Bitcoin bloodbath gathers pace
Cryptocurrency’s crash this year strikingly reminiscent of US dot-com bubble
Bitcoin’s meteoric rise last year had many observers calling it one of the biggest speculative manias in history. The cryptocurrency’s 2018 crash may help cement its place in the bubble record books.
Down 70 per cent from its December high after sliding for a fourth straight day on Friday, bitcoin is getting ever-closer to matching the Nasdaq Composite Index’s 78 per cent peak-to-trough plunge after the US dot-com bubble burst. Hundreds of other virtual coins have all but gone to zero — following the same path as Pets.com and other red-hot Emmanuel Macron’s “grand plan” to relaunch the euro on safer foundations lies in tatters after Europe’s northern bloc refused to contemplate any form of fiscal union, and exhausted leaders kicked the crucial issues into touch.
After battling deep into the night over migration there was no energy left at the Brussels summit for a fight over fiscal architecture. The paralysis means Europe is likely to stumble into the next global economic downturn ill-equipped. It will have no shared fiscal instruments to fight recession, leaving the weakest states vulnerable to collapse.
The eurozone is no closer to a “fiscal capacity” or proto-treasury able to contend with big shocks, entailing US-style transfers to regions in trouble. It is still the same structure that nearly destroyed monetary union in the banking crisis of 2012.
“The eurozone’s death wish has never been stronger,” said Yanis Varoufakis, Greece’s ex-finance minister.
The Franco-German Meseberg Declaration on eurozone reform published with much fanfare two weeks ago — already a diluted version of Macron’s original vision — never even made it on to the summit agenda.
“Leaders only delivered the bare minimum. Decisions were postponed to the December summit. Extend and pretend,” said Carsten Brzeski from ING. “Perhaps someone should warn them that by delaying, they risk another night-long European summit, this time on how to rescue the eurozone.”
The global business cycle has not been abolished. The talk at hedge fund gatherings has already rotated from how to play the final stage of the boom, to how to design a “short” strategy to weather the storm. Recession worries are edging on to radar screens.
The eurozone is already in a soft patch. German retail sales fell by 2.1 per cent in May, the biggest drop since the onset of the 2011 crisis. European bank stocks have slumped 15 per cent initial public offerings that flamed out in the early 2000s.
While bitcoin has bounced back from bigger losses before, it’s far from clear that it can repeat the feat now that much of the world knows about cryptocurrencies and has made up their mind on whether to invest. Bulls point to the Nasdaq’s eventual recovery and say institutional investors represent a massive pool of potential cryptocurrency buyers, but regulatory and security concerns have so far kept most big money managers on the sidelines.
“You’ll have to see the market reverse before you see” institutions pile in, Peter Smith, chief executive since late January, often a harbinger of trouble.
“A eurozone recession can’t be allowed to happen,” said Barnaby Martin from Bank of America. “The idea fills us with a lot of fear.”
Issuance of BBB bonds has exploded fourfold to €800 billion ($1383.7b) and many of the borrowers are badly exposed to a combined growth shock and a trade war.
The eurozone can muddle through without any meaningful fiscal union as long as the global expansion rolls on. Once the cycle turns, it will be dangerously naked.
The European Central Bank has largely run out of monetary ammunition. Interest rates are stuck at minus 0.4 per cent until late 2019. The ECB has “pre-committed” itself to halting bond purchases by the end of this year. While this can be reversed in an emergency, the political bar is high and the effects of quantitative easing are in any case diminishing. officer of Blockchain, which introduced a crypto trading platform for professional investors on Thursday, said in an interview.
Bitcoin declined as much as 4.2 per cent to US$5791 on Friday, the lowest level since November, according to Bloomberg composite prices. Other coins including Ether and Litecoin slumped more, while the combined value of tokens tracked by CoinMarketCap.com
The ECB balance sheet will soon reach 43 per cent of eurozone GDP. German-led hawks will not lightly renew bond purchases if they are seen to benefit a rebel Italian government.
