Over the past couple months, I have fielded a number of calls and emails related to Bitcoin’s meteoric rise in price. These calls and emails request my advice and insight into what I think about Bitcoin. So, I thought this newsletter would focus a little more of my attention on Bitcoin. My intent is to give my honest opinion as a trader and an investor. Both are not one in the same, although many take it as such. A trader typically tries to profit from short-term price volatility. The positions a trader holds could last anywhere from a couple of seconds to weeks. On the other hand, an investor is someone that takes a longer-term approach to the markets. Short-term volatility typically does not play into their strategy.
A Short History Lesson.
Back in the 1990’s the Federal Reserve provided easy monetary policies which helped create the gigantic technology stock bubble of 2000 that eventually erupted, and pushed the US into recession. In order to combat the recessionary pressures, the Federal Reserve decided to push interest rates to historically low levels of 1%. This eventually set the stage for the housing bubble and massive credit binge. As history shows, this led to the 2007 housing crisis, which then caused the Global Financial Crisis.
The Global Financial Crisis was the worst recession since 1929. It caused the Federal Reserve to once again, step in and cut rates to 0%. But, this didn’t work. So, the Federal Reserve decided to take an alternate course in monetary policy. They decided to print money.
This money printing scheme was called Quantitative Easing. This wasn’t the first of it’s kind. Money printing has been tried a number of times in history, but it has always failed. The difference this time is that the amount of money printed is unprecedented. Unlike the monetary policies of the 90’s and 2000’s which provided asset bubbles in very specific asset categories, such as technology stocks and real estate, the current monetary policy of the Fed has caused asset bubbles in almost every asset category throughout the world. Last month a Leonardo da Vinci portrait sold for $450 million or 2 1/2 times the record amount of any painting ever sold. I don’t know much about art, but $450 million seems like a lot of money for oil on canvas.
But, there’s one bubble that’s on everyone’s mind. It’s a bubble that makes the Dutch Tulip Mania or the South Sea stock bubble pale in comparison. It’s like nothing I’ve seen or read about before. It’s the insane world of cryptocurrencies.
To Infinity and Beyond!
At the beginning of 2017 Bitcoin stood at $950. It’s up over twelve-fold in just over 11 months. Since November 12, 2017, it has doubled in price. During the dotcom mania one of the fastest growing bubble stocks, CMGI, blasted off 904%. Guess what? Bitcoin destroyed it. Less than six months ago the total value of the cryptocurrency world was just over $100 billion. It’s now worth $327 billion. I think everyone understands why it’s the talk of the investment world.
As any trader will attest low volatility doesn’t make for a good day in the markets. As we have seen this year volatility has all but dried up. We are at historical lows for volatility. I won’t rehash the whole volatility trade, as you can read about it in November’s newsletter. My point is is that for a trader to make money there needs to be some short-term price volatility. Where have traders been able to find volatility, speculate, and make money? Correct, cryptocurrencies. It trades aggressive, it moves a ton, and the structure of the chart makes many technical analysts drool. There have been some amazing setups to make an amazing amount of money. Many have. Cryptocurrencies have been great speculative plays to take advantage of short swings in price.
A brilliant technical analyst by the name of Peter Brandt has been very involved in setting the stage for short-term opportunities in Bitcoin and Ethereum. Below is a great example of the type of trades he touts. He has been incredibly accurate due to very well known technical setups that stand the test of time. His most recent call is below. As I write this newsletter the price of Bitcoin stands at 12,741. Peter might be spot on once again.
Now, with all that said I’m not advocating that you go out, set up a coinbase account and get your speculation on. You better be damn good at speculative short-term trading and understand what you’re trading. Ya, some people get lucky, but mother market has a knack for knocking the luck right out of you when you least expect it. My bottom line is that this market has been a breeding ground for professional short-term traders and some lucky traders to profit from. I have no problem with it, so if you know what you’re doing and you’re making money, keep killing it. From a trading standpoint, I don’t have any negatives to complain about, except that some novices need to be careful with trading this speculative market. So, let me tell you what Bitcoin isn’t.
But, Ghostface Killah Has One.
The prospect of infinite riches from Bitcoin has lured some of the entertainment elite. These include Paris Hilton, Mike Tyson, Dennis Rodman, and the rapper Ghostface Killah. Many of them backing various cryptocurrencies with suspect business prospects with names like Cream and PotCoin. Some notorious individuals such as James Altucher (tech bubble cheerleader) and John MacFee are calling for Bitcoin to be worth $1 million by 2025. But, is there any lasting benefit to Bitcoin besides the blockchain technology? I guess no one knows for sure, but I have my opinion and Fred Hickey says it beautifully.
Mr. Fred Hickey states…
“I know what Bitcoin isn’t. It is not a coin or gold as it is typically depicted in the media’s illustrations of it. It is not something that is “mined.” It is not growing in use as money to buy things – trade confirmations are too slow, the costs to process the transactions are too high (there are often additional fees charged on each transaction) and each transaction is considered an asset sale according to IRS rules and should be reported as a gain (or loss). For these reasons, none of the major retailers (Wal-mart, Target, Amazon, etc) accept Bitcoin as payment.”
