Jamie Dimon, the unanointed king of Wall Street and chief executive of New York banking colossus JP Morgan did not mince his words. He called bitcoin “a fraud”, a speculative bubble comparable to the Dutch tulip mania of the 17th century and declared he would fire any trader at his bank trading in the cryptocurrency “in a second” for “stupidity”. This has only reinforced the bloodbath in bitcoin, which has plunged 30% from its recent peak of $5014 on 2 September saddling credulous “investors” with $20 billion losses. The Economics 101 definition of money includes that it be a medium of exchange, a store of value – and a currency whose US dollar value plunges 25% in six consecutive sessions is obviously a poor store of value or medium of exchange. The world’s central bankers and securities regulators have also begun to crack down on bitcoin. The Chinese government banned its use as a unit of account in initial public offerings on the domestic stock exchange. Even the DFSA, the regulator of Dubai’s international financial centre, has issued a warning to the public against bitcoin fraud.
Gold was accepted by humankind as a store of value, de facto money, millennia ago and the gold standard once anchored the monetary policies of Britain and America. The rise of sterling as a global reserve currency correlated with the British Empire’s role as the sole global superpower after the battle of Waterloo in June 1815. The US dollar replaced sterling as the world’s dominant reserve currency after the United States emerged as the world’s banker and military/economic hegemon after World War Two. The $5 trillion daily turnover foreign exchange market, the Eurobond market, the IMF special drawing rights, global trading in oil and commodities, World Bank project finance lending and the syndicated loan market all backed by the US dollar, which in turn is backed by the “full faith and credit” of Uncle Sam, history’s wealthiest and most powerful issuer of paper currency. Bitcoin, in comparison is a joke, a cryptocurrency prone to speculative mania, with daily volatility that exceeded 10% in a single session last week. This is no unit of account. This is no medium of exchange (try paying for a Dubai taxi ride with bitcoin!). As more central banks ban its use, bitcoin will become even less convertible than a Third World banana republic’s currency. Cryptocurrencies have been used in the dark web by terrorists, drug dealers and money launderers, making bitcoin classic fool’s gold or, as we say in Wall Street, the ultimate sucker’s bet. It is only a matter of time before cryptocurrencies are banned by governments worldwide and become worthless.
As in any speculative bubble, the only winners will be those who get in early and got out well before the bubble burst in September 2017. This will be a miniscule fraction of current bitcoin investors. Most investors will be, sadly, wiped out. There are dozens of cryptocurrencies that are in the pipeline that use blockchain technology. Sooner or later, the world’s most powerful governments will collude to destroy this embryonic threat to the usage and value of their national currencies. This much, at least, is certain.
As I wrote last week, the Japanese yen depreciated sharply as risk sentiment stabilised while the prices on the ten year US Treasury note bond plummeted. The US dollar, more than two sigma (standard deviations) below its 20 day moving average, was a no brainer buy once the yield on the ten year Uncle Sam note rose 17 basis points from its panic lows. In essence, despite another North Korean missile launch over the Sea of Japan and the US demand for draconian UN sanctions on the Pyongyang regime, the yen fell against the dollar as interest rate spreads widened. Hurricane Irma’s fury was spent over south Florida and the Trump White House gave strong smoke signals of an imminent tax reform deal.
It is significant the President Trump dilute his demands for North Korea sanctions in the UN to achieve Chinese and Russian consent for a unanimous vote in the Security Council. The North Korean volcano is still active and can erupt on the world financial markets at any time.
Sterling’s spectacular surge is related to the British Chancellor of the Exchequer’s statement that the UK will seek a transition period in its negotiations with the EU, de facto soft Brexit, though the strong August CPI reinforced the sterling bulls. However, negotiations with the EU will not progress seamlessly and the currency market is disproportionately positioned for a base rate hike from the Bank of England.
