Morning Market Thoughts
Good morning. The futures are slightly higher this morning, but the real news is a pipe bomb explosion at New York’s Port Authority. There’s not much information at this point, but it’s likely that all subways, bus terminals and rail terminals will be impacted in various ways — either shut down, or at least given an extra level of scrutiny. The perp has been taken into custody wearing a device with a bunch of wires. But let’s not jump to conclusions. It might just be a disgruntled Radio Shack employee. Damage and casualties seem to be minimal, so the impact on the financial markets should be muted.Bitcoin futures started trading yesterday on the Cboe Global Markets ($CBOE), and will be launched by CME Group ($CME) next Monday.. Because there are no natural sellers (yet), it’s not surprising that Bitcoin prices are surging again — currently at $16,650, though I’m sure that price will be a lot different by the time you read this. There’s no question that futures trading will impact the volatility of this cryptocurrency.
If you are trading Bitcoin, just be careful. There is no question that this is a bubble — but there is a big, unanswerable question about what price can be reached before the bubble pops. Perhaps it was already hit last week when Bitcoin hit $19,697 on GDAX exchange. But perhaps we should add a 1 to the front of that number in estimating the ultimate peak in Bitcoin. Nobody knows, though there are many who guess with authority. Last week Kevin O’Leary was licking his chops on CNBC, claiming that he couldn’t wait for futures to start trading so he can short Bitcoin. I wasn’t aware that O’Leary was interested in much other than stocks paying dividends, but he may be a closet genius in the futures market.
There are many causes of bubbles, but the one that you need to be mindful of is the psychological tricks that your mind can play on you. Have you ever chased a stock that you wished you had bought earlier? You first saw it at $15 and thought about buying it…but you didn’t. Now you’re watching it cross through $25 and you are filled with two very strong emotions — fear and greed.
You fear not buying it because you would be missing out on huge profits that you just know are in front of you — “I should have bought it at $15. Now, just 2 days later, it’s at $25. I’m such a dope. But I’ll feel like a real moron when it goes to $50 next week. So I’ve got to buy it now.” So you fear what’s going to happen without you, rather than what might happen to you. That’s a strong emotion, and it prompts you to abandon all notions of risk management.
You’re also greedy. The action you take due to greed is the same as your action in reacting to your fear, but the mechanism is different. You see the skyrocketing price, and visions of glory and triumph take over your thought processes. You just know the stock is going to $50, and you start counting the money before you get confirmation that your order has been filled.
When you are a slave to fear and greed, the result is always the same — only the timing is unknown. That coveted stock may indeed go to $50. But it might also go to $5. We’ve seen it before.
Back in 2000, Qualcomm (QCOM) hit $1,000 on a swell of unabated excitement. The company had split the stock in 1994, and twice in 1999 — a 2:1 split in June, and a 4:1 split just a few months later. Qualcomm fans were everywhere, and they were all geniuses. That’s the sign of a bubble. And after QCOM hit $1000, it pulled back just a bit: 88% in less than 3 years. It has yet to regain its all time high, though it did come within 15% after just 14 years.
The Nasdaq Composite was also in a bubble that popped in 2000. It finally printed a new high a couple of years ago.
What was the cause of these bubbles? Disruption. Al Gore’s invention was truly a game changer of historical proportions. What would we do without the Internet? Buy fax machines? Get the newspaper dropped on our front porch so we could find out what happened yesterday? Semiconductor chip technology was advancing according to Moore’s law.
There’s no question in my mind that cryptocurrencies are disruptors. Any time you see all the banks crying about something and professing concern for the general populace, you know the money changes are worried. They don’t care about you — they care about their power, and they need you to give it to them. Cryptocurrencies threaten that power, though the outcome is unknowable. And most people, including me, do not have a deep understanding of what it is.
And that gets back to fear and greed. If you don’t understand something, it’s typically not a good idea to invest heavily in it. You’re gambling; not trading…and certainly not investing.
So if you are participating in this phenomenon, recognize that you’re buying a bubble of unknown size. Be aware that fear and greed are everywhere, and it’s easy to get caught up in it. If you’re taking that plunge, try this: Imagine how you’ll feel about losing 50-80% of what you are investing in it. Seriously. Think about it — Bitcoin might be the next Qualcomm. Nobody knows for sure, though many believe that they do. But if you go by the 50-80% rule, you’re not going to get into much trouble. But if instead you are counting the money that you’re going to have when BTC reaches $1,000,000, then you probably need to lay off the sauce.
Meanwhile, back on planet Earth, we’ve got a nice market that’s rewarding the bulls, and it’s not a bubble (as far as I can tell).
See you in the forum.
–Dan
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