What Bubble? The Bullish Case For Cryptocurrencies
People are taking out mortgages and using retirement funds to buy cryptocurrencies.
When experienced and sophisticated investors read about the herd jumping into a hot new thing that has run up over 500 percent in a matter of months, they naturally get concerned that the market in question could be in a speculative bubble.
Many experienced investors went through the boom-and-bust cycles of tech stocks in 2000 and real estate in 2008. They’re familiar with the “it’s-different-this-time” story and can recognize when something smells bubblelicious.
— Jamarlin Martin (@JamarlinMartin) August 16, 2017
There are many many flags related to the crypto market that signal it has gone into a speculative parabolic bubble. That doesn’t tell us much about how long the bubble will last or what inning the bubble is in. Are we in the first inning of a massive bubble or the eighth?
Bearish investors and traders need to fully understand the comprehensive bull case for crypto.
Here it is.
1.Massive demand for alternative to fiat currency optimized for the digital age
There is a massive demand for an alternative to major currencies such as the USD, euro, Chinese yuan, or yen. Governments print as much money as they like and the system works as long as the public believes it is valuable and the government doesn’t go too far. Because the system has worked in the past doesn’t mean it will always work. In extreme cases such as Zimbabwe or Venezuela, the paper that the government printed is worth nothing. It is conceivable for major governments to make fatal mistakes that will make their currencies worthless. It is conceivable for the public to lose faith in the dollar, yuan, euro, or yen.
The fiat system is dependent on a belief that a government can pay its bills if forced to. Major governments are supposed to have A+ credit but in reality, most governments have expenses that are a multiple of their revenue. They spend more money than they take in and just borrow money, print, borrow, print. There is an unlimited supply of fiat currency while scarcity and limited supply will work in Crypto’s favor.
The Ponzi scheme goes on and on until it doesn’t. If the fiat currency system fails, is there an alternative? Gold is a good option but is there something for the digital age? Yes. It is crypto. Diversification is at at the core of smart capitalism and many investors are exposed 100 percent In the fiat system. Investors are increasing their knowledge of adding crypto in their asset allocation mix. Crypto could have a multi-decade run if institutional and individual investors target crypto at 1perent of their portfolio allocation.
Converting foreign exchange is not very efficient. You travel to several countries such as Vienna, Prague, Oslo, and Cape Town and you are dealing with four different currencies — euro, Czech krona, Norwegian krone, and South African rand. Multiple exchange-rate conversions can be a nightmare with time and expenses. What if each city took Bitcoin, Ether, or both? You could buy great food with crypto without thinking about FX conversions. One of many promises of crypto is it can make it less expensive and more convenient to deal with FX issues between countries.
3. Government Control and Privacy
As governments seek to control and monitor their citizens, fiat currency is used as a powerful weapon. If the government controls the currency, they control you. With crypto, at least in its current form, governments don’t have any control and customers can transact privately and securely without government meddling.
For example, many investors in China feared that the Chinese economic miracle is a mirage and locals fearfully sought to move billions of dollars of yuan out of China. China sought to put restrictions on how much its citizens could exchange into foreign currency (selling yuan, buying USD for example). Let’s say you had $50 million in China but were scared the government wouldn’t let you move your hard-earned money out of the country. If it is in yuan and at a bank, you could be screwed. However, if your money is in the cloud without any government control, maybe you have a chance to transfer your funds freely. One way China is regulating this is at the intermediary level but Chinese wishing to get their money out are likely better off with crypto than fiat currency. Crypto has the flexibility potential to shift the power dynamic in favor of the consumer or asset holder.
4. The elite global establishment is increasingly embracing crypto
Former Federal Reserve Chairman Ben Bernanke will be speaking at cryptocurrency startup Ripple’s conference in Toronto. In 2013, Bernanke wrote a paper stating that Blockchain, the technology behind crypto, might hold long-term promise. Now crypto has enough credibility where one of the second-tier alt currencies is getting Mr. Establishment to speak at their conference.
