There were hundreds of tech companies formed during the tech bubble in 1998 to 2000. It seemed that anyone starting a business based on the Internet and had an i in its name would have VCs competing to throw money at them. Companies just had to show they had eyeballs, and not revenue, to justify absurd valuations.
Revenue was secondary and profits were something that would be generated down the road, somehow. Public companies would split their shares and they would move higher, even though the underlying fundamentals and valuations had not changed. Sound familiar?
Morgan Stanley’s Strategist, Sheena Shah, believes there are similarities between Bitcoin and the Nasdaq during the tech bubble. Both had huge increases in value and have fallen dramatically. Bitcoin seems to have collapsed in the same manner.
In the chart below it shows the Nasdaq from June 1994 to June 2002, or over 8 years. The timeframe for Bitcoin is February 2017 to February 2018, or 1 year. If Bitcoin follows the same pattern it could be around $1,500 in a few months time frame.
Shah’s report includes analysis of the Nasdaq’s peaks and troughs and compares them to Bitcoin’s. While it is a limited dataset he found some disturbing similarities in that:
- The four trough to peaks for the Nasdaq averaged 40%
- The three trough to peaks for Bitcoin have averaged 43%
- The five peak to troughs for the Nasdaq averaged a decline of 44%
- The three peak to troughs for Bitcoin have averaged a decline of 47%
Shah’s analysis is similar to Stefan Hofrichter who is Allianz’s Head of Global Economics & Strategy. He has developed 8 criteria to determine if an asset is in a price bubble, which Bitcoin is showing similarities to a number of them.
On the other hand Tom Lee, currently the Head of Research at Fundstrat and ex-J.P. Morgan Chief Equity Strategist, believes that Bitcoin is in an oversold condition per his Bitcoin Misery Index and that it could reach $91,000 by early 2020. However, he isn’t surprised that Bitcoin is having troubles as it has experienced large declines before.
Cryptocurrencies due for a shakeout
There are over 1,500 cryptocurrencies, with more than 1,200 of them springing to life in the past year per icobench.com. Coinmarketcap.com shows that less than 100 of them have a market capitalization over $100 million, over 1,000 of them are less than $5 million and about 400 of these are under $100,000. It seems that hundreds of them are on life support and could have been fraudulent in the first place.
As can be seen in the chart below, in the past 12 months there has been a feeding frenzy to start them with over 1,300 coming into existence, raising over $8.6 billion. This has led the SEC to issue multiple warnings to investors to exercise extreme due diligence before investing in them.
Bitcoin continues its downtrend
Bitcoin is testing its recent low and looks to continue its multi-month downtrend from its December high. During most of Friday it traded down to about $6,600 and as of Saturday early morning has bounced back to around $6,850.