Thursday, June 29, 2017

Bitcoin Breakout Coming…

Since the FED created their QE game of charades, the “markets” are no longer real – none of them.  Unlimited quantities of “money” are thrown at them from all central banks around the globe.  Heck they even have Janet Yellen convinced that up is the only direction the markets will ever see again in her lifetime!

This boundless supply of limitless “money” has now hit the mathematical fixed quantity of Bitcoin and Litecoin – my two favorites because of their fixed quantity.  I liken the unlimited supply of “dollars,” “yen,” “Euros,” “Yuan,” and all other “currencies” around the world, to an F-4 Phantom Jet Fighter going well over 500 miles per hour.  Well, that F-4 Phantom just hit the Rock of Gibraltar – the unmovable limited quantity of Bitcoin.

The Rock of Gibraltar is not in a bubble, it is the F-4 traveling at near the speed of sound that is the bubble!  This will become evident as the collision between the two plays out over the coming years.

Keep in mind that we're not just talking dollars, the Yuan is the largest player in this space by far - note that they don't call it the Renminbi for nothing! Literally translated it means “The People’s Money” in Chinese.


The market for Bitcoin was previously so small, but growing so fast, that applying technical analysis (TA) to it was pretty much pointless.  But over the past few months I have been noticing that reliable patterns like Head & Shoulders were playing out according to known TA rules.

I keep money in Bitcoin, Litecoin, and Ethereum, not to speculate, but as a store of value.  But that doesn’t mean I’m not paying attention to the TA formations.

I see a reliable pattern playing out now – it’s called a pennant.  This pennant WILL resolve not later than about July the 5th (remember that Bitcoin trades year round without “after hours markets” or holidays), and it is a big one!

The run into a pennant is called the mast.  This formation resembles a flag, which is similar to a pennant, but shaped as a rectangle, not a triangle.  Both the flag and the pennant are consolidation sideways moves.  The rule for both is that the entry direction, in this case up, will be the same as the exit direction.  And that the length of the mast will be equal into and out of the pennant or flag.

I believe this mast began at about the $1,200 level and ended at $3,000, thus this pattern is worth about $1,800 on a break higher.  So in this case, IF THIS FORMATION IS VALID AND BREAKS HIGHER, then I will be looking for Bitcoin to proceed to roughly the $4,300 level, and that it will take approximately two months for it to get there (a proportional amount of time).

This is interesting to me because the bond market has just made a significant move higher, while stocks have cast off a six Hindenburg Omen cluster (showing internal weakness), one of the necessary ingredients for a stock market crash, and at minimum higher odds of a significant decline.

Bitcoin did not exist during the last financial crisis, so we do not know how it will behave in the next.  My guess is that speculators who hold Bitcoin may need to initially sell them to raise dollars to pay other “investment” losses.  But overall I would expect those who hold dollars to want to move those dollars to safe haven.  Where is it safe?  Bitcoin.  Why?  Because it’s secure and it’s a store of value because it has a fixed quantity, unlike tulips or dollars.


A word about interest rates.  I think most analysts have this wrong…  Mathematically our macro economy is saturated with debt.  Mathematically adding more debt to a saturated system does not promote real growth, it actually destroys growth because new “money” that is created has to go to service the debt and to pay interest to bankers who made the “money” from thin air.

As we raise rates I expect that the differential in rates between the U.S. and the rest of the world INITIALLY will cause dollars to repatriate thus INITIALLY fueling the “asset” bubbles higher.  This will, and may have already, run out of steam.  Once dollars stop repatriating, then the expected slowdown will occur again caused by the math associated from higher interest burden on an already saturated environment.  Yes, you read that right.  Creating more debt OR raising interest rates BOTH will create a negative math situation beyond the short run.

For those new to the diminishing returns of debt phenomena, here is what I call the Chart of the Century up to the phase transition that occurred in 2009 - 2010:

QE toyed with the numbers and produced this more current chart:

Bitcoin is limited in quantity to 21 million – ever.  Litecoin is limited to four times that amount, or 84 million.  Thus once all coins are in circulation, the ratio should be 4 to 1.  In other words, if Bitcoin is $4,000 per coin, then Litecoin theoretically would be worth about $1,000 if that ratio holds.

But only two weeks ago that ratio was close to 100 to 1.  Today Bitcoin is at about $2,560, and Litecoin is at $41.13, or a ratio of 62.24 to 1.  I expect that mathematically this ratio will close over the coming years to get closer still to that 4 to 1 ratio.  That means that I expect Litecoin to outperform Bitcoin in percentage gains from this point forward in the long run.  For example, over the past month Bitcoin has risen 16.81%, but Litecoin has risen 68.92%.

Below is a chart showing a correlating Litecoin flag formation to Bitcoin’s pennant:

Litecoin’s mast appears to me to be about $28 long!  If it breaks from say $40, then I would expect a target of $68.  That would be a 70% rise which is very comparable to Bitcoin’s target – again, IF it breaks and behaves as TA would expect.


Ethereum is NOT limited in supply, unlike Bitcoin and Litecoin.  For this reason it may or may not be a weaker store of value.  But it does have better transactional value, a trait that may carry it very far indeed as several major banks and even countries are looking to incorporate Ethereum onto a transactional basis.

It’s performance over the past two months has been astonishing, but it has stumbled recently.  I own Ethereum, but wish it had both transactional athleticism and a fixed maximum quantity.

I see the same flag pattern playing out in Ethereum now:

The mast on Ethereum is proportionally longer than either Bitcoin or Litecoin – I measure it to be $280 long!  So if it breaks from $290, then that mast length
would be targeting $570, a 96% rise!


I think these three cryptocurrencies will all head higher as the math of unlimited quantity smashes against fixed and truly secure quantity.

We will see if these formations play out.  The track record is very short, so I will not be that surprised if they don’t.  I would not take action until a clear break is made up and out of those formations.  If they break below the formations, I will personally do nothing but add to my positions as they reach key support levels.