With Bitcoin soaring and on a wild roller coaster, I find it ridiculous that people like Jim Cramer would say “Bitcoin could go to $1 million one day”. They’re making up “fundamental” reasons that are just ridiculous.
“I think it could [go to $1 million] because the European banks are frantically trying to buy them so they can pay off ransomware. It’s a short-term way to be able to deal with cybersecurity. It is the way to pay off the bad guys” – Jim Cramer
I know a bunch of people high up in the investment and commercial banking world, and NO ONE is buying Bitcoin for ransomware reasons. Bitcoin doesn’t have fundamentals. As usual, Cramer has been drinking the Kool-aid.
Why is Bitcoin rising
Yes, Bitcoin is in a bubble. But what most people don’t know is that the Bitcoin’s speculators are mostly Chinese.
Here’s a timeline.
Throughout 2016, 80-90% of Bitcoin’s total trading volume came from China. When Bitcoin first soared to $1150 in January 2017, 90%+ of the trading volume came from China. Then the Chinese government clamped down on Bitcoin in China. China’s share of total Bitcoin volume immediately plunged to less than 15%. Since then, Bitcoin’s trading volume in Japan has exploded. Japan now accounts for more than 50% of global Bitcoin volume.
People don’t realize that Chinese investors are routing their Bitcoin trading through Japan. A lot of Chinese investors have companies that are tied to Korea, Japan, and the rest of Asia through trade. With the Chinese government clamping down on Bitcoin in China, the Chinese investors are masking their trades overseas.
Nobody speculates like the Chinese. The Chinese speculate everything from Chinese stocks, global real estate, and (now Bitcoin) like they’re buying candy. Like one of my friends in Goldman’s Beijing office puts it, “the Chinese have a unique trading style – their herd mentality is insane”.
The Chinese pump and dump.
- In 2015, the Chinese pumped and dumped Chinese stocks. When was the last time you saw a broad stock index soar more than 150% in less than one year? (The Shanghai Index soared from 2000 to 5200 in less than 1 year by 2015).
- Many major cities around the world like Toronto, Vancouver, and Sydney are clamping down on foreign (i.e. Chinese) real estate speculators. Following these policies, housing prices in cities like Vancouver immediately collapsed 30%. Here in Sydney, the Chinese buy real estate like their buying candy at a candy store.
When the dust settles from Bitcoin, we’ll see the same thing occur. Someone will start the initial selling, and Chinese “investors” will hit the exits at 200mph. Like Warren Buffett says, “only when the tide goes out do you see who’s swimming naked”.
*After the Chinese exit Bitcoin, they’ll move on to another asset to pump and dump. That’s why our sister hedge fund is bullish on gold, silver, and commodities for the next few years. Our sister fund trades commodities but we don’t.
Where Bitcoin is right now
We don’t trade Bitcoin from either the long or the short side, and we never will. Bubbles kill both longs and shorts. We only trade UPRO (the S&P 500’s 3x ETF).
In late-May we said that Bitcoin’s top wasn’t in. We said that Bitcoin should consolidate in a big range and then make a new high.
Since then, Bitcoin has completed its consolidation and made a new high. Perhaps this is the top of Bitcoin’s bubble. Who knows.
Predicting the top is meaningless. No one can consistently and accurately predict when and where a bubble is going to burst. That’s the nature of a bubble. Towards the end, you have a lot of dumb money entering the market and make up “justifications” for why the market should go to infinity and beyond.
Here are some of those “justifications”.
Bitcoin is not a currency
Some people believe that Bitcoin is the greatest currency on earth because it is out of the “evil government’s” reach. “The government can’t print Bitcoin the way they can print paper money”. They say that Bitcoin should go to $10,000 because “this is the currency of the future – a democratic currency.” Although these people are in the minority, their “rationale” captures the most media attention. Everyone loves a good story.
Their rationale is just plain BS. There’s no other way to put it.
Bitcoin is not a currency. It’s an asset. Let’s go back to the most basic definition of a currency.
A currency has five characteristics:
- A relatively stable store of value.
- Limited in quantity.
- Accepted as a means of transaction.
The third reason is why Bitcoin will never be a currency. A currency must be a relatively stable store of value. The average Joe doesn’t want to hold a “currency” that can lose 20-30% of its value in 1 day. Can you imagine having $10,000 in your bank account and waking up tomorrow to find out that you only have $8,000 in your bank account?
- This is why many people in third world and developing countries prefer to hold the USD. The USD is far from being a perfect currency, but at least it’s relatively stable.
- Similarly, this is why even English Premier League players want to be paid in Euro and not Pounds. They would rather hold a more stable currency like the Euro than a currency that’s volatile and has been falling like the Pound.
- Likewise, stores don’t accept gold. Gold’s value relative to the USD fluctuates wildly. And unlike gold/silver, Bitcoin doesn’t even have any real physical demand. Bitcoin is just code.
Bitcoin often jumps and crashes double digits in a single day. It will not gain mass acceptance.
Speculators account for the vast majority of trading volume on the Bitcoin exchanges. They’re creating “value” out of thin air.
Like any asset (especially a digital one), Bitcoin will have its fair share of crazy bull markets and bear markets.
The U.S. will not adopt Bitcoin.
No government is going to replace their own fiat currency with Bitcoin. No government is going to give up the right to print money. To gain mass traction, Bitcoin must be approved by the government AND be a relatively stable store of value .
Perma-bears and doomsayers can argue all they want about “the USD is going to zero”. But let’s look at the facts. After trillions of dollars of global quantitative easing, international inflation is still low.