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Market Bubbles and Risky Ventures: How Bitcoin Price Toys With Modern Investors

Market Bubbles and Risky Ventures: How Bitcoin Price Toys With Modern Investors

Money Without Borders

Central Bank Killer

Disruption. Central Banks worldwide react as Bitcoin hits $10,000 US dollars a coin. Governments and financial institutions, normally calm, steadfast, and non-reactionary, suddenly change channels.

“Everyone has a plan ‘till they get punched in the mouth.” - Mike Tyson

The unprecedented negative reaction of the Central Bank Cartel to cryptocurrencies in the fall of 2017 is a huge tell for the future of this technology.

Why You Should Pay Attention To Bitcoin

If you’re interested in cryptocurrencies, you may not be interested in Bitcoin. You might be of the opinion Bitcoin has no value, and it will eventually go to zero. You might not be interested because of Bitcoin’s negative utility and overhead due to its “Proof of Work” consensus mechanism. You might not be interested because it’s not scalable. And for many other reasons.

For one reason only this is a mistake— because right now Bitcoin is the gatekeeper.

Generally, all the other coins and tokens rise and fall under Bitcoin’s price action. Yes, a few go their own way in the short term because of pump and dumps. In the long term, the cryptocurrency space is correlated to Bitcoin’s price movements.

Until there is a permanent de-coupling between Bitcoin’s price action and the rest of the cryptocurrency space, the supply and demand dynamics of Bitcoin is front and central.

Read on…

A Brief History of Bitcoin

In January 2009 Bitcoin, the world’s first digital currency was released as open source software, and nobody cared. Sixteen months later in May 2010, Laszlo Hanyecz bought two pizzas using Bitcoin — 10,000 of them.

Nobody Cared

At least not at first…

July 11, 2010: Slashdot, the “News for Nerds” website ran a post naming Bitcoin as a new disruptive technology.

The price of Bitcoin went up 800% in the next five days from 1 cent to 9 cents per coin.

Would you buy after an 800% increase in price?

You’d be feeling pretty bad if you had.

Because Bitcoin eventually traded back down to 1 cent again.

The first half of 2011 was when Bitcoin arrived. On the 9th February 2011, Bitcoin hit parity against the US Dollar.

Would you buy here?

Bitcoin at 1 dollar parity

Bitcoin at 1 dollar parity

If you had you were just about to lose 49% of your money. 

What about here?

Bitcoin 1000

Bitcoin 1000

If you bought near the high, you’d just bought a front row ticket to the collapse of Bitcoin. Your pain was over -86% later.

It’s human nature to wait for confirmation. A signal from the herd that it’s ok to act.

Don’t worry you’re not alone.

Bitcoin’s history is one of the extreme moves and violent collapses. Each time Bitcoin dropped its recovery was spectacular.

Governments Take Notice

To control the economy (and you) the government needs to be able to introduce or manufacturing conditions. Conditions to keep the cost of risk (the price of bonds), and exchange rate stable, and the workforce competitive.

In previous articles, we’ve talked about how governments control the value of money. In modern history, your wealth has been devalued and even confiscated — without your consent.

Remember, money is no longer based on gold. It’s based on nothing. And because it’s based on nothing it can be created at will, out of nothing. Today, money is backed by regulation and law, not gold. The money you use today is called fiat currency.

Since the 2008 financial crisis, the national debt of the US states has doubled from around 10 trillion US dollars to 21 trillion.

When the US Federal Government runs out of money, it shuts down. In January 2018, the US government shut down for the 19th time in history. Governments shut down because they run out of cash. You can call government shutdowns something else — Funding Gaps.

Balancing the books when the Debt to GDP ratio is high (like now) becomes much more difficult.

20 countries with the highest public debt in 2017

20 countries with the highest
public debt in 2017

As individuals, we can’t run large budget deficits. If you get into debt, your bills go unpaid, and your credit score is hammered. This makes it much more expensive for you to take on new loans to cover the old debt and refinance without having to pay more interest.

