An impossible crash

Bitcoin continues its bear market. Or is it a correction?

The cryptocurrency has lost about 60% of its value from the highs. And it’s heading down in a steady trend of lower lows and lower highs. That’s a bear market, if you ask me.

But cryptos aren’t like other financial assets, right?

Cryptocurrencies’ detractors have been lambasting the exchanges in particular. These are the gatekeepers of the crypto world. To get in on the action, you go to an exchange and swap your real money for the digital stuff.

But these exchanges are failing to protect their customers money. They look like Ponzi schemes. They don’t get on well with their auditors. And nobody really knows what’s going on behind the scenes. Because they’re not regulated properly, you can’t trust them.

Take for example the suspicious habit of locking customers out of the trading platforms when the price of cryptos crash. When things go wrong, they just shut out their customers’ ability to trade, “temporarily”.

The Financial Times recently reported on the devastating effect this recently had on cryptocurrency buyers and sellers:

Some of the biggest US retail investment groups suffered system outages during the markets maelstrom on Monday, frustrating customers seeking to sell their positions or buy into the dip.

Mobile apps and websites buckled under the strain of demand as retail investors rushed to log in to their accounts during one of the heaviest trading days this decade. Customers of Vanguard, TD Ameritrade, T Rowe Price and Charles Schwab were among those affected.

The technology failures on what was the worst day for US stocks in more than six years prevented some individual investors from placing orders.

Wait a minute. Those aren’t cryptocurrency exchanges. Those are regulated and major brokerage and investment firms. They allow their customers to punt on stocks, not cryptos.


But cryptos should be banned. And the recent meltdown only goes to show why. Cryptocurrencies have lost $500 billion in value since January. That’s almost an eighth of what stockmarkets lost yesterday morning!

Wait a minute…

But what about when the cryptocurrency exchanges are run by fraudsters who use dodgy accounting to siphon off money and then abscond with it? Like the licensed and reputable Bernie Madoff did…

Then again, cryptocurrencies can be used in criminal exchanges. Or even by terrorists, who can use them just like money.

Wait a minute, just like money?


The real driver of the crypto world

The cryptocurrency world is deeply flawed in many ways. The key one being that governments and big business can copy them. And they’ll have to if they want to get rid of the threat posed by the cleverest cryptos.

If your crypto-pound offers most of the same advantages as your privately issued cryptocurrencies, then why not use the pound version?

Unless you have something to hide… but that’s a function of government too. If it’s illegal to buy drugs, cryptocurrencies specialising in anonymity will always be popular. The solution isn’t to ban the cryptocurrency, but to legalise drugs. That effort seems well underway around the world. About time too.

That seems to be the trend of things around the world, actually. Governments are made to look like fools by their own policies. The private sector just evades their stupid rules with innovations like cryptocurrencies. After the failure of regulation leads to painful unintended consequences, then they adopt what their critics brought to the table to undermine them.

Prohibition of alcohol gave your organised crime. Eventually it was legalised.

Drugs gave you the first real use for cryptocurrencies, legitimising them.

These days terrorists use the cryptocurrencies for far worse than drugs. Just as organised crime used prohibition revenue for far worse than selling alcohol.

Now countries are exploring issuing their own cryptos, just as they went about legalising alcohol in an arcane way.

The same sort of thing happened with Uber, Airbnb and peer-to-peer currency exchanges. People avoided the nightmares of government-run taxi licensing systems, hotel business fees and taxes, and the cost of bank regulation, simply by matching people. Those who want to provide something and those who want to buy it. If they can find each other, they can transact.

These days, all three are legal around the world to some extent, despite government campaigns to stop them. Now they’re usually part of the regulated system.

So, if the monetary authorities of the world adopt the technology of cryptocurrencies, and reduce the demand for cryptocurrencies by fixing their other policies, where does that leave private cryptocurrencies?

Nowhere nice. In the hands of terrorists and political campaign donations, most likely. At a significantly lower price.

If you want to predict the price future of cryptocurrencies, watch governments. Their policies that create demand for cryptos, and their policies to adopt them.

The bond balancing act  

Here’s a riddle for you. If a bond bear market is behind the stockmarket crash, but people flock to bonds during a crash, how can a crash continue?

The stockmarket rout of the last few days was supposedly triggered by rising interest rates. Specifically, the higher wage growth in the US generated fear of inflation, which should come with higher interest rates and bond yields. It did, briefly.

But as soon as the stockmarket rout began, investors flocked back to government bonds again. And yields fell accordingly.

Overnight, the stockmarket recovered and bond yields rose again. But this time without triggering a crash.

The point is that a crash makes perfect sense, but it can’t seem to break out. The bond market is a self-correcting balancing mechanism. Because people buy bonds when they worry about a crash.

Tim Price has the answer. He’s calling it the Big Bang. The idea is that bond markets don’t need to be what cause the stockmarket to tumble. Instead, it could be something else. Something far more simple. And far more important.

Until next time,

Nick Hubble
Capital & Conflict

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Category: Investing in Bitcoin

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