The Legacy Of 2017 Into 2018 Vis-à-vis Bitcoin

January 7, 2018

Bitcoin is the biggest market phenomenon that 2017 experienced and the question is what will happen to Bitcoin – and by implication to all the other crypto-currencies – in 2018. There is widespread opinion that Bitcoin et al is the ‘new money’. That in turn raises the question to what extent Bitcoin can fulfill all the roles that can be expected of ‘good money’. While many people have made large amounts of profit with Bitcoin, the answers to that question, discussed below, appear to indicate that even more people will lose money during 2018.

Money is a convenient medium of exchange and to be useful in this role it also has to meet certain other requirements. It has to be frangible, resistant to deterioration over time, be a safe store of value and also can serve as a unit suitable for financial accounting. If it can’t meet these requirements it cannot be more than merely an asset, perhaps different from the many other kinds of assets, but not ‘real money’.

Bitcoin is frangible and resistant to physical deterioration over time. However, there are many instances of client wallets at brokers being emptied by hackers; which is worse than gradual deterioration. It is doubtful that it will ever be used as units for formal financial accounting, which limits its usefulness as a replacement for what the government has decreed to be ‘real money’.

As a safe store of value, it seems certain the number of people who will invest their lifetime retirement funds in one of the crypto’s will be a very small minority. It was profitable to remain ‘invested’ in Bitcoin while its price ran from a few dollars to $20 000. However, now that the price is fluctuating 10% and more in one day, who will go on vacation without it being essential to follow closely how his Bitcoin is doing?

As long as the price of Bitcoin continues to fluctuate wildly, who can really afford to continue to accept Bitcoin as payment for goods or services? Can a car dealer afford to sell a car for Bitcoin at its list price if by the next day the price of the Bitcoins in his wallet had fallen by 10% or more? Who can be so brave to continue to operate as a retailer for the longer term with such uncertainty? It was hunky dory when you could sell a car or anything else for Bitcoin at a time when the price was rising all the time, but will any retailer continue to accept Bitcoin while its price is so volatile, perhaps even to settle in a sustained down trend?

Another question is to ask what Bitcoin offers the holder. The possibility of making a profit only attracts speculators and traders and their activity almost certainly will guarantee that the price will continue to fluctuate. That makes it no better than the tulips of the Dutch tulip mania. Some people may invest for the long term, hoping the bull market will continue, which can only happen if the pool of new and eager buyers continues to grow, despite the evidence now that Bitcoin is vulnerable.

For many people, a belief in its anonymity is attractive, as long as banks and other financial institutions do not record Bitcoin transactions on behalf of the authorities. It has been reported that criminal elements are deserting Bitcoin in favour of other crypto-currencies that offer even greater privacy, but will the average person be as desperate for privacy to conduct business in an expensive crypto-currency that may not enjoy as wide acceptance as Bitcoin or cash?

Finally, what price will people be willing to pay for the non-speculative advantages of Bitcoin, once the price has settled in a narrow range? There is no basis for even a wild guess on what that price might be. It seems unlikely, once speculative fever has dissipated and all who desire to own Bitcoin has acquired a stake, that its price will remain some thousands of dollars – not when most holders can be expected to start spending their Bitcoin, no longer hoarding it to try and make more profit.

Compared to Bitcoin, except for the latter’s meteoric rise that may have ended, the precious metals offer significant advantages – more so if one has direct ownership and control of the metal. Might it be that recent increased interest in gold and silver could be a result of a switch from Bitcoin to precious metals by wealthy speculators in the crypto’s? There are many that have made large profits and who may want to keep their new funds outside the fiat money system. To do so they have to invest in something that offers longer lasting and more certain value – and which perhaps offers them a second bite at a strong bull market?

Should this really be happening, further sideways volatility from Bitcoin and lack of a clear new favourite among other crypto-currencies should draw further attention from crypto-millionaires to sustain the recent bullish performance of the metals.

Wall Street is relegated to lower down this week’s discussion, not because the DJIA and other indices have failed to perform, but because achieving new all time highs is no longer breaking news. 2018 has started with Wall Street in turbo mode, rising steeply from the serial all time highs towards the end of 2017.

The stock market is beginning to look like the start to 2000, moving steeply higher with few significant corrections or long hesitations. In 2000 this trend did not last very long, with the market peaking in March of that year.

