Bitcoin is a speculative asset, not applicable to the settlement of trade transactions

a. In its current state, Bitcoin cannot become an acceptable measure for any kind of economic settlement

b. If you were to measure inflation in the U.S. in Bitcoins, then: in 2018, inflation on goods would be 275%; in 2019, deflation would be 50%; and deflation in 2020 would be 75%. Any economy can work when you get home from work on Friday and know how many goods you can buy on Sunday

c. Bitcoin, like other alternative assets, is rising because of what are negative real interest rates around the world. Many institutional investors (who manage clients’ money), are forced to hold over $18 trillion in debt with negative yields to maturity, in other words – with a guaranteed loss. Therefore, instead of a small portion of a portfolio with a guaranteed loss, they choose an asset with an “unknown yield” (Bitcoin).

d. The use of blockchain technology will actively develop, but Bitcoin today has only the use of a “market sentiment indicator”. Someone is trying to compare Bitcoin with gold, but it is also not correct due to the realized volatility of Bitcoin and due to the industrial application of gold. The daily liquidity in gold and gold-linked financial products is over $140 billion a day. And here’s a detailed investigation into how it’s very likely that most of all Bitcoin trading volume on crypto exchanges is probably fake

e. If you believe that Bitcoin will repeat the momentum and growth rate of 2020 in the 21st, then you must believe that by July 2021, Bitcoin’s capitalization will exceed all cash dollars in circulation. It is unlikely that authorities in developed economies will legalize and allow trading in assets where there is no beneficiary identification on such a scale.

It is impossible to predict the exact moment when a bubble burst will happen. The market can remain irrational longer than we can remain solvent.

So for example in the 1980s GMOs predicted a bubble in Japan, sold off all positions completely and waited three years watching the madness. At the peak of the Japan Bubble in 1990, the Japanese stock index was trading at 60x Price/Earnings, and all Japanese real estate was valued at 4x the value of all US real estate.

Puncture in overvalued sectors and asset types can start at any time. Most major investors are talking about the moment the mass vaccination in developed economies begins.

So investors and financiers will deliver the vaccine, realize that the global pandemic will end sooner or later, that governments cannot indefinitely take on the debts of everyone in the economy, look around and see that Teslas are still rarely seen on the roads, the economy is in terrible shape, and financial asset prices are high. All of this will encourage investors to lock in profits.

Financial markets cannot be understood in terms of one exact formula. However, there are asset classes and investment factors that outperform broad market indexes during periods of high volatility and bubble bursts.

For starters, Mendeleev recommends recognizing the presence of a bubble and assessing the risks available to personal portfolios. If you have positions in the names everyone is talking about, begin planning for a gradual and disciplined exit and reinvesting in protective assets.

As a follow-up to this paper, in our next post we will publish a globally diversified Robo-Advisory style portfolio consisting of only a few indices and suitable for challenging market conditions.

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