Fan Yang
All posts from Fan Yang
Fan Yang in Fan Yang,

Bitcoin - Phases of a Mania and a New Paradigm

Bitcoin has been on a rollercoaster ride since 2013. It went from prices around 10 to 250, then dipped back to 100 before taking off to 1163 by the end of the year. This might seem like a fluke, but this chart is actually quite fitting for a "new instrument" or a "new paradigm". Here's a look at a generic "mania" chart created by a professor of Economics at Hofstra University.

(click to enlarge)

Now take a look at the bitcoin chart since 2012:

(click to enlarge)

Let's begin our comparison from the first stage:
1) Before we all knew about bitcoin, this virtual currency was the darling of many hackers, and particular computer, code, savvy individuals. Some vendors accepted it, and it was even used in the black market for who knows what. The point is, bitcoin came from humble beginnings, priced around 10 during the stealth phase.
2) During March to May in 2013, price rallied above 250 before falling and consolidating around 100. This was the first wave of awareness and first sell-off. Bitcoin started to pop up in industry magazines.
3) As publications with more reach like WSJ or NYTimes started to give bitcoin more attention, we got into the media attention and enthusiasm phase, taking bitcoin all the way up to 1163.
4) This final rally was accompanied by success stories of how many were able to make a fortune holding on to bitcoin in 2013.
5) Then by the end of the year, price started to fall sharply. This is the exhaustion or capitulation stage.
6) Now price has a new low of 275, and one has to wonder if we are in the despair stage. If we start to hear stories of how bitcoin is a failure and how it might not be viable, and start to hear about the reasons why bitcoin has fallen so sharply (other than simply pointing to capitulation), then we might be in this despair stage. This might be the time to finally pick the bottom.
7) If price starts to stabilize for a couple of months, we can start considering bitcoin as entering the "return to the mean" stage. Getting in early in this stage might be a prudent investment IF you believe bitcoin is indeed here to stay.