In June, Bloomberg reported that Russian President Vladimir Putin, who allegedly has a net worth of $100 billion, is getting interested in Ethereum or Ether, a Tier 1 alt currency:
Putin met Ethereum founder Vitalik Buterin on the sidelines of the St. Petersburg Economic Forum last week and supported his plans to build contacts with local partners to implement blockchain technology in Russia, according to a statement on the Kremlin’s website.
“The digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models,” Putin said at the event, discussing means to boost growth long-term after Russia ended its worst recession in two decades.
Virtual currencies could help the economy by making transactions happen more quickly and safely online. Besides being a method of exchange, Ethereum can also serve as a ledger for everything from currency contracts to property rights, speeding up business by cutting out intermediaries such as public notaries.
Russia’s central bank has already deployed an Ethereum-based blockchain as a pilot project to process online payments and verify customer data with lenders including Sberbank PJSC, Deputy Governor Olga Skorobogatova said at the St. Petersburg event. She didn’t rule out using Ethereum technologies for the development of a national virtual currency for Russia down the road.
Last week, Russia’s state development bank VEB agreed to start using Ethereum for some administrative functions. Steelmaker Severstal PJSC tested Ethereum’s blockchain for secure transfer of international credit letters.
Fidelity, which has $2.1 trillion in assets under management, announced in May that it will allow clients to see their crypto portfolios right on the Fidelity platform with a hook up with the popular Coinbase platform. In terms of legitimacy, when one of the biggest financial institutions in the world starts to embrace crypto, folks should pay attention.
In July, Goldman Sachs analyst Sheba Jafari made a bold call that Bitcoin would rise 50 percent. It’s significant for a Goldman analyst to take the time to research technical analysis on the Bitcoin chart and provide commentary to clients. It reflects demand from the wealthy clients at Goldman for good information about investing in Bitcoin.
Barrons recently reported that Fundstrat’s Thomas Lee has forecast Bitcoin to go to $6000 in mid-2018. Lee wrote:
We project user accounts to grow 50 percent to 976,350 and usage per account to rise 30 percent to $4,050 (it rose 2,000 percent in past year). These growth rates are a downshift from recent trend and arguably are conservative given accelerating adoption. Based on the respective coefficients, each 10 percent rise in user accounts adds $222 to the value of bitcoin. Similarly, each 10 percent rise in user activity per account adds $274 to the value of bitcoin. User accounts are subject to a log function (N^2) so a 50 percent rise in users is greater than 5X impact.
UBS, is the largest bank in Switzerland and 19th in the world. Its senior innovation manager, Alex Batlin, is bullish on Bitcoin:
“Our innovation Lab at Level39 will provide a unique platform to explore emerging technologies such as blockchain and cryptocurrencies, and to understand the potential impact for the industry.
“No need to open bank accounts or deal with VISA, PayPal etc. Imagine if just half of the unbanked started using Bitcoin. Would the rest of the world be able to resist it?”
5. Corruption, tax avoidance, and asset protection aren’t going away and will be supportive of crypto
In the digital age, it is getting harder for government officials and corporations to commit fraud. The Panama Papers are thought to be the biggest leak in world history with 12 world leaders named. Pakistan’s president was forced to resign in July based on alleged corruption revealed in the leak. Corrupt money is always looking for safer and better places to hide. Look at the corruption in Russia, Venezuela, Nigeria, Brazil, and Saudi Arabia or tax cheats in western countries hiding money from their home countries.
Swiss banks and others have folded from their historical financial secrecy laws, opening up a big void in terms of cleaning and holding dirty money. This produces a natural demand for crypto. Just as Swiss bankers did very well when their financial secrecy laws were in place, some institutions and financial instruments will benefit from dirty money looking for a home. What about asset protection?
In a U.S. divorce, it may be straightforward to go after cash and assets in an American bank. Good luck seizing a complex set of offshore entities and structures owning crypto. Robert Pagliarini, a best-selling author and wealth manager described Bitcoin as The New, High-Tech Way to Hide Assets in a Divorce.
Unless corruption and tax avoidance are going to dramatically change overnight, it is likely that there is room for at least $1 trillion of dirty money, tax avoidance, and asset protection money going into crypto.