It's insanely overbought...
The rally is unsustainable...
When it cracks, look out below...
No, I'm not talking about the stock market. I'm talking about bitcoin.
Speculators have gone totally gaga over cryptocurrencies this year. Bitcoin has tripled in value since late March. A competing cryptocurrency called ethereum has zoomed from $20 to a high of $400 in just three months. Litecoin has enjoyed similar success, jumping from $4 to $40 over the same timeframe.
These short-term gains are impressive. But the cryptocurrency bulls are starting to get cocky.
This headline from a recent MarketWatch article says it all...
My favorite part of any mania is when the obscene predictions start rolling in. Back during the tech bubble of the 1990s, books with titles like "Dow 100,000" hit the shelves every other week. Now we have kids who are barely old enough to drive offering up outrageous cryptocurrency price targets.
But I have to ask -- why is our teenage expert stopping at $1 million?
Bitcoin almost hit $3,000 recently. What's keeping it from hitting $3 trillion? Your imagination?
Do NOT Deposit Another Dollar In Your Bank Account Until You Read THIS.
Luckily, a gold old fashioned flash crash is jerking the cryptocurrency world back to reality. At least for a moment...
Ethereum -- the most popular bitcoin competitor right now -- fell flat on its face briefly on Wednesday before rebounding.
But this was no ordinary flash crash. According to the exchange, a huge sell order hit. The market couldn't handle it and slipped nearly 30% as it executed the multi-million-dollar sale. That in turn triggered stops and margin calls, briefly pushing the price of ethereum to ten cents.
That's not a typo. The price of ethereum fell from over $300 to ten cents in a matter of seconds. The exchange halted and fixed the problem. But all trades were final. Some traders were completely wiped out. I read some sad stories on a few different forums about a few unlucky souls who were filled near the bottom of the flash crash.
Of course, someone else likely hit the jackpot if a buy order was filled at 10 cents. Ethereum is back above $300 as I type. Even a small order of the cryptocurrency could have netted a trader an instant fortune.
So why aren't we rushing out to recommend bitcoin trades? It's a question I get almost every single day from readers just like you.
My answer is simple: risk. I simply can’t wrap my mind around the risks posed by cryptocurrencies right now.
We're always arguing about bitcoin and its lesser-known cousins at Agora Financial headquarters. But even after all the discussion, I feel that I don't fully understand bitcoin, blockchain, and more importantly, how cryptocurrencies trade.
Can I trust that these "exchanges" are honest and transparent? Are they going to execute my trades properly? Will they fix the problem that caused the ethereum crash before something else goes wrong? I don't have the answers to any of these questions yet.
I also have concerns about government intervention. What happens if the government decides bitcoin is a threat? All it would take is a big push from the fake news and a little public outcry for the regulators to step and ruin the entire concept of cryptocurrencies -- possibly even outlawing them...
"Money laundering. Illegal transfers. Moving money outside of U.S. sanctions. Funding offshore accounts. Funding illegal online gambling... are just a few of the HUGE black-market forces that underpin bitcoin," my colleague Matt Insley wrote in his controversial bitcoin takedown. "Bitcoin will undergo the standard lifecycle of development... and I believe that will include swift, sweeping government regulation. Similar to gun control, car insurance, cyber regulation and more..."
I can't argue with that logic.
At this stage of the game, bitcoin and its cryptocurrency cousins have made some forward-thinking investors a lot of money. But judging solely by its recent price action and all the hype it has received, I think the entire cryptocurrency market is going to have to start dealing with some growing pains.
That could mean wild price swings, bad order fills, crashes, and even exchange failures. As a trader, these risks just aren’t worth the potential reward right now.
The stock market is offering us countless opportunities to profit this year. Let's stick to what we know best and continue to pull in double-digit gains from our winning trades...
This article originally appeared on Daily Reckoning.