Macron originally called for a proto-treasury commanding “hundreds of billions of euros” to pack a counter-cyclical punch. Meseberg whittled it down to an investment fund of €30b to help countries through an asymmetric shock, but in the form of loans rather than fiscal transfers. Even this was too much. Nothing has been agreed. There is little to prevent debt dynamics spinning out of control in vulnerable economies with high legacy burdens. Italy’s debt ratio is 132 per cent of GDP and Portugal’s is 126 per cent.
A recession starting from these levels — without a clear lender of last resort — would be devastating. Bond vigilantes would not wait.
The only measure agreed was an declined to US$236 billion. At the peak of crypto-mania, they were worth about US$830b.
While it was difficult to find fresh catalysts for bitcoin’s drop on Friday, hacks at two South Korean exchanges and a regulatory clampdown in Japan have weighed on sentiment in recent weeks.
Lesser-known tokens have been hit the hardest. Dead Coins lists around 800 that are effectively worth nothing, while Coinopsy puts the tally at more than 1000. Fewer than 4 per cent of coins with market caps from US$50 million to US$100m were successful or promising, according to Satis Group.
You’ll have to see the market reverse before [institutions pile in]. Peter Smith, CEO Blockchain
EU “backstop” to boost the firepower of the Single Resolution Fund for insolvent lenders. But this will not be fleshed out until December. The 2012 “doom-loop” for banks and sovereign states remains, each threatening to drag the other down in self-feeding crisis if confidence snaps.
Markets have chosen to see the glass half full. The Euro Stoxx index of equities rose 1.2 per cent on relief over the EU deal on migrants. Yet the stormy summit showed the EU faced a new kind of animal in Italy.
This sets the scene for a bitter fight over Italy’s plans for a spending blitz, starting in September when the first budget drafts are prepared.
Macron has bet his presidency on a grand bargain with Angela Merkel that would force everybody to jump to attention.
Europe has largely ignored him. The political window for radical reform has closed. Recession draws closer. We've reached the midpoint of the year, and some interesting themes have emerged across financial markets.
Global economic activity has been steady over the first half of 2018, although the backdrop has certainly changed from synchronised growth to something a little patchier.
The United States remains the pick of the bunch. Economic growth in the June quarter will be strong, unemployment has fallen to an 18-year low and small business optimism is at its highest since 1983.
The rest of the world looks mixed, with Europe muddling through ongoing political drama and China in the firing line over tariffs.
The local economy remains solid, but there are increasing signs of a slowdown. House prices in Auckland declined again during the first six months of this year, and while the rest of the country saw a small rise, the big gains of the last decade are certainly behind us.
Unemployment is the lowest in a decade, although economic growth for the March quarter was equal slowest since 2013. Migration remains high, but last month posted the lowest annual gain since January 2016. Business confidence has been in negative territory for nine consecutive months, the longest stretch in more than 10 years.
On a more positive note, the export sector is picking up some of the slack. Fonterra is forecasting a milk payout this season of $7, which would be the highest in five years. It's not just a dairy story either, with numerous other industries performing very well on the global stage.
The NZ dollar is down against most trading partners, in particular the resurgent US dollar. Our currency is down almost 5 per cent against the greenback, and is at the lowest levels in over two years.
The last six months have been a mixed bag for global shares, which are down 1.5 per cent overall, dragged lower by a 10 per cent decline in emerging market shares.
After starting the year with the strongest January performance since 1997, US shares have been volatile. The S&P 500 eked out a 1.7 per cent gain in the first six months, but failed to regain those January highs. Tech and consumer stocks have been the top sectors, both posting gains of more than 10 per cent.
Australian shares had a solid half, rising 4.3 per cent to a 10-year high and posting the best quarterly performance since 2015 in the three months to June. The local market was again very reliable, with the NZX 50 up an impressive 6.5 per cent so far.
Finally, rising oil prices have been another big story this year. US crude has rallied more than 20 per cent to the highest levels since 2014.
Unsurprisingly, there is plenty to look forward to over the second half of the year. Trade tensions loom as a big one globally, while the steady decrease of central bank support will keep markets nervous.
On the local front, early feedback from the tax working group (due in September) will be important. We will also be watching the economy to see if pessimistic business sentiment remains just that, or turns into something more concerning.