Obviously good. That’s how Treasury Secretary Steve Mnuchin just characterized the recent collapse of U.S. dollar. Moments later, all hell broke loose.
Currency markets are intertwined, and notoriously fragile. They involve trust. Unfortunately, that is often undermined by reckless government officials.
Cryptocurrencies offer an alternative. Let me explain.
The only thing that gives the U.S. dollar value is the backing of the federal government and the trust of its exchange partners. In truth, every country would prefer its currency to be weak relative to its trading partners.
A relatively weak currency creates competitive advantages. Exports become cheaper to foreigners, while imported goods become more expensive domestically.
None of this is lost on Mario Draghi, president of the European Central Bank. At the World Economic Forum in Davos this week, he immediately shot back at Mnuchin, saying the U.S. is not playing by the rules.
Draghi has a point …
For decades, the U.S. and its exchange partners have pursued a strong dollar policy. The U.S. got to have world reserve currency status … and all of the perks that affords, like global hegemony. The rest of the world got stability, and the opportunity to climb out of relative poverty.
The foundation of this bargain is trust. When trust fails, the results have been catastrophic …
In October 1987, James Baker, then the U.S. Treasury Secretary, took a weekend trip to Germany to talk about trade. He casually threatened to devalue the greenback relative to the German mark.
The result? When the New York Stock Exchange opened Monday, sellers pounced. On that black day, the Dow Jones Industrial Average lost 508 points, or 23%.
Central bankers responded as they always do during a crisis. They immediately began flooding the global financial system with liquidity. In other words, printing more money.
Order was eventually restored. Stocks rebounded. Currencies stabilized.
In 2009, another financial crisis ravaged world markets. Incredibly, bankers found a way to leverage bundled mortgages given to people who could not afford to pay.
Naturally, it all fell apart. The response was the same. More liquidity. More dollars.
Years earlier, Federal Reserve chairman Ben Bernanke wrote metaphorically about dropping dollar bills from helicopters. In the whirlwind of 2009, he got his chance.
It is no coincidence that Bitcoin was born during the 2009 meltdown …
It was supposed to be an alternative to central banker shenanigans and endless liquidity. If money is about trust, then it should not be possible to print it out of thin air.
Bitcoin is deliberately scarce. Only 21 million coins will ever exist. This finite supply is why so many people refer to it as “digital gold.”
And there is no need to trust counterparties. That’s because every transaction becomes part of a permanent record on a decentralized ledger. One that cannot be altered or manipulated, supposedly.
Bitcoin is trustless, limited, decentralized and, in a weird way, safe. In a world of cyber bank heists, corporate ransomware and data breaches, the underlying ledger architecture has never been hacked. Not once.
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Currently, Bitcoin and other cryptocurrencies are in the throes of a speculative bubble. Volatility is extreme, and some of the surrounding characters are dubious, at best.
Steven Johnson, in The New York Times Magazine, writes the asset class has been taken over by “a veritable goon squad of charlatans, false prophets and mercenaries.”
It’s a great line, and accurate.
A Russian company famous for anonymous messaging is about to raise $2 billion with an initial coin offering. DJ Khaled, Paris Hilton and boxer Floyd Mayweather have recently lent their names to Initial Coin Offerings.
It is entirely out-of-hand. It’s also antithetical to why cryptocurrencies exist.
There will be fallout. But that does not mean longer-term investors should ignore this opportunity. Cryptocurrency is a sort of asset class. And it will become much more valuable during the next financial crisis.
Sadly, that event is inevitable.
Related story: Opportunity in Cryptos is Near, and Getting Closer
So far, I have been telling my members to focus on the companies that make Bitcoin mining possible. Semiconductor and graphics card companies like Nvidia (NVDA) have fared very well. But the time is coming look at actual cryptocurrency positions.
I still believe the best entry point is near the 200-day moving average of Bitcoin, around $7,120.
Best wishes,
Jon D. Markman
