Sunday, 4 February 2018

The Bitcoin Canary In The Coal Mine - Part 1 of 5

In my predictions for 2018, I wrote that Bitcoin will go to zero. It has no value, and its ridiculously high price is just an expression of the fact that it is a pyramid scheme, a fantastic bubble inflated as a classic example of the bigger fool principle, but that, as such, it is only the last, and most complete, form of the serial bubbles that have been inflated in every asset class from property to shares, from wine to bonds, and classic cars to classic vinyl. Having risen from next to nothing to $20,000, the price of Bitcoin has dropped to now just around $8,000, and its fall is continuing. But, its not alone. 

In the last year, illustrating one of the points I had made, there were numerous other Initial Coin Offerings, for a number of other crypto-currencies, showing that even if the supply of Bitcoins might be limited, the supply of crypto-currencies is not. The prices of all of those have crashed too. 

But, what is perturbing the various financial pundits on all of the speculation news channels, is that all of the rules they have previously lived by appear to be failing them. In reality, those rules were nothing more than mantras they repeated mechanically without understanding the economic laws that underpinned them. So, for example, one of those mantras is that when a central bank raises its official interest rates, the currency of that country strengthens. But, the US Federal Reserve has been leading the way in raising rates, and ending QE, whilst the value of the Dollar has continued to fall significantly over the last year. Another mantra is that when the price of bonds rises, the price of shares falls, because asset allocators sell shares to buy bonds. But, in the last week, both bonds and shares sold off significantly together. And, that drop, along with the drop in the price of Bitcoin, also went along with a drop in the price of gold, and other assets.  On Friday, the Dow Jones fell by nearly 700 points, the biggest drop since the 2008 financial meltdown.

The reason that all of these asset classes are selling off together is quite simple; they were all inflated into huge financial bubbles together, over the last thirty years. The illusion might have developed that share prices drop as bond prices rise, because, at any point in the last thirty years, asset allocators, in the huge investment funds, might have sought to rebalance their portfolios, by selling bonds to buy shares, and vice versa, but the reality was that, over the thirty year period, as a whole, the price of both rose massively. Now, those bubbles, like the Bitcoin bubble, are bursting. The asset allocators might again still move out of bonds and into shares, so that, on any one day, the relative prices of each will show that inverse correlation, but that reality now will be that the prices of both bonds and shares will drop in tandem, along with the prices of property, and every other asset. 

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