When should the "BUBBLE" bother you and your CRYPTO NEST EGG?

Well, it's been awhile and I felt like riffing on the current layout of the market since the CBOE and CME both launched their BTC futures products. So, this will be largely on the fly, unlike my other not-so-popular and more serious posts that have sweet citations and tangential pictures. Basically, I'll lay out where I think things are and what, if anything, there is to do when stuff happens, that is, should things get dicey in the financial space.

Tangential picture (and funny enough, glass bubbles, which probably won't pop)
www.stockvault.net

BTC HAS BEEN VOLATILE

What's new with that? A whole lot of nothing.

What is going to happen with BTC the market still has to decide. In the coming weeks, and perhaps months, it's going to become readily apparent that BTC is either going to get its shit together or not. Given that the futures are traded as a cash-settled product, it really only amounts to price betting with no substantial effect on the underlying (BTC itself) - in my humble opinion. Don't get me wrong, cash-settled futures can have a dramatic impact on its underlying, yet that has not materialized with BTC to any great extent. The hope of any futures market is to bring some semblance of sanity to the price action, but to this point we have seen none as the futures have experienced lock limits during several trading days since their inception. A 20% move will make or kill someone's day and end trading on the products.

BTC's POSSIBLE BIG BROTHERS?

I love the fact that people tend to be of two camps. Dichotomies are always fun. Either BTC is going to dominate the world's current currency instruments and we'll all be using it to make transactions or it'll be destroyed under foot by the government - whatever government (possibly illuminati?) - seeking to keep its iron-fisted control of the world economy. Complete victory or complete defeat. Ironically, neither of those situations will probably be realized, but they're fun to theorize and imagine. In reality, BTC is the legacy product in the crypto space and it's starting to show its problems scaling. But to what other worldly financial instrument will it begin to correlate? This is important for a number of reasons.

My thinking to this point is that barring some of the longer-term issues coming down the pike like its scaling problems, BTC needs to form a relationship with another asset class or combination thereof. If BTC is the gold of the crypto space (and it's becoming just as cumbersome to use) then perhaps it could find its relationship with literal gold trading at some multiple thereof. That would allow traders, speculators, and funds to lay off some of their risk in trading BTC paired with gold (or some other underlying). The price would begin to stabilize and take an easier path to getting accepted as BTC itself the "gold of crypto." There are other possibilities for instance BTC could be traded as a correlated pair with the S&P 500 futures. As a result, BTC would be tethered to overall health of the US stock market. (I'd argue it already is in an oblique sense, but it has more to do with the credit markets acting as an intermediary.)

Hell, it could be traded as a pair with the Hong Kong index. In reality it doesn't matter what product in terms of limiting risk to trade it, but at the same time it will communicate a gigantic message to the world. If it manages to get correlated to something else then that will help to ensure its identity and store of value becoming real. If it's gold then it's a gold substitute. If it's the S&P then BTC is an expression of the health of the economy. No one even knows if BTC is a risk-on or risk-off asset yet. My thinking is the former at the moment and I'll tell you why.

BUT MY GOD, ARE WE IN BUBBLE?

Probably. The honest to god truth is it's probably in a bubble. Simply because of the massive problems with scaling as of late - meaning the underlying cannot move easily between parties as is its use case (and it's hideously expensive to move BTC around most of the time) - thus it's vastly overvalued. Still everything is overvalued at the moment if looking at P/E ratios in the stock market. However, that alone hasn't precipitated any change to stock prices and with the recent passage of the tax bill it doesn't seem likely to change what's going on in the stock market.

But moving around BTC brings up another problem. Miners who facilitate the exchanges among BTC holders won't bother mining BTC if it isn't worth it. They'll devote resources to another crypto. Here's the great paradox. BTC only works if its value keeps climbing and is itself transferable. If the value goes down then miners stop mining then people cannot use it as a medium of value exchange then its value continues to spiral downwards. The opposite is true if the ecosystem continues to gain in value. A speculative product is going to ebb and flow so...

BUT BTC CAN ACHIEVE AN EQUILIBRIUM!

This is true, but not in the short-term with actual, big money on the line and a lot of eyes on the product. In the long-term that is probably accurate given less people would use/mine it then it'd be relatively less costly to transact business and mine, but I don't think any futures product can step in at the moment and fully appreciate what's going on in this underlying, which is so unique to the financial space.

At the moment, there's a small revolt going on among the financial community that basically from a cost-benefit standpoint BTC cannot scale. It requires too much power and there already exists too many alternatives to what its use cases are. So, yes, it is very likely in a bubble with the electricity necessary to facilitate the level of transactions on the nodes when visa already kicks its ass in transactions processed. Don't get me wrong. I love blockchain, but consumers are fickle beasts.

BUT, WHATEVER. IT'LL KEEP CLIMBING.

It just might. I can't really foresee it not at least hanging around the 10k to 20k levels, if not totally dismantling those levels on the peer-to-peer exchanges. And, at the moment, there really isn't reason to think there will be a drawdown when everything investment-wise in the world is climbing. You see, BTC's price level is probably a direct result of the hunt for yield READ SOME OF THIS GREAT STUFF HERE. What has happened more or less is nothing is working anymore except getting long the overall market. So, the traders, like me, have had to look for volatile products to trade. BTC is the baby of that dynamic.

