Nº 2: Is Bitcoin the Modern Day Tulip Mania?

The cryptocurrency jumped from $7,870 to over $10,000 within 5-days. That is more than 27% gain in less than a week.

Rene Pronk created this illustration above to depict one the most famous economic bubble in human history, now remembered as Tulip Mania.

In the 16oos, excessive liquidity that the Dutch tradesmen held due to their massive gains from successful East Indies trades allowed them to spend money on luxuries. One of the most sort after luxury in the early 17th century Holland was tulip flower bulb, which was newly introduced in that part of Europe and caught the eye of rich businessmen due to its vivid colors and unique shape. Later on, various varieties were introduced in the market.

The tulip price soon became a speculative bubble first due to its popularity among elites, later mass crowd interest and finally irrational exuberance of investors trading it. Many men made and lost fortunes overnight. It reached a point where historians report that people were able to buy a house beside an Amsterdam canal for a price of a tulip. But like all bubbles, the price collapsed in 1637 to the intrinsic value of a flower bulb.

When I look at the bitcoin chart below as the price hits $10,000 milestone, it is reminiscent of the Rene Pronk Tulip Mania illustration. Only that the chart is still in its earlier half.

On a basic principle level, the price has to collapse at some point, unless bitcoin has found the holy grail to escape what even assets like gold, land, oil and stocks of the most successful companies have not been able to escape.

Bitcoin is far more fragile in my opinion. It derives its intrinsic value only from being an efficient technology based medium of exchange in a connected world and as a result being adopted by widespread public as a store of value. Its sounds fragile because all technologies becomes obsolete, and I don't see bitcoin having any fundamental intrinsic value on a longer term basis.

Beside this fundamental view, none of the technical indicators I am using are flashing red just yet.

I have been long bitcoin for last few weeks but the trajectory of the chart makes me nervous. I am now looking for opportunities to shift to the short side and start contrarian trades because the collapse or at least a major correction could be quite severe. This is not my usual method to make market entry but the bitcoin chart is also not usual. I tried a short side trade this morning but I was stopped out within 2 hours. I will be stopped out of few more.

While I am trying contrarian trades based on a fundamental view, I am aware of the fact that markets can remain irrational longer than you can stay solvent. Therefore, the lot size is small and stops are tight.