The cryptos are taking it on the chin again today, compounding what was already a bad month. We discussed both the technological promise and the speculative danger in cryptos and we stand by those comments today. We noted that the bubble in cryptos was bigger than any bubble in the history of mankind. We wondered if people would have gone so crypto crazy if they had to hand over gold or silver bars and coins to buy digits in a software network. In some sense, it is easy to trade one fiat currency for another. There are plenty of plausible reasons and explanations for the enthusiasm in cryptos, not the least of which is the actions of the government and the Fed. Their policies are highly inflationary and have trained people to speculate.
But we believe people are misreading the tea leaves. Cryptos compete with the currencies issued by the world’s various central banks. That being the case, one must be cognizant of the fact that governments and central banks would like to see cryptos fail. Whether it is on the football field, basketball court, baseball diamond or the economic playing field, competitors wish to defeat their opponent. To defend one’s turf is just the natural order of life on planet Terra.
We think the real reason cryptos are allowed to flourish is that there is no way to control what happens on people’s counter, tables, and cell phones. So if you cannot beat you might as well join ’em. (At least on the surface.)
The following charts show the carnage of cryptos has suffered over the past month. Any student of markets and history should expect these kinds of movements, particularly after the way prices defied gravity for the past few years.
Etherium was the worst performer as if fell about 55% in just the past month. The best of the worst was Bitcoin, it fell “only” 34%. Some claim that selling caused by the need to raise cash to pay income taxes in April is the reason for the crash in prices. This may be true for some people in the US, but cryptos are a worldwide market. People all over the planet are active in these markets. It would also only apply to people who were rapid traders. Like stocks and other investments, a taxable event occurs when one sells some or all of their position. So if someone sold, they have cash. If they felt the need to buy the dip, then they need to sell even as the price is down.
In the final analysis, we put the reason for the massive run-up and subsequent crash is emotion and crowd behavior. We are certain that there was FOMO (Fear Of Missing Out) on the way up, so people bought without really knowing the risks involved. Now they are doing the same on the way down. Fear is taking over, We do not have statistics to prove this point, but we believe that the vast majority of people involved in the crypto market are not in the red. With losses in hand, they are hoping for a bounce so they can get our somewhere in the neighborhood of even. Markets are rarely accommodating to the majority so we would not be surprised to see prices fall further.
We have also written a number of times that we think that the price action of cryptos is a leading indicator for stocks and bonds. People have been speculating on anything and everything. We think the euphoria in the minds of people generated by the tranquility and rising price sponsored by quantitative easing is beginning to wear out. We think it is showing up first in the most euphoric market ever known, (cryptos) and is in the process of moving toward stocks and bonds. We do not think it will be anywhere as bad as they are supported by real economic activity.
If our thesis is correct, and we apply traditional charting techniques, then we think there is a possibility of the S&P500 falling to the 2,475 to 2,275 range before we have a tradable rally. Near term, we see markets continuing to do what they did in the past couple of weeks. Big down moves, followed big up moves, followed by big down moves. Notice that his price behavior is different than we experienced with the long post-financial crisis bull market. That market was characterized by steadily rising prices with an occasional short and brief selloff. The wild gyrations are typical of bear markets and severe corrections. Until this pattern changes, we think investors should hedge their portfolios. We have discussed hedging trades in the S&P5oo in the recent past. The following two links will take you back to a few articles where we discussed hedging structure.
Equities Ger Mammered | What’s Next?
Check out this hedge against the next bear market.
Image Source | David McBee, Pexels.com
