Monday 11 December 2017

Would you rather...

Receive one of the following:

  • $16,000 US dollars
  • 1,000 ounces of silver
  • 13 ounces of gold
  • 500 pounds of cobalt
  • 5,400 pounds of copper
  • 1 Bitcoin?
Whatever your fancy, the valuations are all currently about the same.

The pullback in Bitcoin I noted a week ago, which looked substantial at that time, now looks like a minor blip on the chart.  Exponential action!

Was Thursday's high on Bitcoin the top?  Probably not.  People don't seem to learn, so history repeats itself again and again with bubbles (lots of bubbles documented here).  Below is a chart for one of the first documented bubbles, tulip mania.  One thing I've learned from bubbles and market crashes is that the decline in price when a bubble pops is typically several times faster than the exponential rise up.  So, when the Bitcoin/cryptocurrency bubble pops, it is likely going to be mind blowing!  If 20% daily gains and losses are normal for Bitcoin, a sharp selloff is going to look like 40 or 50% in a day.  You see, many of the speculators buying Bitcoin now probably acknowledge that this is a bubble and they are betting that they can get out quickly with minimal losses.  Usually that is not the case.  Something will trigger a gap down, servers will crash, and losses will be staggering for those who jump in too late.

Bitcoin seems to have gained some legitimacy with futures now trading on the CBOE.  My view remains that Bitcoin is a bubble that will crash.  The only question is when.  Tulip bulb prices could not be justified at 10 guilders, yet they went to 60.  Bitcoin could well go to $50,000 or even $100,000.  All I know is that something unexpected will trigger a sudden and sharp collapse.  We will know the top is in when we see a 50% drop.  History repeats itself.
While Bitcoin had a stellar week, precious metal and base metal prices took a beating.  Who wants tangible assets when you can now get cyber assets?  Metals have to be mined and then stored in warehouses.  Cryptocurrencies can be "mined" using computers and stored using Blockchain.  So what if they are constantly being hacked, waste massive amounts of electricity, and if most of the computing power resides in China and Mongolia?

In classic fashion reminiscent of the dot com craze and marijuana mania, failed mining companies and even a failed biotech are rushing to become Blockchain or cryptocurrency companies.  In many cases, all it takes is just the announcement that you intend to get into the sector that can move your stock.  And, in some cases like Routemaster Capital (TSXV:RM) and Vogogo (TSXV:VGO), you don't have to mention anything publicly and you claim no material changes while your stock shoots up on volume right after you raise money at low prices.  A classic case of "investors" chasing returns, which usually does not pan out.

Call me old school, but I still like metals and mining (and fundamentals).  Bitcoin will likely be gone in a decade, but all of our electric, autonomous vehicles will still be using lots of copper, zinc, cobalt, lithium and nickel.  I especially like zinc in the short-term, as inventories are hitting critically low levels.  I think zinc prices will soon start another run up and if I had any Bitcoins I'd be selling them and buying zinc mining stocks.
Source: Scotiabank

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