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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Coming Crypto-Crisis?

Currencies / BlockChain Sep 01, 2017 - 06:43 PM GMT

By: Brady_Willett

Currencies

Since 2008 there has been a widespread increase in debt around the globe, central bankers have printed and experimented with direct asset purchases like never before, and there have been many dangerous bubble-like oddities in the marketplace worthy of attention (i.e. student debt, subprime auto, junk bonds, housing, etc.).  Nevertheless, despite the record increase in paper wealth since 1Q09 there has been no unifying ‘mania’ for the grumpily inclined to ceaselessly growl about.  That is, perhaps, until now:

“Bitcoin Cash’s price nearly doubled within its first 24 hours, surging from roughly $394 to $757…”  Forbes


Some digital currencies have increased 40-fold this year alone ~ Bloomberg

Since the beginning of the year the cryptocurrency market has gone from $20 billion to more than $170 billion (please note the estimated size of the market can change quickly).  Along with this impressive growth has been the launch of initial coin offerings (or ICOs), which, by some accounts, are occurring “at least one ICO per day at the moment”.  As if these mania-like occurrences were not enough, many people, including the likes of Cramer, think the best could be yet to come.

Faithful techies think in coming decades one digital coin will be worth $500,000.  WSJ

At risk of stating the obvious, the recent price growth in many cryptocurrencies (see chart) is not normal and entirely unsustainable.  Quite frankly, the very idea that a cryptocurrency – supposedly born because of a “mistrust of official money” – can be trusted after they skyrocket by  4,600+% in a year is absurd.  The reality is that if there wasn’t so much ‘stupid money’ floating around in the world there would not be an endless stream of ICOs – cryptocurrencies have wildly benefited from the free-wheeling monetary policies they supposedly, in theory, should help police.

As for the size of the market, while $170 billion is noteworthy this is still less than 2% the size of the gold market and a rounding error compared to the amount of leveraged fiat money floating around the world.  Accordingly, the very idea that an isolated mania in cryptocurrencies represents a current threat to central bankers doesn’t make a lot of sense.  Bitcoin, the king-pin of crypto, has been around for less than 9-years and has yet to live through a global economic downturn or financial calamity.  Is Bitcoin really going to take its growing band of ICO misfits and trample the current fiat money system?  Really?

Conclusions

For ‘sound money’/free market advocates the allure of crypto is palpable: if, somehow-someway, the cryptocurrency phenomenon could be harnessed and safely scaled it is possible that this disruptive technology could help subvert the reckless fiat monetary system.  In theory this is a wonderful idea (and gold has served an anti-fiat purpose for a long time).  Unfortunately, the purveyors of finance around the globe are firmly in bed with central banks, and central bankers rather adore the current fiat money system the way it is.

As any good precious metals owner can attest to, central bankers and/or Wall Street will do anything and everything to punish the competition.  And while cryptocurrencies are not a major threat to fiat yet, they are a competitor nonetheless.  Alas, the last thing any central banker that likes to print and any government that likes to borrow wants during the next crisis is investors piling into cryptocurrencies.  To ensure this doesn’t happen tactics to delegitimize/regulate the cryptocurrency market during the next price collapse could be the order of the day.  Other tactics, should crypto continue to be fashionable, may also be deployed.

In short, once a niche-like hobby for the tech savvy dreamers, cryptocurrencies are currently having their day in the sun.  Don’t expect this to last.  As speculators continue to chase gains and powerful monetary forces plot their attack, the cryptocurrency market will, without doubt, implode. The only question is when and how large of a disruption this implosion will be.

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


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