The Cryptocurrency World took a pretty hard hit this last week. This was in addition to an approximate 20% drop earlier. Rumor after rumor, all later to be unsubstantiated, rolled across the news wires, beating down prices. However, for those with any experience in crypto, this was not surprising. I am being kind when I say the price discovery mechanisms in crypto are sophomoric. They are illiquid and suffer from huge scaling problems. This leads to market conditions where prices are either extremely overbought or oversold. Where any sort of equilibrium is short lived and the risk is tremendous. So while the drop was not surprising, the reaction from legacy was:
In all my years of trading, it is hard for me to recall a time where I experienced actual joy at the prospect of people losing money. Even in trades where I have been wonderfully successful, I don’t find much pleasure in the thought that others have lost money. I guess I find more joy in the poetry of finance, which is why this budding crypto market interest me. A dynamic industry has grown large, not only without help from Legacy Finance, but despite it. In fact, it has done so in the face of utter distain from these same legacy types.
Even Dr. Doom couldn’t resist calling Bitcoin, “The greatest bubble in history” this week. There is only one problem with all this bubble talk, bitcoin is not in a bubble and to call it the “biggest in history” is totally irrational. It’s market cap (150B) doesn’t even come close to Apple’s (800+B). Apple is but a single stock traded on the Nasdaq. In fact, the entire cap of the whole crypto market barely registers in the huge world of finance. visualcapitalist.com has done an excellent job showing just how tiny the crypto markets are relative to legacy.
The problem with calling something a bubble, is that their is no way you can ever be disproven. When the market goes up- ‘its a bubble’. When it goes down- ‘I told you so’. It is circular logic, where the user cannot possibly be wrong. Perfect then to offer up as analysis to the public. No wonder it is one of the most overplayed terms in financial news. However, if you are going to stake your money on such things, you will need something more precise, or you are liable to be parted from your money. You will need a way to distinguish between common overbought/oversold conditions and the types of epic historical bubbles we have seen.
In the old days, we used the term ‘manias’. It was more accurate because it implied a kind of broad social involvement, almost like a zeitgeist in terms of public fascination. Bitcoin has some of this, and could one day become the biggest bubble in history, but not yet. The size of the market suggest that not that many people are as deeply involved as they are in the stock or bond market. Which brings me to this chart from tradingview.com:
This shows the percentage gains/losses, comparing Bitcoin to the S&P 500 futures. At its top, Bitcoin barely caught up to the S&P and has since collapsed. So if Bitcoin, with it’s 150B market cap is a bubble, what are we to make of the S&P, with it’s near $20 trillion+ market cap? While everyone from Legacy is shouting from the rooftops, foaming at the mouths over little old Bitcoin, there is barely a peep about the hazards awaiting millions in the equities and bond markets. Worse, I fear that when the S&P and bond markets continue heading south, they will likely blame little old Bitcoin for it.
Unlike the big- ‘I told you so’- legacy leaders, I will not be feeling legafreude, when the public asks their great advisors why their 401Ks are down so much. I suspect the public will also wonder why these same, all knowing, leaders were so busy warning about little old Bitcoin, that they couldn’t take the time to warn more about stocks and bonds.
At some point, the endless condemnation of crypto makes one think of Hamlet. It makes one suspicious, at least, that its critics are not being sincere. However, I think it is part of a larger folly. There is a sense of fragility in the present system and the mere possibility of a threat to that system is a serious matter. I do not disagree entirely, I just think the threats can be minimized and the benefits maximized. As an example, Japan has taken a more healthy attitude towards crypto and analysts think the new approach may have added .3% to Japan’s GDP. Other countries are embracing rather than rejecting crypto too. They are looking to make a healthy regulatory environment, where cryptocurrency can flourish. A far cry from the “crackdowns” we have seen from China, the US, South Korea etc… Might all the fuss just be the sound of Legacy shooting themselves in the foot? What are we otherwise to make of all the “cryptofreude” out there? “The lady doth protest too much, me thinks.”
Honestly, that so many young people have come together to build a dynamic industry on their own, without aid from traditional institutions, should be applauded- not condemned. Sure, there are problems, one should have expected no less, but I am more than proud of these young folks- I am amazed at them. To them I say, Bravo! Not, ‘I feel joy in your pain’. That is far too cynical. Something best left to Shakespeare to sort out. A profound irrationality that should make one shutter.
“Madness in great ones must not unwatched go.”
― William Shakespeare,