I’ve been writing a lot about Bitcoin lately. And believe me, it’s not because I want to.
Writing about Bitcoin (and about cryptos in general) is a lot like writing about Donald Trump’s tweets. It’s highly amusing to editorialize around something that’s inherently absurd and readers relish the opportunity to vehemently agree or disagree in the comments, but you get this creeping suspicion that everyone involved is getting progressively dumber with each successive post.
That’s not the only sense in which writing about Bitcoin is like writing about Trump’s increasingly unhinged Twitter feed. If for some inexplicable reason you’ve chosen to spend your days commenting on politics and markets, you have no choice but to write about Trump’s tweets and about Bitcoin. Rarely a day goes by when one or both of those things aren’t the biggest story in the financial universe. And I’m only about half-joking when I say that it kind of seems like maybe Trump is trying to one-up Bitcoin on Twitter after discovering that for the first time since he became President, more people are searching Google for “Bitcoin” than they are for “Donald Trump”:
One final way that writing about Trump’s tweets is like writing about Bitcoin is that almost invariably, you cannot get through what you’re writing without something else relevant happening in the meantime. If you’re writing about Trump’s tweets, chances are he’ll tweet something else by the time you finish and if you’re writing about Bitcoin hitting XYZ round number, you can bet your ass that by the time you finish writing what you’re writing, it will have cleared at least one more round number and maybe even retraced and bounced to another one.
As you’re undoubtedly aware, Thursday was a wild ride for Bitcoin even by Bitcoin standards. It was, appropriately enough given the date, “a date which will live in infamy.” The two-day chart is so insane that it led an exasperated Walter Zimmerman (a technical analyst at ICAP TA) to tell FT the following:
People are looking at a videogame as a regular market.
Here’s what he means:
That is a two-day chart. Again: two days. It cleared nine round numbers and at one point, it was rising so fast that it very nearly hit Cascend’s new price target ($20,000) just five minutes after the firm raised it from $15,000. Fast forward 30 minutes, and it had fallen by $4,500 back to the original target.
I’m not going to regale you with the whole outlandish play-by-play (if you’re really interested you can skim it here), but suffice to say Thursday served to definitively dispel the notion that this is any semblance of safe. And just three days ahead of the Cboe futures launch.
All jokes aside (well, not really because I’m always at least half-joking), we are entering uncharted waters with this and while a lot of the concerns are well-documented, some aren’t.
One thing to note is that if futures had followed the same price action as Bitcoin did on Thursday, circuit breakers would have been tripped pretty much all day long. It would have been a festival of halts, pauses, fits, starts, and in all likelihood, outright chaos. One person who thinks this is a horrible idea is Thomas Peterffy, billionaire founder and chairman of Interactive Brokers and the “father of HFT”.
“My fear is in the unlikely event [a bitcoin-related liquidity crisis] happens at smaller clearinghouses, we’ll have something like Lehman Brothers — or worse,” he told Fortune earlier this month, in a follow-up to his widely publicized open letter to Christopher Giancarlo.
“At the risk of embarrassing myself with yet another terrible bitcoin call, here it goes; Bitcoin futures will trade like garbage, and when they do trade, it will be at a discount,” former Bay Street derivatives trader Kevin Muir said this week, weighing in ahead of the December 10 Cboe D-Day.
But let’s leave the futures argument aside for now because after all, we’re going to get to talk about that plenty in the weeks ahead.
Perhaps more important is what Bitcoin’s inexorable ascent portends for the mental state of all the people who have been unwittingly put in a position where holdings which were previously immaterial for their personal finances are suddenly of enormous consequence.
This week, Deutsche Bank’s Torsten Slok sent the following list of 30 “risks to markets in 2018” to clients. This list is making the rounds on Friday:
Ok, so number 13 (appropriately) is “Bitcoin crash, confidence impact on retail investors.” That harkens back to something Bloomberg’s Mark Cudmore wrote several weeks ago. “The wealth impact of Bitcoin moves is soon going to become large enough to have the potential to spill over to other markets,” Cudmore warned, adding that “in January this year, you may not have batted an eye-lid at a 30% drop in your Bitcoin investment from $10,000 to $7,000, but if you held your investment until now, you may think differently about seeing your investment fall 30% from $80,000 to $56,000.”
Good point. And while there’s no way to know what percentage of retail investors who are buying stocks at these levels are also buying Bitcoin, myriad anecdotal evidence points to there being a significant degree of overlap. Coinbase added some 100,000 accounts over the Thanksgiving holiday, for instance. As ridiculous as this sounds, that would certainly seem to suggest that people were talking about Bitcoin as they tore apart turkey carcases and then went on to immediately open accounts, perhaps while gorging themselves on pumpkin pie.
Well, TD Ameritrade’s proprietary index that tracks the holdings and positions of retail clients had its largest single-month increase ever in November, rising more than 15% to hit an all-time high:
Now consider this bit from WSJ’s recent feature story on the crypto mania:
78-year-old investor Tony Horsely began investing in bitcoin over the summer just to add some spice to his portfolio. Soon, he moved about 5% of his portfolio into the coin and an exchange-traded fund based on the currency. He started writing a periodic, informal note to about 30 friends, in which he talks about bitcoin’s price dynamics and the logistics of buying it.
“I’m late to the game,” he said, “but I’m enjoying it.”
While some of his friends have expressed doubts, Mr. Horsely says about half a dozen joined him in buying. Meanwhile, he has accelerated his purchases, picking up more bitcoin on Nov. 24, and then Wednesday morning.
And then this from the same piece:
Paul Joseph Spelce, a 22-year-old graduate student in New York, was one of the newcomers who bought in. Over Thanksgiving dinner with friends last week, the conversation was dominated by talk of bitcoin. “Even this woman who didn’t have a computer at home couldn’t stop talking about how bitcoin was going to reach $10,000 soon,” Mr. Spelce said.
Now I don’t know if Paul took out any student loans to pay for grad school, but what I do know is that he’s not the only college student in America buying Bitcoin. Think about that in the context of this set of charts from Goldman:
It is entirely possible (actually, I’m going to go out on a limb here and say that it is a near certainty) that someone, somewhere is funding Bitcoin purchases with student loan disbursements.
Which brings me neatly to another question: how long is it going to be before people are effectively using Bitcoin as collateral? That is, if your net worth has just increased exponentially thanks to gains in cryptocurrencies, how long is it going to be before that gain starts getting factored in when it comes to securing lines of credit?
I mean obviously you’re not going to put an asterisk by your income that draws people’s attention to a handwritten footnote that says “this is subject to change depending on the price of make-believe space tokens that are so volatile I can’t even give you a rough estimate of where they might be trading without checking my phone”, so how are lenders going to know if this starts becoming an input in their models?
The above-mentioned Mark Cudmore said something to this effect the other day. To wit:
Maybe the real threat will come when bitcoin itself is used as the collateral to take on debt. Because investors are buying, holding and seeing incredible gains, we are hearing stories of people in the street who have their overall paper wealth increase significantly due to a few bitcoins. This may lead them to upgrade their lifestyle but belief will prevent them from locking in their profit. That's when they will be particularly vulnerable.
And I could go on, and on. The overarching point here is that before we all come to the conclusion that Bitcoin doesn’t represent a systemic risk, let’s make sure we think through all of the possibilities.