Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Wisdom

Is the Falling Dollar Responsible for the Altcoin Bubble and should we be Scared?

The collapse in the value of the U.S. Dollar during the first eight months of 2017 might be to blame for the bubble in cryptocurrencies.

The greenback has lost 10% of its value since the beginning of the year, CNN Money pointed out. Back on January 6, 2017, a Euro was trading at $1.19 USD, by August 3, 2017, it was trading at $1.03 in U.S. currency.

Investors are dumping dollars and moving their money elsewhere. One obvious is to cryptocurrencies: back on January 6, a unit of ethereum was trading at $10.06. By August 6, 2017, ether was selling for $259.46 according to Coinbase. Nor was it just Ethereum, on January 6, 2017, you could buy a Litecoin for $3.97; by August 6, 2017, one was selling for $45.57.

Then there’s the granddaddy of altcoins; bitcoin. Back on January 6, you could purchase a bitcoin for $908.09 by August 6, 2017 the price had hit $3,220, that’s right folks a bitcoin was trading at more than $3,000 on August 6, 2017.

Is the Dollar Responsible for the Cryptocurrency and Stock Bubbles?

This certainly looks like a bubble that is being driven by fears of inflation. A great many people in the market are afraid the dollar is about to collapse so they’re looking for a hedge.

Bitcoin in particular is great hedge, because it is almost instantly convertible into other currencies, unlike gold. That makes it the perfect alternative for average people who are scared of the dollar.

Nor is it just cryptocurrency money is also flowing into stocks; with the Dow Jones Industrial Average hitting a record high for the eighth straight day in a row on August 4, 2017, Reuters reported. The financial press credited the positive jobs report for the 22,092.81 Dow – but inflation is probably the real culprit.

The U.S. economy added 209,000 jobs in July 2017, the Bureau of Labor Statistics reported. That’s a drop in the bucket in a nation with a population of around 323.1 million; around 42.6 million of whom were on Food Stamps (the dole) on July 7, 2017, Newsweek reported. Some other force must be driving the stock bubble and it is probably fear of inflation or deflation.

Fear is driving the Stock and Cryptocurrency Bubbles

Money is flowing into stocks for the same reason it is pouring into cryptocurrencies: fear. People are scared that other assets are about to lose all or most of their value.

It is no coincidence that the Dow and Cryptocurrency prices shot up on the same week Allen Greenspan predicted a collapse in the bond market. The former Federal Reserve Chairman told CNBC’s Squawk Box that he thinks bonds are in a bubble that’s about to burst on August 4, 2017; the same day the Dow hit 22,092.81 Two days later on August 6, 2017, bitcoin was trading at $3,227.38 (€2,735.88).

Investors are scared to death of the dollar; and fiat currencies in general, and bonds. Some of them are also getting scared of stocks as well, because of all the bubble talk.

Are Mr. Market’s Fears Legitimate?

This market is scary because it is being driven by fear and little else. It also raises some opportunities for value investors because the fears might be irrational.

Much of the hysteria about the dollar is being driven by the White House melodrama, and popular ignorance about how the U.S. government really operates. The real power in Washington D.C., is in the hands of Congress, which is doing basically nothing right now. Under the U.S. Constitution the Congress is in almost total control of fiscal policy.

That too might be driving fears; some investors are afraid that neither Trump nor Congressional Republicans is capable of dealing with America’s problems. That raises long term fears; including the specter of a left-wing Democratic administration and Congress which would raise taxes, and increase regulation of industry.

Are Investors afraid of Fiat Currencies?

Another factor driving the cryptocurrency and stock bubbles is the growing doubts about fiat currencies. Events over the past fear years have certainly shaken the faith of many in traditional paper money.

The biggest of these events was Indian Prime Minister Narenda Modi’s decision to declare the two largest rupee notes worthless on November 8, 2016, (the same day Donald J. Trump was elected president). Modi’s action and Trump’s unexpected win have shaken the markets.

So have other events including the near collapse of the Chinese Yuan, low oil prices and Brexit. Brexit unleashed talk of the United Kingdom breaking up; and speculation about a collapse of the European Union, certainly unnerved the markets. Adding to the hysteria have been the crises in North Korea and Qatar and incessant speculation about war between the US and China.

Are Investors afraid of a Sudden Market Collapse?

This has many investors looking for an alternative such as cryptocurrencies. A big reason why investors are moving to stocks and cryptocurrencies is that those investments can be dumped fast, unlike gold.

Investors are staying away from cryptocurrencies because they are afraid of a sudden market correction. They want to be able to move money quickly and pounce on a sudden drop in stock prices.

Another factor driving cryptocurrencies is their cheapness. Recent events in the U.S. have put some other investments; including stocks and real estate, out of average people’s reach. Altcoins are still relatively cheap now and easy to buy. They can be purchased with a credit card and held in an easy to use digital wallet.


Is Cryptocurrency a Value Investment?

A related factor is the distrust of the financial industry; especially in the United States. Cryptocurrencies are an investment that average people can control and even be stored offline in bitcoin-hardware wallets – such as the TREZOR.

Many people especially Millennials want to invest but they’re afraid of the markets and the investment industry. Cryptocurrency provides an excellent, if unstable alternative. One reason why bitcoin is popular is that it can be used at many retailers, and quickly converted into spendable cash gift cards and debit cards.

This might make cryptocurrencies value investments because they are a popular product that has a lot of untapped potential. A massive driver of cryptocurrency value might be the TenX debit card and mobile wallet; which would allow for fast conversion of several altcoins including Ethereum, bitcoin and Dash into fiat currencies.

TenX’s business plan is to offer accountholders a digital wallet and Visa or MasterCard (it’s unclear which brand the company will offer), that can instantly convert cryptocurrencies into government money. If it works as advertised that would allow large numbers of people to hold a large portion of their assets in altcoins which might increase value.

Such a product would be extremely popular in countries where everybody seems to have doubts about the currency. In today’s world that includes several major economies such as India, China, the European Union, the United Kingdom and increasingly the United States.

Fear then might be the factor that makes altcoin a value investment and the driving factor in today’s stock market bubble. Unfortunately only time will tell if popular fears are valid, or simply mass hysteria.