Unless you can find the cash flow to pay the cost of new more expensive loans, you’ll eventually go bust.

It’s the same with companies too. When a company has large amounts of debt compared to its turnover, it becomes increasingly difficult for a company to finance its debt because the higher the debt, the higher the risk, and the higher the risk, the more the companies bond rating falls. As the bond rating falls, the interest rate the company must pay to finance its new debt goes up.

This is how many companies go into bankruptcy.

This works with countries too. With a twist.

Normally a country with a Debt to GDP ratio as large as the United States would have to pay much more for its debt. New creditors would demand to be paid more to take on the increased risk of a country’s debt compared to its total output.

Like a company, a country has a credit rating. The lower the credit rating, the higher the risk of default, and the higher the risk of default, the higher the return demanded by new creditors to underwrite the risk.

In 2009, the Debt to GDP ratio in Greece was 126.7%. In March 2012, the interest rates on Greek bonds spiked to 48.6% and the Greek government was unable to refinance new loans at the higher interest rate to pay off its old debt.

Greece defaulted on its debt, plunging the European Union into a crisis.

The United States finances its deficit with government bonds, the same as other countries. But where other countries get into trouble, like Greece, the United States does not - Yet.

The Twist

The United States is special because the US dollar is seen as the global safe haven currency. In 1973 the United States did a deal with Saudi Arabia, promising to protect Saudi interests in the middle east, and in return have the Saudi’s sell their oil priced exclusively in US dollars. By 1975 all the OPEC members had signed up.

Today the US dollar is a safe haven currency because it is the currency used for almost all international transactions.

And the United States wants to keep it this way.

Playing With Fire

It might surprise you to know that governments don’t have any money of their own. It’s simple, they have outgoings, just like you, and they have income. A government’s revenue comes from selling debt (think of these as IOU’s) and from taxation. There are other sneaky ways governments extract money from their citizens but for now, let’s keep this simple.

As a government prints more money, eventually this devalues the value of the existing money supply. And since 2009 the printing presses have been cranking out freshly pressed dollars like never before in history.

Part of a government’s income comes from selling bonds, (IOU’s) and if creditors think they are at risk of not being paid back, they will demand higher returns to take on this risk.

Higher returns equal higher interest rates.

If a government has to pay a higher return to creditors on new debt, this means that the cost of paying off the old debt goes up.

As old IOU’s become due, new, more expensive IOU’s have to be written to pay off the old debt.

And this is why it becomes more challenging to run a deficit spending economy because so much of the available cash has to pay off ever-increasing debts.

It’s a delicate balancing act to keep deficit spending under control. If it gets out of control, then things get ugly fast.

In the 1920’s the German Weimar Republic was destroyed by hyperinflation. Hyperinflation destroys wealth and has a dark side. If citizens of a country have nothing to lose because they’ve already lost everything, people are more likely to look for more extreme solutions. The extreme solution, in this case, was the rise of right-wing politics and the Nazi party led by Adolf Hitler.

Confidence in a country’s ability to pay off its debt is everything. If there’s any sign, a nation has reached or is reaching maximum leverage creditors will demand higher returns to underwrite the IOU. This leads to higher interest rates, high inflation, and even hyperinflation. Argentina and Zimbabwe are countries that have suffered hyperinflation in recent history.

Effects of hyperinflation

Effects of hyperinflation

As Bitcoin’s price increases, its market capitalisation increases. And the more significant it becomes, the more risk Bitcoin exposes to the delicate act of balancing global economics. A system in which the United States is king in all but name.

Blowing Bubbles

It took nearly nine years for cryptocurrencies to enter into the general public’s awareness.

You might think that it’s over and that you’ve missed the party?

But what if it’s not even started? What if we are still in the early adopter phase?

If you doubt this, next time you’re at a party or socialising with friends ask them this…

What is a Bitcoin?

Or Better yet

What is a blockchain?

Be prepared for blank faces, shrugs, or just wild guesses.

Trends end when everyone from your accountant to your hairdresser is in on the action.