“Bitcoin is not a ‘store of value.'” Stores of value (such as precious metals and great works of art) are tangible, (they’re real), they have intrinsic value and they’re limited in number. Cryptocurrencies, the most prominent being Bitcoin, are like fiat money – conjured up out of nowhere in unlimited quantities. Coinmarketcap.com today lists 1,326 different cryptocurrencies and the list grows longer nearly every day.”
Recently, there has been news of institutional buyers entering the market via Bitcoin futures. Over the coming weeks and months CME, CBOE, and the Nasdaq markets will be dipping their toes into the Bitcoin pool. For professional traders, this may be the best way to manipulate, er play the market. For the novice crowd, be careful what you wish for…
As a professional futures trader myself back in the early 2000’s I have seen some amazing games played in the futures markets. Let’s take Gold as an example. As Mr. Hickey states,
“As we know, these futures traders regularly (and brazenly) attempt to generate stampedes into and out of gold by manipulating the price (both higher and lower) by selling and buying massive amounts of futures contracts (billions of dollars in notional value, but with relatively little money down), often in a matter of seconds in order to manipulate the price in the direction they desire.”
So, what’s going to happen in a market much smaller than Gold, like Bitcoin? Manipulation by big ass future traders. My guess is that these futures traders are more likely to pop this massive bubble than propel it further. What’s to stop the ride down? It’s not like there’s a physical market for Bitcoin to buoy the price. As Mr. Hickey states,
“Gold owners know that there are always lots of physical gold buyers around the world (Particularly in the East) who will come in and buy gold on dips. The physical markets for gold are a limiting factor for the futures traders. That will not be the case for Bitcoin. There is no physical market for cryptocurrencies because cryptos don’t exist – except in electronic form. When futures traders start their stampedes there’s nothing to stop them. The collapse in cryptocurrencies is inevitable.”
“…If I woke up tomorrow with my head sewn to the carpet, I wouldn’t be more surprised than I am now” – Clark Griswold
Speculation throughout history has ended in the same way each and every time. This bubble will end in a massive and uncontrolled sell-off that will catch 99.9% off guard. Everyone thinks they can get out in time. Think again. In the book “A Short History of Financial Euphoria” John Kenneth Galbraith states…
“They (the speculators) are in to ride the upward euphoria; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall. For built into this situation is the eventual and inevitable fall. Built-in also is the circumstance that it cannot come gently or gradually. When it comes it bears the grim face of disaster. That is because both of the groups of participants (the new era believers and the superficially more astute) in the speculative situation are programmed for sudden efforts of escape. Something, it matters little what – although it will always be much debated – triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.”
I have a vivid memory of seeing this type of scenario play out. It happened to me early in my career as a futures trader. As I mentioned, I started out trading the Dow Jones Futures contract in the Chicago Board of Trade pits in the early 2000’s. At that time the Dow was trading around 7,500. I started trading in the pits right after the tech bubble. This scenario was a little different in that the Dow wasn’t in any sort of bubble, but the concept is the same.
I remember the day like it was yesterday. I stepped into the pit around 7 am and stood by my normal position, the second step from the top. On very rare occasions I would hold positions overnight if I had a good reason to. At this time, I had a good reason to. I was short 5 Dow Futures contracts. At that time the Dow Futures would move in 5 tick increments. Each tick was worth $10. That meant that every move made or cost me $250. I wasn’t a big trader, but the position was sizeable to me. The charts told me that the slide was going to keep going. We had an economic number that was coming out early in the day at 7:15 am. I remember hearing that this particular economic number would be in line with expectations, so I kept my short position.
7:15 am came and the economic number came through much better than expected. The Dow rocketed up. Shorts tried covering. We couldn’t. The market was moving too fast. I tried to find a seller. Nothing. My stomach dropped. I felt physically ill. The market kept moving skyward. After what felt like forever I was finally able to offload my position with the largest loss of my career.
I guess my point in telling this story is that this type of spiraling trade happens all the time. The difference is that bitcoin may be the biggest bubble of all time. When it does pop those that are still in the swimming pool will drown. Those that trade or invest in Bitcoin, be safe, smart, and keep those gains. The old tried and true, Gold, might be your best line of defense.
I want to personally thank all of my readers for your support. Here’s to hoping everyone has a wonderful Holiday Season!
Other Stories of Interest:
- A World of Pure Imagination – Grant Williams (30 Minute Video)
- Is the Swiss National Bank the World’s Largest Hedge Fund – Equitable Divergence
- Paul Tudor Jones: “Markets arereminiscent of thebubble of 1999 and on the verge of significant change.
- Neil Woodford: “There are so many lights flashing red that I’m losing count”
- ETF buyers are making the same mistake that led to the financial crisis.