What to take from the recent Bitcoin collapse

The past couple of days has seen some serious volatility in Bitcoin and other cryptocurrencies. Many, including Bitcoin, lost over 40% of their value and although the carnage seems to have halted for now, what are the broader ramifications?

The main point to note is that when ANY market goes parabolic, and starts to make exponential gains, the correction is usually swift and the declines significant. No market that’s gone exponential stabilises at the highs. No one knows where that peak will be made until after it’s been put in place, but it’s usually very short lived.

What other markets potentially risk a sharp correction? You don’t have to look far to find another market that’s shown unbelievable resilience and relentless gains way past what many would consider fundamental value. That market would be US stocks. Now let’s be very clear here, we are by no means calling a top in US equity markets, as stated above, no one knows just how high they may go, but valuations are extremely stretched and many of the US index’s also look to have been making exponential gains, albeit not on the level of the crypto currencies. I think it’s fair to say the air is pretty thin up here for stocks and when the gains do dry up, the market is not going to simply consolidate at these elevated levels. We are much more likely to see a sharp correction lower.

For now, the US economy is in a sweet spot with very low unemployment and solid growth. Trumps recent tax plan success has also added to general positivity amoung business, so the near-term outlook remains very upbeat. But stocks are currently priced for perfection and it may not take much to prick the bubble. US interest rates are on the way up with the Federal Reserve expected to hike rates another 3 times this year. As interest rates climb it’s going to be harder and harder to justify extremely high valuations on stocks.

2018 has started off with a nasty correction in cryptocurrencies which could well be a precursor to much broader market volatile through the year.