Friday, January 17, 2014

Bitcoin and the magazine cover indicator

It had to happen sooner or later and this week it finally did.  

The Bitcoin phenomenon made the front cover of a major news magazine when Bloomberg Businessweek ran a story on the intricacies of Bitcoin mining.  The impressionist art on the front cover was evocative of the dream of fabulous wealth entertained by many Bitcoin enthusiasts.

The question that naturally comes to mind is whether or not this qualifies as a legitimate "magazine cover indicator" and does it therefore have predictive value?  Historically, whenever an investment craze makes the front cover of a major magazine it reflects the saturation of that investment and implies that the value of said investment has (temporarily at least) overextended.  A "correction" or decline in the investment's value often follows soon thereafter. 

Bitcoin is a bit different than more classical investment crazes, however, and requires an entirely different set of tools to evaluate it.  The appearance of Bitcoin on theBusinessweek cover likely doesn't signal the end of the craze -- especially since the vital ingredients of full-fledged mania status are missing, viz. strong institutional and hedge fund involvement and widespread public participation.  What the cover could signify, however, is the commencement of an extended "internal correction" in Bitcoin's value.  

An internal correction can be defined as a lateral trading range-type market in which consolidation takes place over an undetermined length of time.  This would give Bitcoin a much-needed rest and would also take some of the heat off the market by removing it from the mainstream media spotlight.  This is necessary from the vantage point of the hedge funds who need a dull, uneventful market in order to quietly build a substantial position.  

Don't be surprised, then, if Bitcoin posts an underwhelming performance for a while.