairman of the finance committee Bill Huizenga put the crypto community on notice: "This panel, this Congress is not going to sit by idly with a lack of protection for investors."

Despite the perception that regulation would be negative for the sector, it is more likely to be a positive development and will help to broaden the base of market participants.

And looming over all the developments in the market is the uncertainty as to what exactly the regulators are planning to do. We may get a clearer idea on that front at the G20 meeting in Argentina next week, where the finance ministers and central bank governors of the top industrial nations will be meeting and have already signalled that crypto is on the agenda.

Miners in a hole

But the challenging price performance of crypto is bad news for bitcoin miners. One prominent crypto analyst on Wall Street think the breakeven for miners in the US is $8,000.

"Bitcoin currently trades essentially at the break-even cost of mining a bitcoin, currently at $8,038 based on a mining model developed by our data science team," said Thomas Lee of Fundstrat in a report.

Most mining, however, still takes place in China, despite moves by some local authorities in the country to limit the electricity usage of leaders in the field such as Bitmain. Cheap hydro-electricity in Chinese Mongolia has fuelled the growth of miners, but even there, a price below $4,000 would spell trouble.

Miners' earnings have dropped 50% since December.

If miners go offline, it means there are less computers working (measured as hashing power) to verify transactions. As a result, to make sure there are enough miners willing to do the work the difficulty level falls.

And now for the good news

Much of the good news in the crypto markets this week has been seemingly buried, and there were some notable developments.

Payment start-up Circle rolled out crypto trading to 46 US states. In the UK a new exchange set up by the UK's largest crypto exchange, Coinfloor, announced that it would start trading bitcoin futures.

CoinfloorEX will trade the new futures product which, significantly, differs from its CME and CBOE counterparts in being a physically delivered futures instrument and not cash-settled.

In other positive news, US exchange Coinbase has finally been able to enlist the services of a UK bank, with Barclays coming on board. This will make withdrawals from the exchange far easier for its UK customers who previously had to have their bank accounts approved on the system by sending a small payment to the Estonian bank that Coinbase uses for its European operations.

Bitcoin to get faster

Looking to bitcoin fundamentals, perhaps the most important development was the launch of a beta of Lightning Labs implementation of the Lightning Network that could go some way to solving bitcoin's scaling problem, which means it is not a very good means of payment.

It was revealed this week that Twitter and payment company Square founder Jack Dorsey is a major investor in Lightning Labs, as is Litecoin creator Charlie Lee. Lightning Labs is led by co-founder and chief executive Elisabeth Stark.

Additionally, SegWit is now being used in 30% of transactions, which is a healthy development for the bitcoin network because transactions can be handled more efficiently with the software tweak. SegWit has been available since August last year, but exchanges and wallets have been cautious in making use of it.

*interactive investor's cryptocurrency analyst Gary McFarlane picked up the award for Best Cryptocurrency Writer at the ADVFN International Financial Awards 2018.

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