Could A Bitcoin Breakdown Pop 'The Bubble'?

Photo: Could A Bitcoin Breakdown Pop 'The Bubble'?

***Authors Note: If any of my statements cross the line into opinion, they are my opinions, and not necessarily those of Cambridge House International.***

The last few months have been wild in the crypto markets.

December saw Bitcoin prices approach $20,000 USD, only to be nearly cut in half in less than a week. The rest of the cryptos seem to more or less track the flagship, which is Bitcoin, so it isn't outlandish to suggest that if Bitcoin prices saw a major crash from current levels, the entire crypto space would follow it down.

In a recent panel discussion at VRIC 2018 that focused on gold, Kitco's Director of Global Trading, Peter Hug, stated that the millennials have yet to be suffer major financial losses. They were too young during the crisis in 2008 to have seen any action, and thus, exotic new instruments like Bitcoin are all gain without the fear of any pain.

It may be worthwhile to note that the vast majority of crypto owners and traders are under forty years of age, and many are looking at the crypto market as more of a casino than anything else. There is also the issue of redemptions, and how crypto investors that are sitting on huge paper gains could move to monetize them before they go up in smoke.

While these are all interesting ideas to consider, the issue at hand could be much larger in scope.

It drives at the center of an issue that another member of the above mentioned panel has expanded on at length. Jim Rickards has used the concept of Ice-9, originally from a Kurt Vonnegut novel, to illustrate how a liquidity crisis could rock the financial markets.

The financial markets are growing larger and more complex all the time, but the core of their functionality is liquidity.

Jim Rickards points out that a liquidity shortage in any major market could lead to a scramble to find it anywhere else it was available, and thus create a system wide collapse wherein the world financial markets freeze.

Extreme Moves

According to Doug Casey, the crisis in 2008 never ended.

Outright collapse was avoided by creating debt on a level never before seen in human history, with the long term consequences completely unknowable. Doug also asserts that today investment really isn't possible in this financial landscape.

We are all, whether we like it or not, speculators.

This may be one of the big drivers in the crypto space at the moment, and why it has the potential to set off a chain reaction. While the cryptos aren't connected to the financial markets in the same way that Lehman Brothers and Bear Stearns were, they have level of influence that could be just as devastating.

Given the sudden rise in price of cryptos, and the kind of people who are 'invested' in them, it wouldn't take much for their collapse to engender a crisis of confidence around the world.

Another Symptom

The economic narrative that is found in the mainstream US media stretches reality to the breaking point.

To be fair, the media is just reporting the statistics the US Government feed them, though they could do a bit more in the way of critical analysis. It isn't hard to see why the millennials, or South Korea's 'Bitcoin Zombies' are looking for a silver lining in today's world.

The job market is not welcoming in the US, millennials are burdened with debt, and young South Koreans have to live with the ongoing threat of becoming part of the wick that lights off World War 3.

While unemployment in the US is in the low single digits, this feat was accomplished via people leaving the labor force. In a sense, the unemployment rate is low, because there are so many people that are unemployed.

This would explain why homelessness, suicide and drug overdoses are all on the rise in the US, given that all those people who stopped working had to do something.

In a monetary sense, the rise of cryptos is another perfect way to suck up all the money that has been created over the last twenty years, and not have it enter the real economy. If people actually spent the money on real goods, inflation could pick up.

This is never good for governments, as rising prices for staple goods always hurt the poor far more than the middle or upper classes.

As long as people keep dumping their US Dollars, Euros, Pounds and Yen into financial products, and I mean any financial product, the illusion of wealth can continue. But as soon as the financial fairy tale we are being told hits the physical world (commodities), there could be some nasty surprises.

Hungry Bull Running

On the sidelines of VRIC Doug Casey said he was bullish on the commodities, with special emphasis on agricultural goods.

If Doug is right, and agricultural commodities take off, there could be a repeat of the social unrest we saw in 2010. Hungry people are usually short of patience, and will do just about anything to get food. Venezuela is a perfect example of how bad things can get over a short time, with angry mobs sacking stores to get their hands on anything they can find to eat.

Venezuela has also been a prime market for cryptos, with both the government and population looking for ways to take advantage of a system that lets them trade outside of the rigid controls that exist for both groups.

It is unknown to what degree a major drop in crypto prices would have on their utility in emerging economies, but it is unlikely to engender confidence in their use.

If Bitcoin lost half or more of its value from today's price of $11,500 (more or less), the people who have adopted the use of totally new financial instruments might be wary of using something that has no intrinsic value, no physical existence, and no government backing.

The Answer

This piece began with a question:

Could A Bitcoin Breakdown Pop 'The Bubble'?

The answer is: Of course.

But is certainly isn't the only thing that could create a crisis of confidence in a financial system that is a distorted shadow of the real economy that it purports to represent.

There are any number of things that could make faith and confidence evaporate, just like they did in 2008. As many people have pointed out, the same dramatic actions from central banks probably won't be enough to restore faith in the system.

Jim Rickards sees the IMF using SDR's to reliquify the system, though this assumes that there is still enough international cooperation to make the IMF function.

If open war is the reason for a financial panic, the options to shore up trust become more limited. Precious metals have been used since time immemorial as a means of settlement, and depending on how deeply faith in our financial system is shaken, they may be the only thing left that can establish trust.

There is no way to know when the next crisis will hit, but according to numerous respected investors, something will set one off before too long.