Several years ago, when Bitcoin was already on the way up hitting $5,000 for the first time, I was featured in a two-page special spread in The Daily Telegraph alongside James Dimon, chairman of JP Morgan.
We basically agreed the rationale for cryptos was questionable. I believe he shifted his view a little later on.
For me, the outlook was clear and has always been consistent. That the market would rally strongly, at the time I thought $20,000 was a big call, but then collapse back to zero.
I have always said the crypto market presents better odds than a casino and so you have a reasonable chance of actually winning at it. But treat it as just that.
To trade crypto in modest amounts is extremely entertaining while being fraught with danger from the huge volatility. Even if your overall view is correct, you are most probably going to be whipped out of that position should you entertain any of the usual risk management stop loss style techniques.
My stated view in that special report, and has been ever since, is that crypto prices could go to extremely high levels, but quite possibly would inevitably return to zero. In fact, the name of the personal report I wrote at the time was “BitcoinZero”.
Many people have become rich in the crypto mania and far more have lost their shirts. This is the very nature of any tulip bulb type market boom and bust.
In such markets, there are the added dangers of initial success leading to ever heavier betting by participants, I mean investing, until the inevitable turnaround catches them at their most heavily leveraged point. It doesn’t take long for them to lose everything.
This can happen to us in any market, and has indeed happened to me on occasion. Managing leverage is key to long term performance. A general principle however, in the far greater volatility of the crypto world. Personal over-enthusiasm has been on a whole different level.
Why does the crypto crash matter to all investors?
A very special message today to property, stock, currency and commodity investors.
This lesson is garnered from the experience of the Global Financial Crisis. The extremely highly leveraged CDOs of mortgage bonds markets, were simply the weakest link in the chain of then massive leveraged speculation across all global markets.
The weakest link shattered and let go first, and then the strain shifted to the next link and so on. Until property and equity markets and almost every asset class had indeed crashed.
This time, the global leverage across all markets is perhaps 100 times larger?
There is a very real and distinct probability that the collapse of crypto markets is only the first link to shatter.
That the repercussions with a market so widely participated in and of such significant size, are unavoidable in both sentiment and very real bottom line losses across the next and the next and the next asset class. Think just the start of the GFC, but a much bigger event, and you will begin to grasp how great the risk truly is at the moment.
This scenario may somehow be buffered, but every investor and market participant worldwide needs to understand the level of risk we are now all faced with.
Why was I always doubtful as to the sustainability of crypto?
None of the claims about it were true. It is not more efficient that existing systems. You really cannot be pro-environment and invested in crypto at the same time. Crypto currencies do not own the blockchain concept. Block chain is not invincible, it can be hacked.
The security of your holdings is less than in existing systems. The cost of transaction is now higher. There is no secrecy to your transactions. Anyone can mine it, including government authorities, and thereby have access to the entire ledger when they hack it. Which they most certainly do.
For me, though, it was the inevitable growing size of the ledger making it too expensive to continue to maintain. Bitcoin was always on a self-destructive path. This is why fees have been introduced on transactions. The end game was always that it would simply become too expensive for user transactions and for miners to maintain ledgers.
Then there is the volatility, which is just extraordinary, and will also drive participants away. If the losses haven’t already done so.
Crypto Zero: and watch for the strain moving to other markets.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
