Currency
I’ve been asked about Bitcoin a lot lately. I’ haven’t written anything about it because I find myself in an uncomfortable place in agreeing with the mainstream media: It’s a bubble. Bitcoin started out as what I’d call “millennial gold” – the young (digital) generation looked at it as their gold substitute.
Bitcoin is really two things: a blockchain technology and a (perceived) currency. The blockchain element of Bitcoin may have enormous future applications: It may be used for electronic contracts, voting, money transfers – and the list goes on. But there is a very important misconception about Bitcoin: Ownership of Bitcoin doesn’t give you ownership of the technology. I, without owning a single bitcoin, own as much Bitcoin technology as someone who owns a million bitcoins; that is, exactly none. It’s just like when you have $1,000 on a Visa debit card: That $1,000 doesn’t give you part ownership of the Visa network unless you actually own some Visa’ stock.
Owning Bitcoin gives you a right to … what, actually? Digital bits?
I can understand gold bugs and the original Bitcoin aficionados. The global economy is living beyond its means and financing its lifestyle by issuing a lot of debt. Normally this behavior would cause higher interest rates and inflation. But not when you have central banks. Our local central bankers simply bought this newly issued debt and brought global interest rates down to near-zero levels (and in many cases to what would have been previously unthinkable negative levels). If you think investing today is difficult, being a parent is even more difficult. I tried to explain the above to my 16-year-old son, Jonah. I saw the same puzzled look in his eyes as when he found out where babies come from. I also felt embarrassed, for my inability to explain how governments can buy the debt they just issued. The concept of negative interest rates goes against every logical fiber in my body and is as confusing to this forty-four-year-old parent as it is to my sixteen-year-old.
The logical inconsistencies and internal sickness of the global economy have manifested themselves into a digital creature: Bitcoin. The core argument for Bitcoin is not much different from the argument for gold: Central banks cannot print it. However, the shininess of gold has less appeal to millennials than Bitcoin does. They are not into jewelry as much as previous generations; they don’t wear watches (unless they track your heartbeat and steps). Unlike with gold, where transporting a million dollars requires an armored track and a few body builders, a nearly weightless thumb drive will store a dollar or a billion dollars of Bitcoin. Gold bugs would of course argue that gold has a tradition that goes back centuries. To which digital millennials would probably say, gold is analog and Bitcoin is digital. And they’d add, in today’s world the past is not a predictor of the future – Sears was around for 125 years and now it is almost dead.
A client jokingly told me that his biggest gripe with me in 2016 and 2017 was that I didn’t buy him any Bitcoin. I told him not so jokingly that if I bought him Bitcoin, he’d be right to fire me. Maybe I’m a dinosaur; but, like gold, Bitcoin is impossible to value. What is it worth? It has no cash flows. Is a coin worth $2, $200, or $20,000? But Wall Street strategists have already figured out how to model and value this creature. Their models sound like this: “If only X percent of the global population buys Y amount of Bitcoin, then due to its scarcity it will be worth Z”. On the surface, these types of models bring apparent rationality and an almost businesslike valuation to an asset that has no inherent value. You can let your imagination run wild with X’s and Y’s, but the simple truth is this: Bitcoin is un-valuable.
In 1997, when Coke’s valuation started to rival some dotcoms, bulls used this math: “The average consumer of Coke in developed markets drinks 296 ounces of Coke a year. These markets represent only 20% of the global population.” And then the punchline: “Can you imagine what Coke’s sales would be if only X% of the rest of the world consumed 296 ounces of Coke a year?” Somehow, the rest of the world still doesn’t consume 296 ounce of Coke. Twenty years later, Coke’s stock price is not far from where it was then – but on the way it declined 60% and stayed there for a decade. Coke, however, was a real company with a real product, real sales, a real brand and real tangible, dividend-producing cash flows.
If you cannot value an asset you cannot be rational. With Bitcoin at $11,000 today, it is crystal clear to me, with the benefit of hindsight, that I should have bought Bitcoin at 28 cents. But you only get hindsight in hindsight. Let’s mentally (only mentally) buy Bitcoin today at $11,000. If it goes up 5% a day like a clock and gets to $110,000 – you don’t need rationality. Just buy and gloat. But what do you do if the price goes down to $8,000? You’ll probably say, “No big deal, I believe in cryptocurrencies.” What if it then goes to $5,500? Half of your hard-earned money is gone. Do you buy more? Trust me, at that point in time the celebratory articles you are reading today will have vanished. The awesome stories of a plumber becoming an overnight millionaire with the help of Bitcoin will not be gracing the social media. The moral support – which is really peer pressure – that drives you to own Bitcoin will be gone, too.
Then you’ll be reading stories about other suckers like you who bought it at what – in hindsight – turned out to be the all-time high and who got sucked into the potential for future riches. And then Bitcoin will tumble to $2,000 and then to $100. Since you have no idea what this crypto thing is worth, there is no center of gravity to guide you or anyone else to make rational decisions. With Coke or another real business that generates actual cash flows, we can at least have an intelligent conversation about what the company is worth. We can’t have one with Bitcoin. The X times Y = Z math will be reapplied by Wall Street as it moves on to something else.
