The Bitcoin bubble

by JACK RASMUS

IMAGE/Coin Desk

Is Bitcoin the new ‘Subprime Mortgage Bond’? Just as subprimes precipitated a crash in the derivative, Credit Default Swaps (CDS), at the giant insurance company, AIG, in September 2008, setting off the global financial crash that year—will the Bitcoin and crypto-currency bubble precipitate a collapse in the new derivative, Exchange Traded Funds (ETFs) in stock and bond markets in 2018-19, ushering in yet another general financial crisis?

The US and global economy are approached the latter stages in the credit cycle, during which financial asset bubbles begin to appear and the real economy appears to be at peak performance (the calm before the storm). This scenario was explained in my 2016 book, ‘Systemic Fragility in the Global Economy‘. And in my follow-on, just published August 2017 book, ‘Central Bankers at the End of Their Ropes’, I predict should the Federal Reserve raise short term US interest rates another 1% in 2018, as it has announced, that will set off a credit crash leading to Bitcoin, stock, and bond asset price bubbles bursting. How likely is such a scenario?

Is Bitcoin a Bona Fide ‘Bubble’?

What’s a financial asset bubble? Few agree. But few would argue that Bitcoins and other crypto currencies are today clearly in a global financial asset bubble. Bitcoin and other crypto currencies are the speculative investing canary in the global financial asset coalmine.

One can debate what constitutes a financial bubble—i.e. how much prices must rise short term or how much above long term average rates of increase—but there’s no doubt that Bitcoin price appreciation in 2017 is a bubble by any definition. At less than $1000 per coin in January, Bitcoin prices surged past $11,000 this past November. It then corrected back to $9,000, only to surge again by early December to more than $15,000. Given the forces behind Bitcoin, that scenario is likely to continue into 2018 before the bubble bursts. Some predict the price for a Bitcoin will escalate to $142,000, now that Bitcoin trading has gone mainstream on the CME and CBOE, and offshore, commodity futures exchanges.

The question of the moment is what might be the contagion effects on other markets?”

What’s Driving the Bitcoin Bubble?

If Blockchain and software tech company ICOs are driving Bitcoin and other crypto pricing, what’s additionally creating the bubble?…..Who is buying Bitcoin and cryptos, driving up prices, apart from early investors in the companies? The absence of government regulation and potential taxation of speculative profits from price appreciation has served as another important driver of the Bitcoin bubble bringing in still more investors and demand and therefore price appreciation. No regulation, no taxation has also led to price manipulation by ‘pumping and dumping’ by well positioned investors. Another factor driving price is that Bitcoin has become a substitute product for Gold and Gold futures. But what’s really driving Bitcoin pricing in recent months well into bubble territory is its emerging legitimization by traditional financial institutions. Futures and derivatives trading on Bitcoin just launched in December 2017 in official commodity futures clearing houses, like CME and CBOE. Bitcoin ETFs derivatives trading are likely not far behind. Big US hedge funds are also poised to go ‘all in’ once CME options and futures trading is established. Declarations of support for Bitcoin has also come lately from some sovereign countries. While CEOs of big traditional commercial banks, like JPM Chase’s Jamie Dimon, have called Bitcoin “a fraud”, they simultaneously have declared plans to facilitate trading in the Bitcoin-Crypto market.

Bitcoin as ‘Digital Tulips

Bitcoin demand and price appreciation may also be understood as the consequence of the historic levels of excess liquidity in financial markets today. Like technology forces, that liquidity is the second fundamental force behind its bubble. To explain the fundamental role of excess liquidity driving the bubble, one should understand Bitcoin as ‘digital tulips’, to employ a metaphor.

The Bitcoin bubble is not much different from the 17th century Dutch tulip bulb mania. Tulips had no intrinsic use value but did have a ‘store of value’ simply because Dutch society of financial speculators assigned and accepted it as having such. Once the price of tulips collapsed, however, it no longer had any form of value, save for horticultural enthusiasts.


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