Worried You Might Buy Bitcoin or Gold

By Keith Weiner of Monetary Metals

The price of gold has been rising, but perhaps not enough to suit the hot money. Meanwhile, the price of bitcoin has shot up even faster. From $412, one year ago, to $1290 on Friday, it has gained over 200% (and, unlike gold, we can say that bitcoin went up—it’s a speculative asset that goes up and down with no particular limit). Compared to the price action in bitcoin, gold seems boring. While this is a virtue for gold to be used as money (and a vice for bitcoin), it does tend to attract those who just want to get into the hottest casino du jure.

Perhaps predictably, we saw an ad from a gold bullion dealer. This well-known dealer is comparing gold to bitcoin, and urging customers to stick with gold because of gold’s potential for price appreciation. We would not recommend this argument. Whatever the merits of gold may be, going up faster than bitcoin is not among them.

We spotted an ad today from a mainstream financial adviser. The ad urged clients not to buy gold. This firm should have little need to worry. Stocks have been in a long, long, endless, forever, never-to-end bull market. Gold is not doing anything exciting now. $1234? “WhatEVAH (roll eyes)!” Stocks, well, the prices just keep on going up. Like we said, nothing whatsoever to worry about. Other than declining dividend yields. There’s more than enough irony to go around.

Speaking of dividend yield, that leads us to an idea. Readers know that we like to compare the yield of one investment to another. This is why we quote the basis as an annualized percentage. You can compare basis to LIBOR easily. And also stocks. Or anything else.

For example, the basis for December—a maturity of well under a year—is 1.2%. The dividend yield of the S&P stocks is just 1.9%. For that extra 70bps, you are taking a number of known risks, and some unknown risks too.

It is worth noting that the yield on the 10-year Treasury is up to 2.5%. Yes, that’s right, you are paid less for the risk of investing in big corporations than you are for holding the risk free asset. Of course, the Treasury bond is not really risk free. But in any case, if the Treasury defaults then it’s safe to assume most corporations will be destroyed, if not our whole civilization.

Continue reading Worried You Might Buy Bitcoin or Gold

Bitcoin is a Bubble We’ve Seen Before

By Tom McClellan

Bitcoin prices versus Nasdaq 2000 bubble
January 27, 2017

Most investors remember the 2000 Internet Bubble, which was an example of bubbles for the history books.  What is harder is to recognize a replica bubble when it appears again later, especially if it disguises itself.

This week’s chart reveals that the price of Bitcoins is replicating the 2000 Nasdaq bubble and its aftermath.  But the curious point is that Bitcoin prices are tracing out the dance steps much more quickly.  This is a great example of the new and improved “Efficient Market Hypothesis” or EMH.  No, it’s not the one you think.  The new EMH states that the market now can get a lot more work done in a short time, work that used to take a long time.

An example of the new EMH is the Brexit minicrash, which was a surprise to investors and which two and a half days to play out.  It saw a rapid price drop for stock prices, and then a robust rebound.  The Nov. 8 election victory of Donald Trump caused a similar upset to the financial markets, but rather than taking two and a half days to play out, the minicrash and rebound unfolded in a single overnight session.  The market is getting more efficient.

The price of bitcoins had a bubble top and crash back in late 2013 to early 2014.  As a brief review, a bitcoin is a “cryptocurrency”, or a digital asset designed to take the place of money.  Bitcoins have only been used as a medium of exchange since 2010.  Adherents are attracted to them because of their (supposed) anonymity, and portability without border restriction, or so it has been believed.  China’s intrusions into that market have brought that assumption into question.

Bitcoin prices had an initial bubble top in late 2013.  This week’s chart compares the history of bitcoin prices since mid-2013 to the pattern made by the Nasdaq Composite from 1998-2008.  As noted in the chart, the time scales here are not equal.  It appears that bitcoin prices are tracing out the double-bubble dance steps seen in the Nasdaq, but the Bitcoin prices are doing so much more quickly.

The time scales are not equal in this comparison.  So I had to do a little bit of chart trickery to create this image.  Most charting programs that allow two data series to be displayed together in one chart want equal numbers of data points for each data series.  To get around that, and allow the resemblance to be visible, I actually created two charts with transparent backgrounds, and then overlaid one upon the other, like two pieces of acetate used for overhead transparencies (remember those?).  Then a little bit of accordion style stretching and repositioning allowed the pattern correlation to be revealed.

Assuming that this correlation continues into the future, bitcoins are going to arrive in a few days at the equivalent of the Oct. 31, 2007 top in the Nasdaq.  And shortly thereafter, they should see an echo of the 2008 bear market (again, assuming that the correlation continues).

So if you are “holding” any Bitcoins (not that anyone can actually hold something so ethereal), your moment to exit and flee is rapidly approaching.

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