A bubble is “when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely…” This commentary is going to be expanded as time goes on. But I wanted to quickly put something out into the world to explain my concerns with bitcoin and other high risk asset classes.
First, when I say that a sudden collapse is likely, it does not mean that one is imminent. It means that there is a high probability of it occurring. There are ways in which a bubble can end, besides in a crash. Speculation can die down slowly and allow the price to level off or drop slowly. Or the reasonable valuation of the asset can rise due to changes in supply and demand. Either of these situations would cause the bubble to end without a crash.
It is argued that $BTC is not in a bubble. One argument used is that people have been claiming that it has been a bubble for a long time, and yet even new adopters have been profiting substantially. But as I said in the very beginning, a bubble just implies a high probability of crashing. A bubble can last for a very long time before it does, if it ever does at all. Many argue that the $USD is in a bubble, by the same people who profess that bitcoin is going to continue to grow and grow and grow. I agree that the dollar is a bubble. It has yet to crash, but that does not mean that it is not a bubble. The stock market has been argued to be in a bubble. Again, I agree. Months ago I wrote an article about how stocks were overvalued. Since then, stocks have continued to climb higher, but this climb has just resulted in greater risk.
What makes $BTC a bubble? Aside from the rapid spike in price, the high volatility associated with rampant speculation are to blame. Much of the exchange volume is due to speculation, and very little is due to use. This result has been caused by the inherent deflationary nature of the cryotoasset.
One reason why I think $BTC and other cryptoassets are growing in price so much is because people who would normally be shorting the market are instead putting their money into $BTC et al. Because of the “BTFD” mentality, shorting stocks right now isn’t getting anyone anywhere, but most traders do not want to just leave their money on the sidelines. Because of the cryptoasset bubble, even though there is a lot of risk, the reward seems much better than stocks, and so money is flowing into the cryptoasset market. However, that also means that once things start to go south with the stock market, money very well may flow out of bitcoin and others and into short positions in stocks. Now, some of the long positions may transition to bitcoin or another cryptoasset, which may buffer the price, but it is hard to tell. What I do expect is a waterfall effect for the S&P 500 and other indices.
People can certainly profit during a bubble. A bubble may never really burst. However, the risk is great, and that point should be made clear. Also, the way in which the cryptoasset markets, precious metals markets, and stock markets are interacting, make the risk for stocks even greater.
- Gold vs Bitcoin
- Investing 101