Toxic sine
In an atmosphere of prevailing uncertainty, global markets remain extremely volatile, with investor attitudes to and appetites for risk continuing to oscillate wildly.
In an atmosphere of prevailing uncertainty, global markets remain extremely volatile, with investor attitudes to and appetites for risk continuing to oscillate wildly. In times like this, investing outcomes can owe as much to psychology as to fundamentals. We may have found an unlikely tool to help us….
In our recent three-part series on Bitcoin, crypto and the blockchain,[1] we pointed out that crypto is essentially a Sphinx without a riddle, a showy solution to a problem that doesn’t exist, a videogame without any graphics, on a platform (the Blockchain) that is a sub-optimal form of file-sharing, all based on protocols designed by US governmental agencies:
“Bitcoin is a line of digital computer code, generated from an activity analogous to powerful computer processors playing Battleship against each other. This uses extreme amounts of energy to produce game tokens that as yet have no known use or utility.
The Blockchain is an online sharing protocol that has some attractions but at this stage is generally less useful in the vast majority of situations than Windows One Drive or Google Drive.”
It turns out that we might have to re-think that. There may be a use for Bitcoin after all, albeit an unintended one that may be relatively short-lived.The large tract of land, to the North of Pontypridd between the river Taff and the main road, where today Pontypridd High School stands, housed the Albion Colliery from 1887 to 1966.
Coal mining in the nineteenth century was even more arduous and dangerous than today with all too frequent injuries and fatalities. The Albion mine began operating at a time when electricity was only just beginning to be introduced into the mines. The miners who worked at Albion in the 1890s produced 600,000 tons of coal each year (a record for a single shaft mine in the South Wales coalfield) in dangerous conditions, with appalling disregard for human life.[2] As the nightshift took up their workplaces at 4 PM on 23rd June 1894, a massive explosion of coaldust ignited by the shot used to blast the coal face resulted in the deaths of 290 men and boys (as young as 13) and 123 pit ponies. Despite a public enquiry and the recommendation that the Albion Coal Company should be prosecuted, the only sanctions were fines (of £10 and £2 against the colliery manager and the blaster).
As a consequence of this and many other disasters that had resulted in explosions and asphyxiations, the eminent Scottish physiologist (who later helped invent the gas mask and the respirator) John Scott Haldane submitted a report to the Home Secretary that led to the use of small animals, especially canaries, in coal mines as an early warning of gaseous build up in the enclosed spaces underground. Canaries continued to be used in coal mines until 1986 and in the decades following the Albion disaster, British coal mines became very much safer than their counterparts in Germany and America.
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It seems to us that Bitcoin may have become a modern day, digital, canary in the financial coal mine. The downturn in the NASDAQ (the blue line) has almost closely mirrored that in the price of Bitcoin (auburn line), so far this year, as can be seen from the chart below:
To us, this is no coincidence:
The tightening of liquidity was always bound to most hurt those assets and pseudo assets that had benefitted the most from liquidity. Just over a year ago, we highlighted this
“Capital flows to the places that make the highest returns”. As we know it was Tesla, Ark funds, cryptos and SPACs. This is how liquidity fuels bubbles, but it doesn’t last forever”.
The tightening of liquidity was always bound to hurt the biggest beneficiaries of liquidity.
The nexus between crypto and the NASDAQ has grown tighter to the extent that the biggest listed companies closely linked to Bitcoin or crypto (including, Tesla, Coinbase, MicroStrategy, NVIDIA, Marathon Digital, Riot Blockchain, PayPal and CME Group are NASDAQ-listed). With investors like ARK’s Cathie Wood grouping many of these businesses as ‘disruptors’, it can be increasingly difficult to know where crypto finishes and the NASDAQ begins. Just as many crypto businesses have recently had the kind of accidents that befell Luna and Terra,[3] many NASDAQ companies, previously touted as growth opportunities, are now in retreat.[4] Crypto winter could be very cold for tech stocks, especially the newer generation.
Many investors who used additional liquidity (such as their stimulus payments) to ‘invest’ into ARK or crypto, also invested into the NASDAQ. The herding effect on the way up, seems to have become a shared dash for the exit.
Crypto, with its 24/7 trading, may have become a clear signal for the direction of the NASDAQ. In turn the direction of the NASDAQ is clearly related to broader equities, including the S&P500 (black line), Asia Pacific (yellow line), the Dow Industrials (green line) and the All-Countries World Stock index (purple line):
NASDAQ is clearly the most affected, but all stocks seem to be subject to the gravitational pull of the most reflexive measure of investor risk, the price of Bitcoin.
If the Bitcoin canary makes a full recovery, we should expect to see equity markets rebound strongly, but for now, it still looks very sick indeed. Keep a close eye on Tweety-pie. And perhaps spare a thought for the 290 boys and men and 123 pit ponies killed in that one incident alone because of the greed of others.[5]
[1]
[2] A newspaper report of the 1860 Risca Blackvein Colliery disaster bemoaned the "severe financial loss suffered by the mine owner, with the death of 28 pit ponies at an estimated value of £1,000", barely mentioning the deaths of 146 miners, including young boys.
[3]
[5] A further 108 men died in other incidents in that year in the Pontypridd coal field alone.
About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
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