Morning Market Thoughts

by DAN Good morning. Just a very quick note today.

Stocks are set to open a bit higher today as stocks just seem to be melting higher. No big moves (other than $ROKU), but no big selloffs either (other than $SQ). There is a LOT of chatter in the media about Bitcoin hitting $10,000. It’s the typical talk about the parabolic move in cryptocurrency that will ultimately end badly. That’s always a distinct possibility and it pays to be mindful of the risk associated with buying rocketships with booster rockets that are still creating more acceleration. These things always go farther (and faster) than people imagine. Recent “predictions” of BTC moving to $10,000 have shot for several months from now. Instead, that key level is probably going to be reached today. As I’ve previously noted, the “float” in BTC is 21 million coins, though the current true float is a much lower number. So as demand heats up, the price skyrockets because of the finite supply. It’s the Price-Action-Emotion Cycle that I discuss in Technical Analysis for Non-Technicians.

Price moves and that sucks in more buyers who want to get in on the action. They get emotional and just buy! That buying begets even higher prices, which sucks in more emotional buyers. It’s a positive feedback loop. Folks get excited and develop a confirmatory bias, where every upward move confirms their belief (i.e., hope/wish) that BTC will move higher into infinity and they’ll be a millionaire quite soon if they just load up now. The price moves even higher…and they put more money in.

Finally, after all the aggressive buyers are done buying at such lofty prices, the new BTC futures market kicks in and the big sellers rear their angry heads and knock BTC down 40% overnight.

Seriously, it could happen. Look what happened to Square.com (SQ) just yesterday. Down 16% because an analyst said that the Bitcoin payment app was overblown. Boom! The weak hands got skittish and created a cascade of selling.

Your protection? Two things:

1. Reasonable position size (devoid of emotion); and
2. A stop loss that defines your maximum loss.

With respect to Bitcoin — it’s about as liquid as you can get. It trades 24/7 and never gaps. So if you are on a BTC trading platform, you can place a GTC limit order. This allows you to always define your risk. A lot of folks wish they had done that back in 2000 when QCOM looked a lot like BTC. When the stock finally reversed, it fell hard! And it left a lot of wannabe millionaires holding stock that no one else wanted.

Look at Bitcoin as a teaching tool. Watch what happens when a true bubble starts inflating. Ultimately it pops, and it pops loudly. But you never know when that’ll happen. With BTC, it could happen at $9,990…or $49,990. No one truly knows…but you can truly define your exposure.

Be careful out there.

–Dan

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