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WILD SPECULATION?

Mis à jour : 22 mai 2018



The 2017 trading year was an unexpectedly good year for risky assets, 12 consecutive months of increase for the SP500, no correction of more than 3% for the whole of the year, a volatility on the floor, the lowest on average ever recorded.

The 2017 trading year was an unexpectedly good year for risky assets, 12 consecutive months of increase for the SP500, no correction of more than 3% for the whole of the year, a volatility on the floor, the lowest on average ever recorded. Similarly, the amounts invested in ETFs now represent 3.4 trillion USD, one more than the previous year. Also note 6.8 trillion debts issued, 3.7 by the corporates, a new record. In 2017, we witnessed and participated to a huge liquidity feast, under the benevolent eye of central banks. Yet the big winners of last year, which will continue to elicit many comments in 2018, are bitcoin and cryptocurrencies.

A philosophy

Let's talk about bitcoin first. Without going into details, it is first of all a technology: the blockchain. It allows transactions to be validated by a network, without going through a bank or government intermediary. Operations, once performed, cannot be deleted or changed. Bitcoin is a philosophy, it guarantees anonymity and allows all citizens to safeguard their private sphere and therefore their individual freedom. As there is no centralized control, there is no risk of shutdown, it is the network, hundreds of thousands of computers, that acts as intermediary. Bitcoin is also a vision, a philosophy. It is therefore the responsibility of every citizen to declare his assets in bitcoins if he owns some.

Paradoxically, when you go through a bank (often online) to buy bitcoins or you buy certificates that replicate its performance, you do not bear the philosophy of the digital currency, since you go through a broker. It is therefore necessary to separate the utility function of bitcoin and its properties, from speculation around its value. My remarks focus on the latter.

Not yet a currency

There is no doubt that bitcoin is a monetary revolution, even if its detractors do not grant it this status. It has a few drawbacks: the system is slow and energy intensive. Yet the tour de force has already been realized, since bitcoin transactions are not subject to any challenge, the trust is there, without any government or official backing. However, it is still another status to be accepted in the world as a currency of exchange just like the dollar or the Euro. Merchants who currently accept bitcoins and/or crypto currencies as a means of payment can be counted on one hand.

A retail product

So, what is a bitcoin or any other digital currency worth? What is the value of an asset that has no physical form, no income, no backing from a government? This is the question, but rather than asking it in absolute terms, it would be better to compare with existing currencies, accepted as a means of exchange. For example, what is a Yen worth? Knowing that the Japanese debt represents 233% of its GDP, that the Japanese government does not plan to return to budget equilibrium, that the BOJ finances these deficits and that Yen investments yield nothing or below zero, how much is a Yen worth? Does that make sense? Ditto for the dollar, now that the tax reform has been passed, the deficits will strongly increase an already colossal debt (20.2 trillion USD). Yet trust remains, Yen and dollars are still accepted as a mean of exchange. The whole cryptocurrency ecosystem is valued at 600 billion dollars (end of 2017), that's a lot; but little if we put this figure in relation to the 1 to 1.5 trillion equivalent US dollars printed annually for the last few years by the central banks to buy financial assets.

It is therefore amusing to see the vehemence with which certain financial institutions point to the "bubble" that is being created, the same who have not seen the excesses, of much larger magnitude, of the internet bubble or the subprime crisis. Bitcoin and its little sisters are, up to now, a purely "retail" product. Bankers could not "invent" bitcoin, since the purpose of this is to do without banks and pay less or nothing. It is therefore easier to say that it is a bubble when one does not participate.

Another important element is that, unlike anything historically seen in cases of high speculation, there has been no use of leverage. Until recently it was impossible to borrow in order to buy bitcoins. Thus, the sums invested in crypto currencies are small. Even in South Korea where crypto currencies have become a must that no one wants to miss, since 3 out of 10 employees are invested, the average investment is 5'250 USD, a very reasonable amount.

If crypto prices were to go to zero, the macroeconomic impact would also be close to zero. So as long as these investments do not widely concern the institutional, the risks of this speculation for the global economy can be ignored.

Rational

So, is it a fraud, a Ponzi, a bubble? We can say with confidence that this is not a fraud, the technology works, and as Bill Gates says, "bitcoin is a technological tour de force." It's not a Ponzi since the number of bitcoins is known, there is no distribution for the benefit of those who have already entered, it is purely a game of supply and demand that sets the price. A bubble should be defined, however, as it is written above, there are other bubbles, much larger and more problematic, and yet they do not alarm our leaders. It is true that given the volatility of these investments, it is difficult to consider them as a "store of value". However crypto currencies have a near-to-zero correlation with traditional financial assets, therefore a very small allocation to it can make sense.

Finally, take the example of an investor who would have a million euros to invest: is it more rational to invest in very safe German Bunds with a yield of -0.7% with a one-year maturity, which induces a definite loss of EUR 7'000 in twelve months? or risk EUR 7,000 in crypto currencies, taking the risk of losing them, but with the hope to multiply this sum by five or ten in one year? Do not hesitate to write to me if you take the first option!

Current monetary policies, which started almost 10 years ago, no longer allow households to make their savings profitable. It is not surprising that they are looking for solutions elsewhere, the opportunity cost is nil. To Invest small amounts in crypto currencies is to bet that one day, it will be commonly used as a means of exchange.

Happy New Year 2018!

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