People who are buying Bitcoin today are doing it for one simple reason: FOMO – fear of missing out. Yes, this behavior is so predominant in our society that we even have an acronym for it. Bitcoin is priced today at $11,000 because the fool who bought it for $11,000 is hoping that there is another, greater fool who will pay $12,000 for it tomorrow. This game of greater fools is not new. The Dutch played it with tulips in the 1600s– it did not end well. Americans took the game to a new level with dotcoms in the late 1990s – that round ended in tears, too. And now millennials and millennial-wannabes are playing it with Bitcoin and few hundred other competing cryptocurrencies.
The counterargument to everything I have said so far is that those dollar bills you have in your wallet or that digitally reside in your bank account are as fictional as Bitcoin. True. Currencies, like most things in our lives, are stories that we all have (mostly) unconsciously bought into. (I highly encourage you to read my favorite book of 2015: Sapiens, by Yuval Harari.) Of course, society and, even more importantly, governments have agreed that these fiat currencies are going to be the means of exchange. Also, taxation by the government turns the dollar bill “story” into a very physical reality: If you don’t pay taxes in dollars, you go to jail. (The U.S. government will not accept Bitcoins, gold, chunks of granite or even British pounds).
And finally, governments tend to look at Bitcoin and other cryptocurrencies as a threat to their existence. First, governments are very particular about their monopolistic right to control and print currencies – this is how they can overpromise and under-deliver. No less important, the anonymity of cryptocurrencies makes them a heaven for tax avoiders – governments don’t like that. The Chinese government outlawed cryptocurrencies in September 2017. Western governments are most likely not far behind. If you think outlawing a competitor can happen only in a dictatorial regime like China’s, think again. This can and did happen in a democracy like the U.S. With executive order 6102 in 1933, U.S. President Franklin D. Roosevelt made it illegal for the U.S. population to “hoard gold coin, gold bullion, or gold certificates.”
However, nothing I have written above will matter until it does. Bitcoin may go up to $110,000 by the end of the 2018 before it comes down to … earth. That is how bubbles work. Just because I called it a bubble doesn’t mean it will automatically pop.
Read more on Katsenelson’s Contrarian Edge blog.
But the chart above from Boockvar was sooooo hours ago as Bitcoin has now broken above $17,000.
Here is an extraordinary warning regarding Bitcoin that was issued by Jason Goepfert at SentimenTrader: Anecdotal evidence of a blow-off in Bitcoin has exploded over the last couple of days. That’s hard to incorporate, so using data related to price action and public interest, we see that a sentiment model has reached blow-off territory. The few other times we’ve seen an extreme like this, further gains were erased in the week(s) ahead, especially once there was an initial sign that late buyers were getting scared…
….also from King World News:
here is no absurdity so palpable but that it may be firmly planted in the human head if you only begin to inculcate it before the age of five, by constantly repeating it with an air of great solemnity. Arthur Schopenhauer
Gold bottomed in 2002, and it took nine years for its trade to a high of roughly $1900 (September 2011). Contrast that to Bitcoin, in less than 1/3rd of the amount of time it is showing gains of more than 11,000%. It took nine years for Gold to show gains of roughly 700% and Gold has given up a substantial portion of those gains.
We bailed out of Gold in 2011 for two reasons:
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Gold was trading in the extremely overbought ranges, and the Gold Bug Camp could not contain their glee; they thought the sky was the limit. Instead, they found out that the Ground was a lot closer.
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The masses were not embracing Gold, and they refused to treat or view it as a currency.
Only those from the hard money camp continued to believe that Gold was a currency, but sadly their numbers are dwindling with the passage of each day. The masses view Bitcoin as cool and secure; a feat Gold has struggled to achieve and is not likely to achieve in the foreseeable future. Whether this is true or not, hardly matters for when it comes to investing, perceptions are all that matter.
Does this mean the precious metals sector is dead?
Well, that depends on what one means by dead. Gold has performed abysmally since (it topped out) 2011. The money supply soared, and Gold tanked, not exactly a good sign. In doing the opposite of what was expected from it, Gold cemented the view that it was an ancient relic that has no place in today’s monetary system. We are speaking in terms of Mass Perception. What we think, matters not; we follow trends, and we don’t waste time trying to look at things from a personal vantage point. There are many reasons for Gold’s underperformance after 2011; one of them was the “velocity of the money supply” which all but stalled after 2011. However, the masses don’t waste time on details like this. They look for simple cause and effect answers. Money supply soared, Gold did nothing, and hence Gold is a waste of time. A bit simplistic but that’s the mass mindset for you. However, looking forward some factors could limit Gold’s lustre
Demand for Gold in India continues to drop
India’s gold consumption is likely to drop to its lowest in eight years in 2017, hit by government moves to make bullion trading more transparent and by faltering demand from some rural areas, the World Gold Council (WGC) said on Thursday.
