[The following post is by TDV Contributor Scott Freeman]
BITCOIN WATCH – DID WE HIT A BOTTOM?
Thus far bitcoin has rebounded almost 70% from its lows around $150, while litecoin has rebounded over 120% from its lows around $1. This substantial rebound was the strongest in several months and certainly makes $150 into a firm candidate for a bottom.
For the first time in over a year, litecoin rebounded more strongly than bitcoin, and in fact, came close to re-attaining the 1% level it held for much of 2014.
While bottoms are obviously impossible to predict with any certainty, $150 may well turn out to have been the low for 2015. At a minimum, such a scenario merits a probability of at least, say, 40%, and according to some as high as 60%. If we use that 40% figure in combination with a potential upside of, say, $1000, it seems like an attractive bet. Even if the probability is only 25%, it is still an attractive bet. Remember, even a bet with a 25% probability of success can still be a good one if the upside is exponential. To win, I simply have to make enough of these bets.
This kind of bet with the expectation of a loss is a typical contrarian one, because its underlying mathematical logic contradicts emotional logic. Most people prefer not to place bets which they expect to lose, which is one reason why such bets can be so lucrative for the people who DO place them. The recent Swiss franc revaluation was a good case in point. At least from a short-term perspective betting on a Swiss franc revaluation was likely a losing bet. So unsurprisingly, few people made it. But those who did got an exponential payoff.
So will bitcoin or litecoin once again produce exponential returns in 2015? There is no way to know, but it is clearly a possibility worth punting on.
Bitstamp continues to be the market leader, offering the highest prices during most of the rise until today’s $255 top was reached. The fact that Bitfinex price levels temporarily surpassed Bitstamp is a hint that market participants are becoming increasingly confident, since Bitfinex’s margin functionality typically leads it to overshoot the general market. It is also a hint that a short-term correction may well be in the cards.
GAMEMAKER WATCH – TARGETING EXPONENTIAL RETURNS
Thanks to zero percent interest rates and massive asset purchases, the US Federal Reserve has printed the equivalent of over 1.5 trillion new dollars since 2008, more than doubling M1 to almost 4 trillion dollars. Shouldn’t prices then also double on average? Shouldn’t all this printing frighten foreigners from holding them, thus leading to a dollar collapse? This is what many pundits have predicted, and with good reason. And yet, despite rising prices for some goods and services, it has not happened. There has been some inflation of goods and services, but no hyper inflation. And the US dollar has not collapsed. Instead, prices for gold, silver, euros, wheat, copper and yen all collapsed. Not only has the US dollar not collapsed, but it has strengthened.
Technically speaking, inflation is simply an increase in the money supply. If all other factors remain unchanged, this must result in higher prices somewhere. We have in fact seen an explosion in the prices of most stocks which is hard to justify in terms of a booming economy. This is doubtless where a lot of those new dollars landed.
But can that explain away the entire 1.5 trillion dollars, or is there some other factor in play here? It turns out that there is. Specifically one factor is different, and that is the average propensity of capital holders for holding cash. What types of assets do we like to hold? Naturally assets that are rising in value. And what assets have been rising in value across the board for quite some time? You guessed it – US dollars and stock prices.
If everyone’s preference for holding cash goes up, there is less cash available to pump up prices, and – lo and behold – we have a self-reinforcing virtuous circle. There is a catch to this, however: no assets go up in value forever, and especially not ones which are being debased at high rates of speed. So in essence, this is a kind of unsustainable Ponzi scheme, where at some point the up-trend holding up the house of cards must reverse. Given the underlying pressures, at that point the house of cards is likely to come tumbling down rather quickly.
So what will be next to revalue against the dollar? The Danish krona? The Czech koruna? Or gold? Or silver? Or bitcoin? Or litecoin? Or oil? Or wheat? Or copper? Or the Chinese yuan? Or the Hong Kong dollar? I don’t know, but all or them are certainly candidates, and some of them are likely to produce exponential returns when they do finally “revalue”.
Forex platforms such as Oanda support trading in all of the above other than the cryptocurrencies, and at today’s laughably low rates of interest, the cost to maintain a small open position and wait is not high. If your position is small enough that you can afford to lose a bit while you are waiting, your only real risk is that your chosen platform goes bankrupt.
Since this risk is not negligible, don’t forget to diversify your position by spreading it out a bit, for example by keeping some funds in physical form or with comparatively safe banks in Hong Kong, China or Singapore. While one should also be aware of and wherever possible minimize risk, those potential exponential returns arguably justify them.
Act now. Don’t wait.
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Scott Freeman is the CEO of the IT Group, which is a Shanghai-based group of companies focusing on information technology and financial services. He’s always on the lookout for self-starters who bring along creativity, enthusiasm and know-how. He can be contacted at [email protected].
