Inflection Point (Part 3):
The Ultimate Cryptocurrency Surprise
It’s pretty tough to recall a historical example of an “asset class” that has generated as much controversy as Cryptocurrencies. On the one hand, established Wall Street veterans, such as J. P. Morgan Chase Bank CEO Jamie Dimon, have called Bitcoin a “fraud” (https://www.cnbc.com/2017/10/13/jamie-dimon-says-people-who-buy-bitcoin-are-stupid.html). Others, such as the almost infamous “Winkelvoss Twins” (of early Facebook fame) have made utterly preposterous and self-serving predictions that Bitcoin value would reach in excess of $300,000 EACH (http://fortune.com/2018/02/08/winklevoss-bitcoin-value/) for a market capitalization of a measly $6 Trillion.
Markonomics101 first took on the Bitcoin debate December 21, 2017 in a piece called “Bitcoin or Bustcoin” (https://markonomics101.com/2017/12/21/bitcoin-or-bustcoin/). The conclusions, which can be reviewed in the original analysis, were that Bitcoin had a myriad of FATAL FLAWS, precluding it from EVER being very useful as a “currency”. The valuation, which coincidentally peaked two days earlier on December 19th, 2017 at nearly $20,000 per coin, was entirely UN-supportable by ANY conceivable metric of valuation. Since then, the risk factors outlined last year have become much more widely known and in the last 7 months, BTC has lost a whopping 70% of its “value”. Recently, Bitcoin’s use as a “currency” suffered further damaged in the loss of acceptance by travel giant Expedia for payments (https://news.bitcoin.com/expedia-drops-bitcoin-payments-official-confirms/).
Recently, we have made the case that the vicious Cryptocurrency Sector 2018 Bear Market was nearing resumption (https://markonomics101.com/2018/06/24/cryptocurrency-sector-resumes-its-historic-2018-bear-market/). But, that prediction needs to be put into a longer-term context as Cryptocurrencies appear to be every bit as prone to the “Inflection Point” as Equities (https://markonomics101.com/2018/07/12/inflection-point-part-1-the-long-term-equity-valuation-cycle/) and Precious Metals/Commodities (https://markonomics101.com/2018/07/15/inflection-point-part-2-financial-assets-give-way-to-hard-assets/).
The Cryptocurrency Mania was a “side effect” of the roughly 8 years of Quantitative Easing (QE) by the Federal Reserve and the Ocean of liquidity it created. Rather than stimulate Economic Growth, the prolonged period of near zero short term interest rates drove investment capital to seek returns elsewhere. Much of that investment capital ended up in Cryptocurrencies. In the one-year period ending January 7th, 2018, according to CoinMarketCap (https://coinmarketcap.com/), the total Market Capitalization grew from a practically non-existent $16 Billion to a “world conquering” $830 Billion, an unprecedented 5000% return.
Did that mean the Bulls were right? Not necessarily. One month later, the Total Market Capitalization had plummeted to $282 Billion, a jaw dropping 64% loss in 30 calendar days. Did that mean the Bears were right? Not necessarily.
Keep in mind that the nature of Mr. Market is to confound and confuse the largest proportion of players possible. The scenario which accomplishes that objective the best has BOTH BULLS AND BEARS being partially right and partially wrong. What if the BULLS were right about the ultimate evolution of digital currency becoming a major factor while the BEARS were right about the value?
Bus tokens are useful but have no real value. How are Cryptocurrencies different? They are NOT.
It is important to note the “asset classes”, referenced above, include equites/stocks, bonds, commodities, and currencies. PAPER currencies fluctuate AGAINST or RELATIVE to each other, obeying the laws of supply and demand.
Presented below are charts of 5 Large Capitalization Cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Ripple (XRP) and Litecoin (LTC). These 5 make up about 75% of the entire value of the Cryptocurrency Sector. Notice anything unusual about these charts? They’re virtually identical. Why is that important? There is NO DIFFERENTIATION. Does that remind you of another asset class, never uttered in the same breath as Cryptocurrencies?
Cryptocurrencies are COMMODITIES. Let that sink in. Cryptocurrencies are COMMODITIES. Think of Crude Oil as an example or refined products such as Gasoline. Don’t prices of 91 Octane Premium Unleaded essentially trade in tandem with 89 or 87 Octane Unleaded, other than a small premium or discount?
If Oil is reported to have gone up by $3/barrel to a new level of $75/barrel, that usually refers to West Texas Intermediate Crude (WTIC), but there are literally hundreds of “Grades” or “Qualities” of Crude Oil. Some, such as Brent Sea Crude (“Light Sweet”),which trade at a premium while others, such as that produced by Venezuela (“Heavy Sour”). trade at a discount. But, if one grade of oil goes up in price, they ALL GO UP, and vice versa. If Gold goes up, Silver, Platinum, and Palladium tend to go up. If Bitcoin goes up, the other Cryptocurrencies go up with an extremely HIGH probability.
Math geeks like me, love to use statistics to measure the validity of our theories. A terrific site for Cryptocurrency Analytics is called SIFR Data (https://www.sifrdata.com/) which performs some pretty advanced statistical work on these “assets”. The “red boxes” below are “Correlation Matrixes” for major Cryptocurrencies amongst and relative to each other for both the last 90 days and prior 365 days.
How do we make ANY sense of this? Take a minute and look at the TOP ROW of each matrix. The TOP ROW is labelled BTC and is the degree of correlation between Bitcoin and Ethereum (ETH), Ripple (XRP), Litecoin (LTC) and other LARGE Capitalization Cryptocurrencies for either the last 90 days or 365 days. The correlation for the last 90 days for BTC and ETH is 0.91, for BTC and XRP is 0.82, and for BTC and LTC is 0.88. Over the last year, the correlations are MUCH LOWER: for BTC and ETH it is 0.67, BTC and XRP is 0.45, and BTC and LTC is 0.67.
Normally, a maturing asset or market sector, such as equities, will be characterized by greater differentiation between companies and thus a lower degree of correlation. During the dot com Mania, for example, Amazon (AMZN) became a huge winner while similar and competitive enterprises like defunct bookseller Barnes and Noble (WHO???) ultimately failed. In stark contrast, the correlations between the individual Cryptocurrencies has RISEN to an average near 0.9 over the last 90 days, which is stunning.
As an example of another commodities grouping, gold and silver bullion dealer Scottsdale Bullion has performed the same type of analysis regarding the correlation between Silver and Gold: (https://www.sbcgold.com/blog/predicting-gold-prices-with-correlation-coefficients/). Their statistical work shows a long-run correlation coefficient of 0.89 to 0.92, nearly identical to that measured between Cryptocurrency giants BTC, ETH, XRP and LTC!
The ramifications of this stunning and surprising analysis are far reaching for Cryptocurrency players. In the next installment of “Inflection Point”, we will reveal exactly how this correlation will play out and how Mr. Market will FOOL the MOST PLAYERS and relieve them of their hard-earned money.