Evidence of weaker appetite in a country where gold is used in everything from investment to wedding gifts could drag on global prices that have been hovering near their highest in three weeks. India is the word’s No 2 consumer of gold behind China. Full Story
The Dollar appears to be putting in a base
The dollar topped in early 2017 and what did Gold do? Absolutely nothing; take a look at the chart below. Instead of surging to new highs it could not even trade past its July 2016 highs. The dollar, in contrast, has been going through a well deserved period of consolidation after mounting a stunning rally that started in 2011. It tested support and held, and as long as it does not close below 90 on a monthly basis, the outlook will remain bullish. Consequently, a monthly close above 94.50 will open the possibility for a test of the old highs.
The dollar topped in Jan of 2017 as mentioned above but if one looked at the chart of Gold only, one would think that the dollar hardly pulled back. The reaction was boring, to say the least, and to make matters worse; Gold put in a lower high than it did in July of 2016, even though the dollar traded below its 2016 lows.
Gold has also been putting a series of lows since 2013, and during this period it has not managed to trade above $1350 for a significant period. A fortress of strength comes into play in the $1350 ranges, and unless it can trade above this level on a monthly basis, the outlook will remain Neutral to bearish.
Conclusion
The dollar is getting ready to mount a rally, demand for Gold is declining, and Gold has been unable to trade past $1350 even in the face of a weaker dollar. Then we have the Bitcoin market, which the masses (especially millennia’s) find to be a lot more exciting and rewarding than Gold. All these factors don’t bode well for Gold. It appears that Gold is likely to test the 1000 ranges unless it decides to diverge and trend upwards in tandem with the dollar. Bitcoin, on the other hand, is now in the feeding frenzy stage, so this market is ripe for a correction. However, the upward move is still not over. After a hard correction, Bitcoin is likely to resume its upward trend.
Gold will probably never experience a move akin to that of Bitcoin, but that does not mean it won’t make for a good investment one day. For now, the trend is neutral; a weekly close below $1100 will darken the outlook for Gold, but a monthly close above $1350 will indicate that Gold is ready to trend higher.
Word to the wise; never fall in love with any investment. In the end, it’s the trend that you should pay attention to, for no sector can trend upwards forever. The odds of the Dow trading to 29,000 are far better than of Gold trading to $1900.
Iteration, like friction, is likely to generate heat instead of progress.
George Eliot
I am actually quite surprised with reading many of the public articles and blogs focusing on the US Dollar of late. It seems many are again calling for the end of the world for the US Dollar. But, I have been seeing something quite different than most in the DXY chart.
I remember back in 2011, when the DXY was in the 73 region, and many were also calling for the death to the dollar at that time. But, for those following my work since I began publishing it in 2011, I was looking for a multi-year rally in the DXY, with a target for a 3rd wave in the 103.53 region. And, at the start of 2017, we struck a high of 103.82 to complete that 3rd wave before we began the pullback we have experienced since that time. But, admittedly, I was off by 29 cents in my multi-year call. (smile)
The DXY has been adhering to our Fibonacci Pinball analysis almost perfectly for years. And, our next larger expectation is for the DXY to rally back to the 100-101 region into 2018. The only question with which we have been grappling is if we see one more lower low before we begin that rally back to the 100-101 region or not.
Based upon the structure we have completed over the past week, it strongly suggests that the current decline is only a (b) wave in the first move up off the recent lows within the larger degree corrective rally back towards the 100-101 region.
As you can see from the attached 21-minute DXY chart, we are now moving down into our target region we set for the (b) wave of the larger degree green a-wave of the green (b) wave, as shown on the daily chart. And, as long as the market holds over the 1.382 extension off the high in the 91.70 region, my expectation is that this (b) wave pullback will set up the DXY to rally over the 96 region.
So, that means as long as we hold over the 91.70 region in the DXY, many may wind up quite shocked with the potential rally the DXY seems to be telegraphing it wants to set up over the coming weeks.
Alternatively, if the DXY should strongly break below the 91.70 region, then it certainly opens the door to the market making one more lower low before the next larger degree rally back to the 100-101 region begins in earnest.
See charts illustrating the wave counts on the DXY.
By Avi Gilburt, ElliottWaveTrader.net
The price of one full Bitcoin (BTC), the original decentralized digital currency, officially hit 10,000 U.S. dollars early Tuesday morning, according to data from CoinMarketCap.
The blockchain “coin” began its latest rally after Black Friday, hitting an all-time high of $9,000 on Saturday, November 25, only to surge past 10k only three days later.
Soon after, the price dipped down to around $9900. At the time of this writing, BTC has risen back to $10499.00.
Why so high?
There are several likely reasons for this massive price surge.
First, a host of big financial players recently announced they will get in on the action. Most prominently, CME Group, the largest futures exchange in the United States, has signaled that it will allow BTC futures trading as early as mid-December. While it bodes well that many traditional investors may make the jump to digital currencies, a considerable number of them seem poised for a big short. The current price spike may indicate a buying frenzy to get in ahead of the short.
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