MENU

Bitcoin, Cryptos and Financial Asset Bubbles

January 20, 2018 • Global Capital Markets

By Jack Rasmus

At less than $1000 per coin in January, Bitcoin prices surged past $11,000 this past November. It then corrected back to $9,000, only to surge again by early December to more than $15,000. Given the forces behind Bitcoin, that scenario is likely to continue into 2018 before the bubble bursts. This article will in part address those forces behind Bitcoin’s bubble, and why the bubble will continue to grow near term.

 

What’s a financial asset bubble? Few agree. But few would argue that Bitcoins and other crypto currencies are today clearly in a global financial asset bubble.  Bitcoin and other crypto currencies are the speculative investing canary in the global financial asset coalmine.

One can debate what constitutes a financial bubble – i.e. how much prices must rise short term or how much above long term average rates of increase – but there’s no doubt that Bitcoin price appreciation in 2017 is a bubble by any definition. At less than $1000 per coin in January, Bitcoin prices surged past $11,000 this past November. It then corrected back to $9,000, only to surge again by early December to more than $15,000. Given the forces behind Bitcoin, that scenario is likely to continue into 2018 before the bubble bursts. As of mid-December, Bitcoin is trading at $17,009 and predicted to surge higher. Some analysts are even predicting the price for Bitcoin will escalate to $142,000, now that trading has gone mainstream on the CBOE and other commodity futures exchanges. The question of the moment, however, is what might be the contagion effects on other markets?

This article will in part address those forces behind Bitcoin’s bubble, and why the bubble will continue to grow near term. But Bitcoin and other crypto currencies are but one case example of financial asset price acceleration underway in global markets that also are either in, or approaching, bubble territory – a condition typical of a late credit cycle reaching its limits.

Other asset bubble candidates include equities markets, especially in the USA, Japan and some emerging market economies (EMEs); corporate junk bond markets globally; and high risk bank loans – particularly in Europe, Japan and Asia – emerging on a base of trillions of dollars of pre-existing non-performing bank loans.

In the following, the determinants and driving forces behind the growing financial asset bubbles are discussed, with special focus of Bitcoin and crypto currencies which have a potential of “contagion” to other financial markets more than most commentators today like to admit.

Less debatable are potential contagion effects from global equities, now approaching bubble territory in some regions like the USA and Japan. Or corporate junk bond markets worldwide. Or high risk leveraged loans, the return of CLOs, and the late-cycle trend increasingly apparent among banks toward covenant-lite lending terms, as the search for yield becomes ever more desperate everywhere.

 
Please login or register to continue reading... Registration is simple and it is free!

About the Author

Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression, Clarity Press, July 2017, and the previously published “Systemic Fragility in the Global Economy, also by Clarity Press, January 2016. For more information: http://ClarityPress.com/RasmusIII.html. He teaches economics at St. Marys College in Moraga, California, and hosts the radio show, Alternative Visions, on the Progressive Radio Network. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

 

References

1. (2016). For this author’s quantitative index of financial fragility as predictor of instability, see the appendix equations in Jack Rasmus, “Systemic Fragility in the Global Economy”, Clarity Press, January.
2. Jack Rasmus. (2017). “Central Bankers at the End of Their Ropes?”, Clarity Press, August. See the review of this book by Dr. Larry Souza in this issue of the European Financial Review.
3. Claudio Borio. https://www.bis.org/publ/qtrpdf/r_qt1712_ontherecord.htm
4. Mohamed El-Erian and Huw van Steenis. (2017). “Economic prospects caught in a tug of war”, Financial Times, October 19, p. 18.
5. Mervyn King. (2017). “Warning Signs About the Global Economy”, Wall St. Journal, September 25, p.R6.
6. Gabriel Wildau and Tom MItichell, (2017) ‘Zhou’s ‘Minsky Moment’ see as reform signal to party elites’, Financial Times, October 23, p. 3.
7. Adam Samson. (2017). “BofA raises fears over “irrational exuberance”, Financial Times, November 15, 2017, p. 20; and Deutschebank, Global Financial Data, September 19.
8. Martin Wolf. (2017). “Fix the roof while the sun is shining”, Financial Times, December 6, 2017 p. 9.
9. Ciara Linnane, “Finance chiefs are becoming increasingly pessimistic about the future”, Marketwatch, Sept. 23.
10. For a survey and tutorial on blockchain, see “Blockchain Security and Demonstration”, by Yao Yao, Jack Rasmus-Vorrath, and Ivelin Angelov. https://github.com/JackKRasmus-Vorrath/Blockchain_Security_and_Demonstration/blob/master/MSDSProject_BlockChain_Final_v2.pdf
11. (2016). See chapters 11 and 12 of “Systemic Fragility in the Global Economy”, Clarity Press, which addresses the proliferating of unregulated shadow banking, new securities, and new highly liquid financial asset markets worldwide, and the relative shift to financial asset investing (from real asset) that has been underway in the 21st century.
12. In the US alone, more than $6 trillion in corporate bonds have been issued

You might also like:

One Response to Bitcoin, Cryptos and Financial Asset Bubbles

  1. Panda says:

    Just another pyramid scheme waiting to collapse. When all the original purchasers cash out and become billionaires, all the late comers will be left with nothing.

Leave a Reply

Your email address will not be published. Required fields are marked *

« »