by Ivan Martchev

June 29, 2021

Bitcoin traded down to $28,800 last week, but as far as breakdowns go, this intraday trading below the 30K level does not really count. For $64,000 to be the “mother of all tops,” bitcoin needs to take out 30K more decisively and then get some momentum to the downside. So far, that has not happened.

BitStamp Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

My view – that we are experiencing a plain vanilla crash – is not just based on the fact that there were two head-and-shoulders tops juxtaposed on top of one another, but those events bear examination. The first head-and-shoulders top with a sloping neckline right near 50K already produced its downside target (65K head minus the 15K distance to the neckline at 50K), the equivalent of 35K. The second, more ominous and much larger head-and-shoulders top has a neckline at 30K and the first (smaller) head-and-shoulders top acts as its head. If the second head-and-shoulders top breaks convincingly, the target for bitcoin is -$5,000 (negative $5,000!). Basically, bitcoin disappears – like a dying Dutch tulip in 1637 Amsterdam.

For bitcoin to disappear, it needs to be outlawed, which is now happening in major countries like China, India, and Turkey. I think there will be more such actions taken, for the simple reason that no government in their right mind will give up control of its own financial system – Ecuador excluded. On the other hand, Ecuador does not have its own money. They would rather use U.S. dollars.

Like a Dutch tulip bulb, bitcoin does have some utility, as it can make efficient cross-border transactions. But since it can bypass regulated financial systems, it has made powerful enemies, not the least of which is the Chinese Communist Party – and I would not put the Federal Reserve in its circle of friends, either.

The other problem with bitcoin is that an increasing amount of leverage pushed the price higher this year. This is one reason why it got cut in half so quickly, and I think it could crash quite a bit more. There is 100:1 leverage in bitcoin, and nobody knows how much larger some leverage is, as it trades unregulated over the counter. In some respects, it is similar to the leverage investors used to be able to get on Wall Street before the 1929 crash, which was 10:1, but bitcoin has margin account holders whose leverage is 100:1.

Dow Jones Industrial Average Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I find it rather peculiar that the Dow in 1929 also had two head-and-shoulders tops juxtaposed on top of one another, and when the second neckline broke at that initial low in 1929, the wheels came off the wagon all the way until 1932, resulting in a drop of nearly 90%.

For bitcoin that second neckline is around $30,000.

Can Crashes Be Predicted? (Revisited)

Over six years ago in this column, I wrote a piece on April 28, 2015, called “Can Crashes be Predicted?” dealing with the ongoing bubble in Chinese stocks at the time. That was the second time the Chinese were experiencing a bubble in their stock market (the first was in 2007).

As I predicted, China’s market crashed in 2015 and it hasn’t recovered since (blue line, below).

Shanghai Composite Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Below, I’ll repeat my column calling the crash in the Shanghai Composite six weeks before it happened, since there are quite a few similarities with bitcoin. This piece is no longer available in the GlobalMail archives, but this is a complete reprint, for your reference:

Can Crashes Be Predicted?
(from Navellier MarketMail April 28,2015)

by Ivan Martchev

Can one predict a market crash? I believe the answer is “absolutely yes.”

The topic came up in the office last week, since numerous bears have been predicting big declines for U.S. stocks over the past year. In reality, however, we had just one V-shaped classic sharp correction in October of last year [2014] and by mid-November the market had fully recovered.

When a bull market correction gets going, it likely won’t turn into a full-fledged bear market if the economy is still improving and stocks are not hopelessly overvalued. Last October [2014], we had an improving economy and the S&P 500 decline stopped in the vicinity of a rising 200-day moving average, which traders in general deem as a serious area of support, where the bulls have to make a stand – and they did.

A crash and a big bear market are very different than a bull-market correction. They are much deeper by multiples, more prolonged, and much more serious in nature. They can turn a recession into a depression and devastate wealth on a massive scale. Crashes can be predicted, in my opinion. You cannot predict the day and the level when an index will make an all-time high and unwind the vast majority of its gains in a vicious bear market, but you can spot it early on and capitalize on the decline – there is nothing evil about short selling, if done the right way – or get out of the way so that you don’t get wiped out by the decline.

Could I give an example, the key question was put to me.

“I think the Chinese stock market will crash in the next 12 months,” I said.

This prediction shouldn’t come as a surprise. I have followed the unwinding of the Chinese real estate bubble here in MarketMail and in other media outlets. I have picked “three canary indicators,” two of which have shown serious signs of carbon monoxide poisoning – Soufun Holdings (SFUN) and BitAuto (BITA) – while the third, Noah Holdings (NOAH), has gone parabolic with the Chinese A-share market.

Navellier & Associates does not own Soufun Holdings (SFUN) and BitAuto (BITA) and Noah Holdings (NOAH). Ivan Martchev does not own Soufun Holdings (SFUN) and BitAuto (BITA) and Noah Holdings (NOAH) personally.

China Financial Markets Indices Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What has gone even more parabolic in China is the rate of new account openings. They are adding new investors at a rate of more than a million per week (the latest week soared to 3.26 million; the week before was 1.68 million). At the same time, the real estate market is gathering momentum to the downside and the Chinese financial system is operating on record leverage.

Overleveraged financial systems and busted real estate markets usually lead to much sharper economic slowdowns and severe recessions as well as deflationary shocks. Japan in 1990 and the Asian Crisis in 1997 are good examples. The U.S. in 2008 would have been another example, but a deflationary outcome of that event has so far been averted by truly extraordinary quantitative easing measures on a scale the world had never seen before.

Iron Ore Price Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

You can see the Chinese economy slowing down in the price of key commodities like iron ore, copper, and oil and the decline in commodity-based currencies like the Australian and Canadian dollars as well as the Brazilian real. The day of reckoning of a massive credit cycle that has been accelerating in China in the past five years is upon us.

It is not possible to guess the day when the Chinese stock market will crash as long as the authorities are opening stock trading links between China and Hong Kong and new Chinese stock trading accounts are being opened at a more-than-a-million-per-week rate. The Chinese authorities are also aggressively loosening monetary policy with reserve requirement rate cuts and other measures, but I think the credit cycle unwinding has gathered enough momentum to the downside that it cannot be stopped.

I personally think the Chinese stock market will crash in the next 12 months. I think the odds are high that this will happen sooner rather than towards the end of 2015. This is not a market where long-term investors should participate at the moment. I have nothing against trading Chinese stocks for a profit, driven by the “greater fool” mentality of those freshly-minted Chinese “investors” that just entered the stock market; but don’t forget to sell “too soon” rather than “too late.”

An economic downturn in China, driven by a busted real estate market, likely followed by a stock market crash, would be a profoundly deflationary outcome as China is the largest consumer of commodities and its trade relationship with the rest of Asia is more important than its trade relations with the U.S.

Ultimately, this means that U.S. long-term interest rates (like the 10-year note) might fall as low as the 1% mark as the effects of the Chinese unravelling spread globally. Meanwhile, interest rates in the greater Asian region – like those in Australia, a country that has a huge trade relationship with China – might do what the German bunds are doing at the moment, i.e., trading at ultra-low yields.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Bitcoin Breakdown Below $30K Is Inconclusive, So Far

Sector Spotlight by Jason Bodner
Are the New “Roaring 20s” About to Begin?

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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