1. Everyone is interested in Cryptocurrencies
Most people (especially in developed countries) have already heard about Bitcoins. However, even though some people may talk about Bitcoin, many studies have shown that only a small percentage of people actually own any Bitcoin. According to a 2,000 person study done by Finder.com, less than 5 percent of Americans own Bitcoin. Although Bitcoin has taken over media outlets by storm, it’s still a very small phenomenon.
For perspective, the market capitalization of all cryptocurrencies (below $250 billion as of August 2018) is less than one-quarter the market cap of Apple, which has a market capitalization of more than $1 trillion. Therefore, when everyone starts becoming interested in cryptocurrencies all at once—i.e. friends, family members, co-workers—it should be a major red flag that something is wrong.
2. Celebrities start to promote (shill) cryptocurrencies
Similarly, when celebrities suddenly jump on the bitcoin bandwagon—either promoting Bitcoin or other ICOs (initial coin offerings)—you should also be aware of a possible crash. Here are some examples of crypto-related celebritiy endorsements that took place during the height of Bitcoin’s bull run in late 2017:
3. Increased media coverage (especially if all news is positive)
Back in late 2017, traditional media outlets such as CNBC, Bloomberg, and Fox Business started increasing coverage on crypto-related stories to the point where you couldn’t watch the news without hearing the word “Bitcoin”. When this happened, a record number of people started talking about and buying cryptocurrencies, driving prices to insane levels. Between November 17 to December 17 2017, Bitcoin prices increased 250% from about $7,800 to nearly $20,000 at the peak.
4. Garbage coins are obtaining insane valuations
Shortly after Bitcoin prices reached its all-time high of $20,000, prices tanked very quickly falling 50% within a 30-day period. Leading up to this market correction, there were a lot of “garbage” coins with no use case that, in hindsight, were clearly ponzi schemes, yet raised a substantial amount of money. One example is Bitconnect (BCC), a lending platform that became one of the top 20 cryptocurrencies at one point in 2017 until it was suspected of being a ponzi scheme.
5. Investors (including yourself) start to brag about high returns or feel overly confident about the market.
“If it sounds too good to be true, it probably is”. Remember this saying whenever you deal with anything in life, especially when it comes to cryptocurrencies since prices tend to fluctuate often and increase unexpectedly. Furthermore, when prices are increasing 5-10% per day for an extended period of time, you should be cautious and worried because “what goes up must come down”. You should also consider reaping profits on the way up (i.e. selling a portion of your holdings for every 20-25% increase in price) instead of tweeting about how much money you made last week.
Back in June 2017, Mark Cuban said it best in this infamous tweet:
As we head into the next bull cycle, it is important to keep these 5 intuitive red flags in mind. If you start to notice 1-2 of these red flags, you should be mindful of where the market is and how it has been performing recently. And by the time you have spotted 3-4 of these red flags, you should be nervous and consider cashing out some profits. However, if you can spot all 5 red flags, sell immediately and be prepared for a short or long-term market correction.
Bitcoin can be a great investment if you think it has a 10% chance of becoming a long-term trusted store of value. Nevertheless, cryptocurrency is still a very risky investment and investors should only invest a small portion of their portfolio in the asset class and keep a close eye on the markets at all times.
“B2B reporter – Content Manager – Contributor – Fintech – Blockchain – Cryptocurrency”
Simon Chou is a B2B reporter and content manager specializing in technology and finance. He has worked with many clients in the fintech and blockchain space. He holds investment positions in bitcoin and other large-cap cryptocurrencies, and has been reporting on cryptocurrency since 2017. Currently, Simon is the content manager for a major cryptocurrency exchange @HybridBlockHQ.