Seventh in a series. Part 1, Part 2, Part 3, Part 4, Part 5
Sometimes you have to say an unfortunate truth:
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I see a lot of blowhards on CNBC, the trader’s wallpaper, which I watch most of the day and most every day. As the Dow has tripled upward since 2009, from less than 7000 to 24000 and rising, these doomsayers have predicted the inevitable correction, sudden bear-market turn or cataclysmic crash, again and again.
They have been wrong, again and again. It would be unkind, in this generous holiday season, to name names, so I won’t do that… besides, you already know who fits the description.
One day the handwringers will be right: A crash will come, it always does. In the meantime, you missed out on HUGE gains if you listened to these on-air doubters. They know that no stockpicker ever got fired for causing a client to miss out on an upside opportunity. You do get killed, though, especially in a market panic, for meting out advice that results in your client’s losing money on the downside.
So, when chaos or catastrophe descends on the markets, TV gets timid. Most everyone utters solemn and somber warnings of more doom to come. Instead of searching for hope, they keep serving up fearfulness.
This bias toward timidity is something you should keep in mind if you are betting on bitcoin and the pixel pundits start with the dire warnings on the Bitcoin Bubble. You likely will hear all kinds of panicked advice— “You’re dead meat, man! Get out! Get out!!!”—and almost no reassuring words to help you ride out a decline.
Invoke “Hitchhiker’s Guide to the Galaxy”: Don’t Panic.
It is a difficult instruction to follow, given that bitcoin’s main driver is rank emotion and its path is so volatile. Yet volatility is a trader’s opportunity.
Right now, it’s a little scary, compounded by the lack of data to help us predict where bitcoin is headed: scant market data on trading trends, no news events that can be anticipated, no earnings flow on which to slap a multiple as we do for, say, Apple, no new-product unveilings that can stoke a stock price, no prospects for takeover activity.
Making things all the more obtuse is that bitcoin was designed explicitly with an emphasis on secrecy, privacy, encryption and invisibility, making it impossible to trace—so you can’t gauge trading volumes and who’s buying and who’s selling and all those other market hints that accompany stocks, bonds and futures. In the absence of transparency, rumors run wild with no way to quash them. Emotions dominate.
In part four of this series, we posed a question:
So, what holds up the price of bitcoin? Not GDP growth or earnings at any particular company; not the price of gold. The main thing keeping bitcoin prices aloft is little more than speculative frenzy and the virally spreading desire to own a piece of this newfangled invention. This is emotional, and it is important to force the emotional to bow to the rational.
Speculative frenzy and human desire: those elements are difficult to quantify and track. We must look elsewhere for clues to bitcoin’s prognosis—and I have just come across a striking possibility:
Bitcoin has been shadowing the almighty U.S. dollar. I have put together a chart on this (see above), and it shows a rather cool correlation between the two. As the U.S. dollar rises against other currencies on the world markets, so that it costs ever more euros, let’s say, to buy dollars, bitcoin rises in pursuit. As the dollar’s strength ebbs a bit and traders pull back, bitcoin prices pull back, as well.
For instance, in the two charts below i have highlighted an interesting (predictive) correlation between the price of bitcoin (tracked by their futures exchange traded derivative counter parts the XBT and BTC contracts, and the US dollar index. With that said, the purple line in both charts is the US dollar index, which as you can see lays directly over the price of bitcoin.
This correlation has remained consistent since the listing of the contracts on the CME and CBOE, thus where the dollar goes, bitcoin goes. The US dollar has been downtrending from from the 94 level into its lowest level in months today, 92.19. The Bitcoin index is 9% today, while the US dollar index is down half a percent. So the correlation ratio is is for every half percent the dollar loses, bitcoin drops around 10-15%, and of course the same hypothesis works on the upside as well. Any rally in the dollar is met with a rally in th US dollar index, as well as the US equity indexes.
It’s a cool correlation, and I’m unsure whether anyone else has noticed this (and I’d like my theory better, perhaps, if someone had). The correlation is all the more surprising given that bitcoin is supposed to be, in some ways, a rival to the dollar, an in-the-cloud play to replace the greenback with something new and vanquish the antiquated notion of a fiat currency based on pieces of paper printed by government.
I have watched this connection between bitcoin and the dollar since bitcoin futures began trading on the CBOE a couple of weeks ago; we shall see if it continues.
The U.S. dollar has been the wind at the back of the U.S. markets and their recovery—and the stunning 5,000-point gain in the Dow Jones Industrial index in the year since Donald Trump got voted into office. (I recall a Nobel Prize winner in economics, writing for The New York Times and predicting a cataclysmic selloff in stocks if Trump were to win the election. What the Krug, man; the nominating committee wants its medal back.)
Thus, of course, if the dollar falls in value against other currencies, it may be likely that stocks will fall as a result, and so might bitcoin decline, following suit. That means forecasts for the U.S. dollar are worth studying for a possible hint to where bitcoin might go, in puppydog pursuit.
I’d argue that bitcoin is following the U.S. dollar, rather than the dollar following bitcoin. Bitcoin’s total market cap, at $15,000 per coin for a total 21 million coins in “existence,” is at more than $300 billion, compared with trillions for the equity markets and dollars in circulation.
So, it is as if bitcoin itself has become just another risk asset—and not the mythical cryptocurrency that will supplant the dollar to become the fiat currency of the 21st century. It may turn out that bitcoin most often will track the price path of U.S. dollar and stocks, and like those assets it will run counter to the price direction of gold and bonds
And if bitcoin gets relegated to merely another risk asset alongside stocks, bonds, futures and options and gold, what will make it so special that millions of people desire to own it, so special that its price deserves to go up twenty-fold in a year, as it just did? Old sayings exist for a reason, no? To wit: Familiarity breeds contempt.
Next up: Bitcoin catfight: Buy the original or the new kids on the blockchain?