This guest commentary was written by Mike O'Rourke of JonesTrading.
The crypto craze is morphing into a crypto crash, from Bitcoin mania to Bitcoin bust.
It was a little less than a month ago that we expressed our dismay regarding the cryptocurrency market’s calm response to Litecoin founder Charles Lee’s announcement that he divested all of his Litecoin holdings. We noted,
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“Imagine walking in one day and learning that out of the blue, Mark Zuckerberg sold every share of Facebook he owns, or Jeff Bezos sold every share of Amazon, Elon Musk sold every share of Tesla and so on. Needless to say, the shares of the respective companies would encounter selling pressure.” |
Then it was only a couple of weeks ago when Ripple touched $3.30 and we highlighted the story that Ripple’s cofounder had become richer than Google’s founders on paper. At the time, the market capitalization for Ripple was $330 Billion. That was up from $25 Billion three weeks earlier. In the past two weeks, Ripple has declined more than 60% including today’s 30% crash.
It was in that note in the 3rd trading day of the new year that we asserted,
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“What should be concerning to policymakers, investors and market participants is that cryptocurrencies meet Hyman Minsky’s definition of Ponzi units in his Financial Instability theory. Minsky asserts that - For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations.” |
In the same note, we described the cryptocurrency environment as a bubble. There is little doubt that 2017 was the year of the cryptocurrency bubble and 2018 is beginning to give the appearance of a bust (chart below). The problem investors encounter when bubbles burst is that there is no level at which value players step in. Instead, there are cascading technical sellers and a bounce only comes after those sellers are exhausted. Considering the unregulated nature of these exchanges and markets, it is hard to imagine that eventual bounce will come any sooner.
It will also be interesting to see if the cryptos take some of the markets animal spirits with them. The S&P 500’s 1.4% intraday reversal is minor compared to historical standards, but it is major compared to history.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.
