Are we allowed to talk about Bitcoin?

I speculate on asset prices for a living and I am ALWAYS worried.

If you buy more bitcoin (or any cryptocurrency right now), whether you realize it or not you are betting on central banks being able to keep a giant asset bubble going. Except the bubble is already popping. In slow motion, even though many of the things that traded at crazy prices, including bitcoin, are already down 50, 60, 70 percent.

Since the financial crisis, they have been buying debt via quantitative easing, and have kept interest rates pinned near zero in nominal terms, and that blew up asset values artificially. And they did that on turbo during the pandemic, which brought us to a peak late last year. They created an everything bubble, even though people on here focused on cryptos, and NFTs andt he meme stocks like Gamestop and the IPOs we talked about like Coinbase, etc.

Every time the Fed made overtures about reversing since they started this craziness after the financial crisis, markets freaked out and the central bank panicked and stepped back in with more rather than letting any failure happen.

Bitcoin may or may not have intrinsic value of some sort in the final analysis, but its price has been directly correlated to the riskiest assets out there, many of which are also down more than 50 percent since they peaked,.

The bubble is deflating because the Fed is raising the overnight rate and has a plan in place to start letting the enormous balance sheet it built decrease-- what sent things flying during the pandemic.

If you think this is a buying opportunity, whether you understand what is happening or not, you are entirely betting that they are going to back off again and somehow be able to start injecting more liquidity in again. At least understand that and have a fundamental basis for why you believe that is what is going to happen.

What is different this time, though, is the INFLATION that has run away on them. And now, the bond market is forcing their hand. Right now, it is telling them that even with their 50 basis point hike last meeting, and promise of hikes of 50 basis points coming up. ... it's not enough because inflatoin is so out of control. It's compounded by economic data slowing, so they are just f'd now by stagflation if the economy keeps slowing. The bond market is doing the work for the Fed right now, whether it likes it or not, and after Powell blew it last week at the press conference after the Fed's last meeting, it sent the yield on the 10 year another leg higher. It's up over 3.1 percent now. And with all the misallocation of capital on the back of the trillions of dollars of debt they have enabled. ... the world (including the U.S. government) can't handle nominal rates higher than this. If rates keep spiking, it's game over, not just for all the speculative things people have cluelessly been betting on, but for the broader economy which is dependent on negative real interest rates.

Rates rising is what is taking down risk assets right now, and really everything else including sound companies whose stocks got way overvalued.

People have been conditioned each of the last few times this happened to think the Fed will give in to markets and reestablish the Fed put -- blowing the bubble bigger by manipulating the rates markets with bigger and bigger interventions. But what if they can't?

The Fed is trapped this time, which was the eventual outcome all along. If they try to keep rates down, in real terms those rates are very negative, and that is a huge problem because the inflation genie is out of the bottle and they are feeding it. If they don't give in, they will entirely pop the bubble they blew and we are going to see a credit crisis. And either way, the bond market may continue to wrestle control of the rates markets away from them for good and do it itself. It probably won't happen all at once, these kinds of markets are now designed to sucker people. Bear market rallies are viscious and designed to bring people back in. If you don't want to listen to me, talk to anyone who got suckered when the dot-com bubble was taking a lot of things down 80, 90 percent front peak to trough with bounce backs designed to sucker people back in.

I feel bad for the people who bought bitcoin, or some of the dogshit stocks that have no earnings and were trading at ridiculous prices and have taken huge losses. But if you think that those things can't lose more. ... they can.

I am sure someone will now turn this into me making a prediction of some sort. I'm not. But if you are going to buy and hold anything, have a fundamental or technical reason for why it is fairly valued, and understand the macro factors surrounding it. Right now, you really should be afraid. Trust me.

 

After I posted that, I was doing some more procrastinating rather than doing my homework and saw this thread on Twitter.





He may be entirely correct, that we can't afford higher rates ever again, so the Fed will once again pivot and act out of desperation. And that could be your argument for the party starting again.

The thing is, THAT is what you are betting on if you own bitcoin at these prices.

And it is entirely artificial. It also doesn't address the thing that is different right now: the inflation (which would mean they don't address it and throw their credibility out the window).
But let's say they pivot, and start pumping liquidity back in to avoid credit defaults and recession (where we are headed), their problem now is that you'd think that would keep stoking the inflation they let loose, and that is absolutely eating people up, particularly the poorest people whose staples have run up in price while their real wages haven't come anywhere close. And that has people edgy.

Do you really want to make a bet on one of that set of choices without any basis for knowing where some people you can't control (but have these asset values completely in their hands) end up?

 

Also, along the lines of what I was saying about bitcoin being correlated with the riskiest assets out there. ...



You owned bitcoin. But you may as well have been holding Cathy Wood's ETF. or Netflix stock. or any number of companies with no earnings that went public and have seen their stock prices halved in the last few months.

Most of those assets are still way overvalued on a historical basis on the back of all the money that is still sloshing around. The Fed still hasn't reduced that giant balance sheet by even a penny yet (they are starting next month) and we have already seen things come down a lot. IF it doesn't pivot the way he suggested they will end up doing in the tweet in my post above this one, there is a lot of room for some things to come down in price a lot more. And bitcoin has been / is trading in lock step with those techish stocks that are still historically VERY expensive.