This time the bull market has lasted much longer than the run higher into 2000 and the trend has been much steeper. It is not clear to what extent funds coming home from foreign safe-keeping and corporate stock buy-backs are boosting the stock market. One has to question how long this trend can continue unabated, given that the economy is not (yet?) booming and with the threat of higher rates soon.

2018 is setting up to be a fascinating year. It is a brave commentator who dares to state a definite view on how the markets and their trends will perform in 2018. At least it seems we will not suffer from boredom.

Euro-Dollar

Euro-dollar, last = $1.2030 (www.investing.com)

The rally off the bifurcated break below line M ($1.0932) easily broke through the resistance at line R ($1.157), but then stalled at and reversed lower off resistance at line D ($1.2042). Rebounding off support at line R again, the euro has managed to challenge resistance at line D again.

There is ample room for further sideways movement before support at the bottom of bull channel KL ($1.1416) can be tested. The dollar has been trending lower for the past week or two and if this continues the euro could managed a break above line D to extend its new trend. More likely though, is a sideways move to remain below line D and probably well clear of line R.

DJIA

A completely new analysis was done to accommodate the very steep trend of the DJIA since it rebound off the support of line S (18 128) in 2009. A second rebound off line S early in 2016 sparked a new leg of the bull market that closely followed steep trend line L (24 171). A lasting break clear below line L would be a first sign of new weakness, but there is no indication that this will happen soon.

The intra-day behaviour of the stock market still suggests that dips in the market find ready buyers to push the price to higher levels. This could be normal behaviour of perma-bulls, except that the sudden and sustained very high turnover since the election suggests a fundamental change in the market where bears are not allowed to take control. It suggests that some new bullish force has joined the market.

DJIA, last = 25295.87 (money.cnn.com)

Gold PM Fix - Dollars

Gold price – London PM fix, last = $1317.15 (www.kitco.com )

So far, 2018 has extended the rally in gold that had started late in 2017. Managing to break above the resistance of lines D ($1271) and L ($1285) cleared the way to the $1300 level and when this was easily penetrated, it also meant a break above the large and unfinished pennant SG ($1301).

This pennant is the final large formation in this analysis that had to be broken for a new bull market to become established. The break higher is a positive sign, but the rising trend now has to extend and overcome all attempts to suppress and hold the price of gold back below the important $1300 level.

Euro-gold PM fix

Euro gold price – PM Fix In Euro, last = €1094.3 (www.kitco.com)

The improvement in the price of gold was, as usually happens, off-set to a degree by the gains of the euro against the weaker dollar. Nevertheless, the euro price of gold could manage to break and hold above the resistance of line C (€1076) as well as marginal breaks above lines Z (€1093.8) and T (€1092). Gold has to outperform the dollar for these breaks to hold and extend.

Silver Daily London Fix

Silver also extended its gains during the first week of 2018 and managed to break marginally back into bull channel KL ($17.03). While this is a positive sign, silver, like the euro price of gold, has to hold the break and extend higher to inspire any near term confidence in the metal. The bias remains bullish while the price holds above lines B ($15.93) and R ($15.57) but it will be better if channel KL can hold.

Silver daily London Fix, last = $17.155 (www.kitco.com)

US 10-year Treasury Note

US 10-year Treasury note, last = 2.476% (www.investing.com )

The bond market rally managed a brief break above the resistance at the top of channel XY (2.468%), but then retreated again. The squeeze between lines X and L (2.423%) continues, with line D (2.455%) also contributing some support. A break from between lines X and L has to happen soon and, if the talk of fresh rate hikes early in 2018 continues and gain credibility, the break – when it comes – should be to above line X to extend the recent bear trend.

Such a break would imply an extended move higher to reach market support at line R (2.662%) and the top of channel CD (2.663%). Doing so will have the yield near the highs of early 2017, probably with significant effect for other markets.

West Texas Intermediate Crude. Daily Close

WTI Crude – Daily Close, Last = $61.44 (www.investing.com )

The price of crude has been holding close the steep support of line F ($59.37) for some time, creeping higher along the support line, but stalling for some time below the resistance at lines C ($59.02) and R ($60.50). 2018 has seen the price finally rally to break above this resistance and still holding clear of line F.

Line F is steeper than the lower boundary of the broad bull channel KL ($54.61) so that a break below line F is not necessarily an end to the current bull trend. For that to happen, the price has to break below channel KL.

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