The crypto-bulls have regained their mojo now that Bitcoin is at $11600, though $2000 below its most recent peak. While financial history tells me parabolic moves always end in tears, the current euphoria does not surprise me. Facebook’s Libra announcement gives the crypto-currency hype a touch of badly needed class. Risk appetites have gone bananas now that the Chicago Volatility Index (VIX) has tanked to 12.6. The US stock market trades at a record 19 times earnings. The G-20 summit in Osaka averted new 25% tariffs on $300 billion in Chinese exports to the US.
The Powell Fed and Draghi (soon to be Lagarde) ECB have cooed dovish sweet nothings to the financial markets. Unlike Dutch tulips in Rembrandt’s Amsterdam, crypto-currencies have been resurrected from the black hole of irrelevance after their brutal flameout in 2018-19. Bitcoin, for instance, has almost quadrupled in value since it bottomed at $3000 in early March 2019. More significantly, unlike last time, this speculative mania in crypto-currencies is not driven by retail investors, who were wiped out in the millions after bitcoin plunged from $20,000 to $2800 between December 2017 and December 2018. Satoshi Nakamoto is now a global celebrity, even if nobody knows whether he is man, beast, hologram, the ghost of a slain samurai or a computer algorithm.
Bitcoin is a digital currency not manipulated by any government – for now. It is not exactly a useful store of value since it trades up and down like a demented rollercoaster. It is a joke as a medium of exchange or a standard for deferred payments. The network “miners” do not exactly inspire the trust generated by a superpower’s central bank, like the Fed or the ECB. Crypto-currencies are abused by terrorist financiers, tax evaders, dictators of sanctioned nations (North Korean army officers are paid in crypto, just like US college campus drug dealers) and Latin American narco trafficante cartels.
Even though Bitcoin futures trade on the Chicago Mercantile Exchange, most crypto-currency exchanges are open to fraud, manipulation, abuse by insiders, money laundering and tax evasion, the reason many governments have banned trading in this speculative asset that is finance’s latest version of Russian roulette. I remember a single $35 million Bitcoin sell order on Coinbase led to a brutal selloff in May to $6000, wiping out $32 billion in crypto’s big enchilada.
Global central banks and regulators like the US Financial Stability Board are skeptical about bitcoin’s prospects – and can well destroy this embryonic threat to their monopoly power/seigniorage rights with a stroke of the legislative pen. It is absurd to compare the unregulated, hyper-volatile, semi-criminal crypto trading ecosystem, dominated by offshore cowboys and con artists (70% of all ICO’s are frauds!) to Libra, designed to be a stable private currency for 2.4 billion Facebook users, backed by Treasury bills and bank deposits, a stable digital coin embraced by a corporate constellation that includes Visa, Mastercard, Paypal, Uber and Lyft but no banks (why?). It is like comparing a pedigreed thoroughbred horse who wins the Epsom Derby to a wild feral mustang in the Nevada desert.
Will this bitcoin rally end in another ghastly meltdown and 80% bear market, like the doomed 2017 crypto bubble? Yes, it will. My Gen Z twins (toddlers when Daddy was deal hunting in Silicon Valley’s dotcom madness) have now turned into fintech philosophers and assure me the US dollar is doomed and crypto is the wave of the future. I quote them J.P Morgan’s dying words – never, ever, bet against America. This is a warning Saddam Hussein, Colonel Gaddafi and the Soviet Politburo should have heeded when they strutted on the world stage in their time.
So will digital money transform the global banking and payments system? Absolutely. I spent a week in Nairobi, Kenya, the land of M-paisa. I have French friends whose blockchain technology based auction marketplace for virtual/digital assets could well prove a ten- bagger investment or an acquisition candidate for Sotheby’s, Christies, Ebay or Amazon. The global remittance market, dominated by daylight robbers known as retail banks, foreign exchange houses and unlicensed hawala crooks, is ripe for disruption – but I predict a stable coin like Libra will do it, not the crypto – gunslingers.
Does the world need an alternative, safe haven currency? Sure. My grandfather trusted ten tola gold bars, my father trusted only Citigroup (but thankfully not its shares. The Citi never sleeps but was almost wiped out in 1991 and again in 2008), I trust global megacap equities on the NYSE and derivatives on the Chicago Board Options Exchange. My twins will embrace Libra as the first human generation reared entirely on the Internet, Harry Potter, Lady Gaga and, sadly, Nicki Minhaj!
True, the US Treasury and White House have weaponized the US dollar, access to the US banking system and the New York capital markets. China and Russia have tripled their central bank holdings of gold and sold $400 billion in US Treasuries in the past decade. So what? The charmingly misnamed Free World still runs on the dollar standard, the currency of our lifetimes. I remember another J.P. Morgan insight, seared into my consciousness “Liquidity is like a cab on a rainy night in New York. It disappears when you need it the most”. I know this viscerally. I lived six years in Greenwich Village, the boho enclave in lower Manhattan trading money for money – or as Mickey Rouke tells Kim Basinger in 9½ Weeks “some would call it arbitrage”.
I feel terrible about retail investors in the Gulf. It seems as if they exist just to be fleeced by Swiss money/leveraged debt brokers (aka Private Bankers), insurance scamsters, crypto-criminals and even witchdoctors who cast magical spells to “double your money”. Crypto-madness, like the wolf of Wall Street, is a predator targeting the financially illiterate. Regulators? Who saved the smart money investors in the Gulf from the colossal Abraaj fraud? Definitely not the regulators, whose silence is eerily deafening.
The price of Bitcoin correlated almost perfectly with Google search results for the term “Bitcoin”, clear evidence of a retail speculative mania in the 2017 bubble. Bitcoin peaked at 20000 in December 2017 at the same time as it peaked at 100 on the Google Trends tracker. Its Google Trends score is barely 20 now, so the correlation coefficient with the price of Bitcoin has broken down.
Investors cannot handle the gut churning volatility of Bitcoin or counterparty risk in opaque, easily manipulated exchanges. Is this a credible source of value? Is kryptonite your next asset class of choice? “Markets can stay irrational a lot longer than you can stay solvent”, John Maynard Keynes warned us eight decades ago. So do yourself a favour. When the urge to speculate in Bitcoin possesses you, just go to Jumeirah Beach and tan yourself in the sun until the urge goes away.