MAN, THIS IS CONFUSING

So, in easier steps to digest:

1. BTC becomes a product that grew in popularity to such an extent among its true believers that its price kept climbing.
   (I personally think some of that was predicated upon market structure and has less to do with the product itself, but that's for another time.)
2. It got noticed by the financial community, and ever the opportunists they endeavored to monetize it in an even easier fashion than what was available on the marketplaces.
3. Those futures products are still trying to gain their footing in the traditional financial space (i.e. to what is it correlated), so BTC looks for its identity to be codified somehow. Is it like gold or is it like owning Amazon?

Here's where my prognostication takes off.

1. The market continues to climb on the back of the wave of international central bank liquidity as there seems to be no hard-landing exit in the near-term planned.
2. BTC, a relatively small market at the moment by comparison, rides the same wave growing to actually be real player internationally growing alongside the traditional investment space.
3. It gains ever greater popularity as people move down the quality ladder looking for yield; however, without something addressing its scaling issues it'll flounder and never get a physically-settled futures product.
4. The markets finally do correct, which creates a risk-off environment.
5. BTC either weathers the storm and is seen as risk-off asset. OR BTC plummets in value and is seen as a risk-on asset.

SO, WHO WINS THEN?

Does BTC usurp gold as a international store of value and not plummet with the market if it ever corrects or does it fall to the Earth like the devil himself when international central bank liquidity dries up? I think the timing is the most important factor.

A) If the market corrects in the next few months, it's unlikely that BTC will be much affected. The underlying peer-to-peer and online markets are still fairly insulated. This would be good for BTC. The true believers would win out and be able to say their things. At any rate, with a market correction and flight to safety dynamic taking over the hunt for yield the money that is moving into blockchain technology would eventually start to dry up killing would-be rivals and BTC would remain the largest share of the crypto market cap for the foreseeable future. Eventually, like everything else it would succumb to a market drawdown, but not to the extent of its rivals nor the overall market.

B) If the market corrects in longer than a year or so, it's likely BTC will already be fending off other newer technologies that can better scale. Since there will be alternatives it's unlikely that it'd be able to weather the storm of a market drawdown and it would fall with the market, being seen as a risk-on asset along with its crypto brethren. This holds unless there is a huge distinction drawn in the popular press and crypto actually gets "mainstreamed" enough to be seen as a safe haven asset. Either way, BTC will probably start losing market share in the overall market cap of crypto moving forward.

BTC has been resilient, but given different environments how resilient could it possibly be, one should ask oneself? The question comes down to how interconnected is BTC and the larger crypto space to the traditional financial space. Eventually the two will catch up to one another.

SO, WHAT'S MY CUE TO EXIT AND TAKE PROFITS?

I'll be fair and say I'm not entirely sure. I'd be inclined - if I even owned any large BTC positions - to watch for a real market correction - one based on an inverted yield curve, inflation picking up, and a draw down of greater than 10% in the S&P 500. If the federal funds rate treasury curve keeps inverting AND inflation picks up things are going to get really dicey for the overall economy as the Fed will move to stomp out inflation anyway. That'll raise interest rates in consumer products (think credit cards). When interest rates rise that stamps out a lot of the space that was available, so to speak, in the economy for innovation (i.e. growth). Blockchain still in its infancy could very well be pushed even further out into the future for being adopted because of a lack of capital to implement it.

Granted I'm assuming the market will correct somehow. At this point, I'm not even sure that's allowed anymore because of the behavior of central banks. In any event, take one thing away from this post and that is BTC doesn't exist in a vacuum. My primary concern would be my alts, but I'm thinking that a correction is further down the road and BTC's rivals will come along and begin to eat away its market share even though all boats will rise in the tide for the time being. Should a drawdown in the market happen BTC will be seen as a risk-on asset, drop, and another crypto or several could take its place; yet, I would be out of the vast majority of positions on the subsequent bounce after the 10% correction in S&P and look to redeploy after a new polarity is struck in the direction of the overall market.

Regardless, my friends, if you're long BTC just remember you're also long the market - whether you like it or not.

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BLOG NOTE: I plan on starting to write up my experiences in Guatemala and trying to get the "NGO's NGO" set up. More on that to come as it tends to be pretty gut-wrenching exercise in futility, but hell it could be interesting. At the very least I'd like to get something down on digital paper and this is a nice medium to check interest and blog my thoughts out. The Steemit community, for better or for worse, is a pretty good group of people - even if at times misguided - still nice.

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As ever, my interest lies in the craziness and zaniness of the crypto space and if I get the itch I'll post a thing or two here or there. Let's see how things go. And please by all means comment, question, and let's start a discussion below. I'd love to hear from you, but let's be civil. Thank you so much for reading! And of course, I say all of this for your entertainment. Make your own decisions. So, from your friendly neighborhood trader...

We're all gonna make it!

Minderbinder

[Disclaimer: All the opinions expressed in this article are my own and are in no way meant to be construed as investment advice. Please exercise your own judgement in any investment or money management ideas that you happen to undertake in the traditional finance or cryptocurrency spaces. All images come from either personal files or websites that allow free images and each has an inline citation for reference. Good luck out there!]