Use your social circle as a proxy or poll. (I tried this within my social group ranging from professional money managers, retired hedge fund owners, art dealers, and entrepreneurs)

Most, by 2017, had heard of Bitcoin and cryptocurrencies. Three owned some.

None understood how it worked.

The SnowBall

It took time and four price bubbles to bring Bitcoin to the mainstream media’s attention.

And with every move, more people got involved.

Bubble #1

Between October 2010 and June 2011 Bitcoin traded from 1 cent to a high of $31.91.

An increase of 319,000%.

Between June 2011 and November 2011, Bitcoin lost 93.76% of its value. On the 14th November Bitcoin traded at $1.99.

Bubble #2

From the $1.99 low, it took 20 months to trade back to the previous all-time high of $31.91.

After Bitcoin broke out above the previous high, it quickly moved to $266 in the first week of April 2013. The move took six weeks.

Eyebrows were raised.

A good axiom to work with is this— “When the only way is up — the only way is down.”

This is why it’s difficult to learn how to be a successful speculator. It’s not your fault. It’s hard-wired into your DNA. You literally can’t help it. Like blinking.

From $266 in April 2013, Bitcoin dropped 75.41% to $65.42. Anyone caught up in the frenzy took a hit.

Bubble #3

Prices go up when demand outstrips supply. I know its almost a cliche. But so few people truly understand the implications of this phenomenon.

If a large percentage of the available supply is not for sale, then buyers will have to raise their bids to compete for the asset.

From the April 2013 low of $65.42, it took seven months for Bitcoin to hit $1163. An increase of 1677.74%.

The Mississippi scheme, the South Sea bubble, Tulipmania. The Wall Street crash. The 1987 stock market crash. The Dot-Com crash. The 2008 financial crisis.

Think you’re smarter than Sir Issac Newton?

How Newton's Fortune Fell to Earth

How Newton's Fortune Fell to Earth

We can’t help it.

A few see the outcome. But nobody listens.

If economics is so useful, have you ever asked yourself why economic consensus never sees it coming.

Think on that.

And while you do, think about this… When prices go parabolic, (think of a move from 6 o’clock to 3 o’clock) who is doing the buying?

Weak hands or strong hands?

I’ll put you out of your misery.

Weak hands.

“When the only way is up — the only way is down.”

After hitting a high of $1163, Bitcoin started down. Lack of new buyers forces sellers to lower their offer to meet the bid. This vacuum is what causes prices to fall. This is how supply overwhelms demand.

RIP Bitcoin

  • Bitcoin made an all-time high of $1163 on the 4th December 2013.

  • Over the next 13 months, Bitcoin traded lower. It hit bottom in mid-January 2015 at a price of $152.40. A drop of 86.89%.

  • Then it died. Some thought forever.

Bubble #4

The Craze Begins…

From the January 2015, low Bitcoin started its run. The move ended at $19,666. Up $19,513.60, an increase of 12,804.2%.

It’s easy to look back in hindsight. The trick is this. Could you hold on?

Imagine you bought at the low. Could you hold through the following drops?


Did you notice anything?

During all through the chaos and hype, look at the consistency of the price drops. Then notice the last price drop. It’s around 50% of the others. This is the signature of a parabolic move.

Psychologically, we experience loss 250% more intensely than we experience gain.

Could you have held on through the prices swings?

Some are naturals, but this skill is so rare, assume you are not. If you doubt this, when did you buy your home? At the beginning of a move? At the end? No prizes here. You know, and that’s enough.

Big Money was on the move.

Bitcoin was about to go big time.

An unstoppable force met an immovable object.

Popularism, Patriotism, Nationalism, Protectionism... The Globalization Aiding Cryptocurrency

Popularism, Patriotism, Nationalism, Protectionism... The Globalization Aiding Cryptocurrency

The Governments Have Awoken: Seizing Control of an Uncontrollable Bitcoin

The Governments Have Awoken: Seizing Control of an Uncontrollable Bitcoin