Prepare for distress and revulsion….

Tuesday, 23rd January 2018

Prepare for distress and revulsion….

These things tend to begin with some new technological breakthrough or development that promises to change the world and the way we live….

Back in the early- to mid- 1990s, it was the Internet that promised to revolutionize life as we knew it….

And, of course it did….

The Internet, or the World Wide Web, has fundamentally and irreversibly changed the way we source information, access services, communicate and shop (among other things).


The Internet also succeeded in creating an investment bubble and inspiring a lot of crazy behavior….

A lot of so-called ‘mom and pop’ investors (along with big financial institutions) lost a lot of money investing in early-doors ‘Internet’ businesses that were often little more than an idea – and sometimes not a very good one….

Many such businesses raised hundreds of millions via Initial Public Offerings (IPOs) despite never having produced a penny’s worth of income or even a coherent business plan….

Some didn’t even have a product or service to go to market with – just a pocketful of dreams and stardust….

It didn’t seem to matter at the time though. Investors were falling over themselves to get into the market. They couldn’t invest enough money fast enough in any business that had a in its name….

Amazon and e-bay were born in that era, of course. They survived, endured and grew strong over time. Today it is hard to imagine a world without them….

But many more businesses charmed investors down the road to ruin. Their names read like those on old gravestones…., and were just three spectacular (but now largely forgotten) Internet flops of the day – losing millions, going bust and burning the market’s fingers in the process….

  • Excitement creates a boom….

Crazy is what tends to happen in the markets when a new and potentially life-changing technology comes along….

People start talking about a ‘new era’. About how things will ‘never be the same again’. About how the world has ‘changed’. About how the ‘paradigm has shifted’….

It’s the kind of talk that gets people (and for people read markets) excited….

Everybody wants to be first-up and best dressed. Everybody wants to be in on the ground-floor of this new gilt-edged opportunity. Everybody wants to be first to the punch with his capital….

An initial explosion of interest and excitement creates a flood of money. And that flood of money creates what Hyman Minsky and Charles Kindleberger referred to as the second of five stages in a bubble: the boom….

The boom period is one in which the specific asset, industry or market concerned enjoys a period of sustained support in terms of capital allocation….

Then – often at some indeterminate point – one thing turns into something more dangerous. Stage two leads to stage three. Boom leads to euphoria….

  • The boom leads to euphoria….

Euphoria is what might encourage a man to declare that he will eat his own genitaliaon national television if his proposition about the future value of a given asset doesn’t come to pass….

Euphoria is something that might encourage the man on the street to take note of and act on Harry Redknapp’s or Floyd Mayweather’s investment tips….

The euphoric stage is the stage of a bubble in which the price of the asset skyrockets. Investors tend to throw caution to the wind during the euphoric phase….

The market becomes something of a feeding frenzy driven by stories in the media about early-doors investors who have already made fortunes and fresh investors motivated by the fear of missing out on a golden flood of certain and sustained life-changing profits….

During the euphoric stage of a bubble, the ‘greater fool’ game is played out across the board. The real value of the asset underpinning the market activity is largely forgotten….

In the ‘greater fool’ game it ceases to matter what the price of the asset is or whether that price represents good value. If a greater fool than you will buy at a higher price than you paid, buying (at any price) is good business – and profitable….

I think we reached the euphoric stage of the Bitcoin bubble back in November 2017….

People were seeing cryptocurrency themed ads on the London tube. Daytime radio programmes were hosting phone-in discussions on the subject. Newspapers were full of Bitcoin stories. Every columnist under the sun was hard-pressed to produce copy that didn’t touch on the subject….

And it was in November 2017 that the line on the Bitcoin chart rose more steeply than ever before. In just over a month between 12th November and 16th December, the price went from $5857 to $19,343 – a gain of 230%…

  • Euphoria can dissipate suddenly….

For Bitcoin bulls everywhere, it did indeed seem like Christmas had arrived early.

The Bitcoin price seemed destined to disappear into the deeper reaches of outer space. Upward progress wasn’t quite straight and true. There were dips and troughs along the way. But Bitcoin was proving resilient….

What it lost one day, it swiftly made up for the next. Dips were nothing to worry about. If anything, they were easy money – an opportunity to buy at a discounted price certain to swiftly rebound….

It seemed like nothing could retard this upward progress. It seemed like anybody could get rich if he wanted to – quick too. You couldn’t print money this fast….

But then something happened. The engine that had been operating so efficiently sprung a leak. Steam hissed out of broken pipes and cracked gaskets. Momentum was reduced. Progress flagged.

Then, suddenly, this wonderful new flying machine – was sputtering along and losing lift. Just ahead of Christmas it started to fall out of the sky….

Who knows why? News from South Korea or Russia? Fears of government regulation? Fears about hackers? Some rumor on Twitter or Reddit? Too many speculators cashing out to fund Christmas or to take a break?

No-one knows for sure. We can only guess. And It hardly matters anyway. The price of Bitcoin fell away. That’s the bottom line….

  • Prepare for distress and revulsion….

There were pockets of resistance. Dip-buyers bought in expectation of the bounce-back – and some who timed their trades right saw rewards….

But where Bitcoin had previously recovered from short-term price crashes to post new highs, this time it was different. The general trajectory of the price has been downward for 30 days….

On Monday night, Bitcoin was trading at $10,622 – a 45% drop from the 16th December high-point. The euphoric stage of the bitcoin bubble might well be over. Or it might reignite. What do I know? Only time will tell….

But it is worth mentioning that the fourth stage of a bubble – according to Minsky and Kindleberger – is financial distress….

Are we at that point yet? I’m not sure. The latest price crash will have caused some distress. But there is still much scope for plenty more. It is still a long way to solid earth for the Bitcoin price….

After financial distress comes revulsion. That’s the final stage of the bubble. That’s the endgame – when that which was once loved and fated is now feared and hated. So much so that few will touch it – not even with a long pole….

At that point the asset in question is one of two things: a busted flush or a bargain.

We can’t know which Bitcoin might be at this stage. But it is a distinction worth keeping in mind as events continue to unfold….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths