Bursting Bitcoin Bubble?

Fundstrat Daily reports that “YTD, the crypto market is down -60.7%” as of July 2.

We have been asked again about Bitcoin and “bubbles” following the recent gyrations and the plunge. “Should I buy it?” asked a reader.

First, we offer the required disclosure: We don’t own any cryptocurrency in any Cumberland managed account. And we don’t own any derivative or other form of crypto. We have avoided the group. We don’t see crypto as a deep-enough and mature-enough assemblage of tokens to qualify as an asset class – yet. That assessment may change at some point but not likely soon.

Nick Colas and Jessica Rabe have been tracking Bitcoin for a while. They write about it from time to time. See http://datatrekresearch.com.

“We’ve been tracking Bitcoin wallet growth and Google search term volumes… as the carnage has unfolded. Our repeated message in these pages: the former is growing only slowly, and the latter is in outright decline. Bitcoin is ultimately a technology, and without incremental adoption growth it has a tough row to hoe.”

Later in their research they add the following warning: “To be clear: we’re not calling a bottom on Bitcoin, but its complete decoupling from stocks may be one sign of a washout [s]ince it now resembles the time before anyone but computer nerds really cared about it.”

Thank you, Datatrek, for keeping us up to date.

Readers may recall that in previous writings we argued that the world wants the use of crypto and security of blockchain linkage in a secret transaction. Illegal use is one reason. Privacy is another. So is having a wealth-hoarding mechanism that cannot be confiscated if the owner has to flee. As Fundstrat Daily noted (on July 2), “When comparing Bitcoin to other major asset classes (stocks, bonds, hedge funds, oil and gold), Bitcoin has the highest correlation to Gold (4.4%) and the lowest correlation to S&P 500 (-15.2%).”

We also see the eventual rollout of credible asset-backed crypto as an evolution in progress. Many gold-backed tokens are in the works or are in the start-up phase of issuance. That activity is mostly outside the US. We think it will expand and will intensify once the Venezuelan selling of gold has run its course. For more information about gold-backed crypto, see Goldscape’s weekly blog and guide at http://www.goldscape.net.

Note that Russia and China are continuously buying gold, according to official reports. Also note that a Sharia-approved, gold-backed crypto called OneGram (https://onegram.org/whitepaper) has launched in the Arab world. (This link is provided so readers can see this evolutionary development in crypto. It is not an endorsement.)

In sum, crypto is not over, though the Bitcoin bubble, having burst, may yet have more deflating to do.

The bursting of bubbles has a long history in finance and economics. That means the making of those bubbles is equally long in history. For a great recitation of bubble history see Charles MacKay’s famous classic, Extraordinary Popular Delusions and the Madness of Crowds (https://www.amazon.com/Extraordinary-Popular-Delusions-Madness-Crowds/dp/1539849589/ or find the PDF online.)

Commodities have bubbles. Silver, gold, copper and oil are examples.

Real estate has bubbles – housing, shopping centers, offices, the Florida land boom a century ago. The Florida condo boom today may become a future bubble.

Stock market bubbles are renowned –  bowling alley stocks, casinos, tech stocks, home builders, banks, savings and loans. From tulips to Trump’s Taj Mahal, the history of bubbles is littered with casualties.

Could FAANMG be the current stock market bubble? Is the hotel, leisure, cruise ship sector about to become a bubble, too?

Note that the bursting of a bubble doesn’t mean the selloff goes to zero. When the Nasdaq bubble burst 18 years ago, the Nasdaq lost two thirds of its value from peak to trough, but it didn’t go to zero. Some of the start-up companies that traded at price/fantasy ratios went to zero. Similarly, some start-up crypto ventures are now at zero.

In the end, markets clear to reasonable values, and the range of those reasonable values includes zero if the value is worthless.

Some have argued that Bitcoin’s rise was tied to stock market success and that the cryptocurrency’s subsequent decline portends a stock market crash. We’re not so sure of that linkage. We agree with the Datatrek conclusion: Despite occasionally looking like a barometer for systematic risk appetite, there continues to be no proof that Bitcoin’s price presages where the S&P 500 may go in the near term.”

We’re a lot more worried about the consequences of a trade war than we are about Bitcoin. We think the US economy is peaking in growth rate in Q2. The Trump-Navarro policy and an escalating trade war are already starting to bite. Ask Harley-Davidson. Ask a soybean farmer. Ask a Maine lobsterman. This is only the beginning.

We have some cash reserve. We took a defensive position in consumer staples. We favor small and midcap and domestic US versus international. We sold the overweight tech exposure.

David R. Kotok
Chairman & Chief Investment Officer
Email | Bio

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

Cryptocurrency Investors Worry, Wait After Bitcoin Price Drop

Excerpt below:

In the wake of this week’s crash, the top post in the Reddit forum /r/CryptoCurrency was about how to contact a suicide hotline, apparently a response to distress on the part of recent investors.

Some economists say this is a familiar pattern.

“Twenty years ago, the technology stocks and new Internet stocks achieved an excess valuation of $7 trillion because of speculation,” said David Kotok, chairman and chief investment officer of Cumberland Advisors. “The prices of shares were bid up to very high levels. When they collapsed, investors … they got very hurt. We see similar characteristics in cryptocurrencies right now.”

Bitcoin investors know this trend as well.

“I think [cryptocurrencies] are highly speculative,” Kotok said. “Putting money into cryptocurrencies is a speculative thing to do. You might make a profit, but what we are seeing is people who — in the last month or two — put money into bitcoin, are having trouble getting cash back when they sell and are now watching the price fall and panicking.”

Read the complete article at WPSU Radio

Longboat Kiwanis Club hosts financial expert to discuss Bitcoin

An expert on one of the world’s suddenly hot, but still mystifying, investments is the scheduled luncheon speaker at the Kiwanis Club of Longboat Key’s Jan. 18 meeting at Portofino Restaurant at the Longboat Key Club.

David Kotok, chairman and chief investment officer of Sarasota based Cumberland Advisors, will discuss Bitcoin, Blockchain and other financial topics at his 11:45 a.m. presentation.

Read full article at YourObserver.com

Wealth Managers Are Being Inundated With Calls About Bitcoin

At 74, Cumberland Advisors’ David Kotok has guided wealthy clients through a long career’s worth of bubbles and crashes. Now he’s being inundated with questions about the latest soaring asset to confound investors — bitcoin.

“Clients bring up bitcoin all the time,” said Kotok. “They think it’s cool. It has the newness, which is attractive to some people, though others would say newness is a risk they don’t want to take.”

Read full article here: https://www.bloomberg.com

Kotok On Bitcoin, Gold & Trump’s Approval Ratings