Forget Bitcoin and Focus on Stocks

Have you heard the latest news?

Twitter banned advertisements on cryptocurrency initial coin offerings (ICOs). CNBC reported on Monday:

Twitter announced Monday it would ban advertising for cryptocurrencies, following similar bans by Google and Facebook to crack down on fraud in initial coin offerings.

“Today’s news on Twitter’s ban is likely a significant contributor to the steep sell-off,” said Timothy Tam, co-founder of crypto-market intelligence platform CoinFi. “As new retail investors enter cryptocurrency, a large portion of them are trading on raw emotion.”’

Bitcoin fell 7% on the news. It’s trading below US$8,000 at the time of writing. Weeks of regulatory uncertainty has weighed on the digital currency.

ICOs are similar to initial public offerings (IPOs). However, when you buy shares in an IPO, you’re buying part of a real business. ICO’s aren’t backed by anything — they offer zero value. That said, despite these comments, we actually considered buying an ICO a few months ago.

Are cryptocurrencies worth the gamble?

The plan was to take advantage of the hot crypto market. But we decided against it. To start, you need to buy bitcoin or ethereum to enter and exit the market. That’s like using BHP Billiton Limited [ASX:BHP] or Rio Tinto Limited [ASX:RIO] to access stocks on the ASX.

It doesn’t make any sense.

The transaction fees and spreads (between buyers and sellers) are a joke as well. You can’t even short cryptocurrencies, unless you’re trading the futures or CFD markets. That poses another risk — leverage.

In our view, cryptocurrencies will become the next Dotcom bubble. They move according to global government regulation updates on a daily basis.

What happens when the government finally cracks down on the sector? That seems likely one day. When it happens, cryptos will probably crash across the board.

Remember, bitcoin was born during the depths of the Global Financial Crisis of 2008/09. It was created as an alternative to the modern-day (regulated) banking system.

It allows you to move your capital off the grid. But, if bitcoin becomes regulated, what value will it and the rest of the crypto market offer?

We argue, not much.

Bitcoin has crashed 40% over the past 12-months and could go a lot lower.

Cryptocurrencies are backed by nothing other than faith, hope and dreams. That’s why, if you’re looking to create real wealth, there’s no better substitute than the stock market. Of course, it always matters when you buy and sell.

The bond market matters for stocks

Market Watch reported yesterday:

The stock market surged on Monday—and it really needed to.

U.S. stocks are coming off the biggest weekly decline in more than two years, and the aftermath of that drop has market technicians warning that major indexes are on the verge of a full-fledged, technical breakdown.

“The extent of the deterioration in equities is very much a concern given the combination of near-term technical damage, along with the decline in longer-term momentum after having reached record overbought conditions into late January,” wrote Mark Newton, technical analyst at Newton Advisors, in a Monday research note.

We warned that a sharp-sell off was imminent last week. And while we could still see lower prices, there’s no need to panic yet. 10-year US treasury yields are still trading below 3%:

10-year US treasury yields 28-03-2018

Source: CNBC
[Click to enlarge]

10-year treasury yields haven’t traded above 3% since 2013. There’s a risk when it breaks above that level, the stock market could see a sharp drop. The 3% yield level signals the bond bull market is over. That could impact investor confidence and lead to more volatility.

Market Watch reported yesterday:

Frank Cappelleri, chief market technician at Instinet LLC, said it was important to watch for levels in the 10-year Treasury note, which had been seeing muted action even as stocks soared. That is especially curious given that bonds, considered havens, tend to see selling as stocks climb. Bond prices and yields move in the opposite direction.

‘“If investors are more willing to buy bonds than stocks that would be telling.”’

We’re not surprised by the action in the bond market — US interest rates are on the rise. The US Federal Reserve increased interest rates last week. It plans to raise rates three times this year, while slowly unwinding its money printing program.

The clock is ticking

The smart money sees the writing on the wall. As the Fed increases interest rates in the months ahead, bonds will become less attractive. Mathematically, when bond prices fall, yields rise.

It’s only a matter of time until 10-year yields hit 3%.

Banks and institutions will need to re-price risk when it happens.

For too long, they have assumed a low interest rate environment. Among other forms of long-term debt, when the 3% level breaks, variable rates on mortgages — set on 10-year rates — will probably go through the roof.

Can the US economy handle an era of rising rates? That’s yet to be seen.

Remember, debt is at an all-time high. That’s why higher rates are likely to cause more volatility and uncertainty across all markets. And as punters become more nervous about the future, stocks could fall sharply.

But we’re unlikely to see any major selling until the 3% level breaks.


Jason Stevenson,
Resources Analyst, Gold & Commodities Stock Trader

Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:

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