27.11.2017

The Great Cryptocurrency Bubble

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Volatility has dipped under 10 in the stock market but reached much higher levels with Bitcoin. Since January 2017 the price has skyrocketed from just over US$1,000.00 to more than US$ 8,600.00. Daily transactions are over $2 billion.  Ethereum is trading at over $420 with a capitalization of 42 billion. There are now over 1,000 cryptocurrencies that have made their appearance, and the number will probably increase just as the number of apps has reached great heights. The Dutch tulip mania bubble of 1637 may be topped by the cryptocurrency craze.

            Such a rapid price increase, however, could be considered to be panic buying with investors trying to get out of fiat currencies and into what they think is a safe haven. What the central bankers think about this new development is not at all clear even though the PBoC has put an end to ICOs in an effort to stem the outflow of cash that was weakening the renminbi. What is clear is that central banks will not go softly into the night and let Bitcoin replace fiat currencies worldwide without attempting to stem the tide. The IMF will not want SDRs to become irrelevant in the global financial system. Just how governments will tackle the rampant growth of cryptocurrencies is difficult to predict although the Chinese example is a first step. One way of hemming the new money is not to accept it for taxation purposes. This would be one way of keeping demand for fiat currencies high.

         Gold has been subject to market manipulation in order to keep the price low and disqualify the yellow metal from being treated as a currency. The BIS has intervened on the gold futures market by dumping large numbers of contracts at untimely hours and then buying back the contracts at lower prices, thereby making a neat profit. So far the BIS has not been brought to heel by any court with the charge of fixing or manipulating the market price. Central bankers do not go to jail.

         The case with Bitcoin is somewhat different since at the present time it is difficult to short Bitcoin in large amounts although this would change if a futures market is instituted. The central banks would then do their best to bring down the price of any digital currency that threatened the fiat currencies so as to discourage investors putting money into it just as has been the case with gold.

            If at the moment “smart” money is going into Bitcoin and the price may even go up to $10,000.00, staying long will become increasingly risky the more the capitalization of the “new” money increases. We still expect a strong correction or crash in the stock markets and now foresee a dark global future for cryptocurrencies. Do markets ever stop going up or is the sky the limit?

Walter Snyder    

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