Low Volatility, Low Yield in Stocks Fuel Bitcoin and Altcoins

There’s been no shortage of news about the surge in Bitcoin and some of the altcoins (alternative crypto currencies) in 2017. Japan allowing Bitcoins for transactions was a big factor in fueling the demand for Bitcoin as well as increasing odds that other countries, most notably South Korea, may follow suit.

However, there’s an additional factor that is driving up the demand and speculation in Bitcoin and other altcoins. A low volatility and low yield stock market is forcing many people to look elsewhere for volatility and higher yields. More funds are looking at cryptocurrencies as a place to take on more risk for the higher yield. More traders are finding solace in the volatility that cryptocurrencies like Bitcoin and altcoins such as Ethereum offer. The chart below shows the number of confirmed transactions on the Bitcoin Blockchain per day for the last 12 months.

Confirmed Transactions Per Day (click to enlarge), Source: Blockchain.info

The chart below shows the number Bitcoin Blockchain wallets, which have almost doubled over the last 12 months.

Bitcoin Blockchain Wallets (click to enlarge), Source: Blockchain.info

Now let’s look at the chart below, which is the USD equivalent of daily trading volume of only Bitcoin.

USD Exchange Trade Volume (click to enlarge), Source: Blockchain.info

The final chart shows the average daily market price for Bitcoin across major exchanges in USD.

Average USD market price for Bitcoin (click to enlarge), Source: Blockchain.info

From these charts, we can see:

  • The number of Bitcoin transactions is rising rapidly.
  • The number of wallets, and likely, the number of people jumping into the Bitcoin and cryptocurrency world continues to rise.
  • The daily trading volume of only Bitcoin continues to increase with wild swings.
  • Continued volatility in the price of Bitcoin is making it, and in turn, other cryptocurrencies very attractive to traders and speculators.

I expect volatility to moderate a bit in the short term but I also expect more and more traders, investors and technically savvy users jumping into the cryptocurrency world, mostly because of curiosity but also because other high-yield assets have already been widely invested in and the hunt for yield in a near zero interest rate world continues.

The whole ICO market is fascinating, if not highly speculative, and also offers another path to long-term yield. I expect this to add to the volatility and, hence, the increased speculation in the base cryptocurrencies. There aren’t many places that a company can raise $35 million for their company in less than a minute. Come to think of it, I can’t think of any place one can do that.

Related Posts:

The Top 10 Myths and Misconceptions of Long-Term Capital Management (LTCM) by Eric Rosenfeld

Eric Rosenfeld, one of the founders of Long-Term Capital Management (LTCM), gave this presentation at MIT back in February. If you have even a remote interest in finance (and even if you don’t), this is an hour and a half very well spent. Eric is brilliant and fun to listen to.

Update: Sorry about that, the video embed code somehow got lost during an upgrade. It should be visible now and the original is here.

Related Posts:

  • No Related Posts

The Financial Ninja and “Greenspan Sees market Rebound”

Here’s a great post over at the Financial Ninja’s Blog about how Greenspan sees the market rebounding in six to twelve months. I couldn’t agree with the Financial Ninja more when he says, “I too believe we’ll bounce significantly… but only to dive into abyss after.”

Related Posts:

Don’t Believe the Market Hype!

Intro

As all of you who’ve been keeping up-to-date on the happenings in the financial markets know, there’s been a good deal of turmoil and volatility continuing. GM and Chrysler, in the US, are begging for bailouts, small, medium, large and extra large companies are laying off people in droves (Citigroup will be laying off 53,000 people). Things are pretty bad in the US right now. We all know that, we all hear about it, and the US stock market shows us daily.

What about India? Well, if you ask the Prime Minister, the Finance Minister, various financial “analysts” on TV, etc. they will tell you that India is very well insulated and the India growth story continues, with a few minor speed bumps along the way. My personal opinion is that the politicians and media are generally telling us what we want to hear. They’re not accurately portraying the severity of the situation in India. The situation is about to get worse in India but, barring any further catastrophic meltdowns, India should see some incredible growth post 2011.

Relative GDP Growth

Let’s look at India’s economy on a relative basis. Relative to the US and other developed, highly deregulated economies, India’s still got a growth story, whereas, the US, the UK, Japan, etc. are all in a recession (negative growth). The talking heads in India tell us that India is still on track for 6.5% to 7% GDP growth in 2009. Assuming that is true and exactly what will happen, it’s huge number (in aggregate terms) compared to other developed and many developing countries! However, India still has roughly 450 million people at or below the poverty line. This is one and a half times the population of the whole US. In order for India to decrease the number of poor and continue to provide for the basic necessities of the economically disenfranchised and cater to the increasing consumption of the middle and upper classes, growth needs to accelerate, considerably. GDP growth in India MUST be at least 10% if India is to continue to grow, relative to other economies. In my opinion, 7% GDP growth is akin to a recession in a developed economy. How can India grow at more than 7% in 2009? It’s a complicated question that the smartest economists from Harvard, Oxford, LSE, etc. are trying to answer. I won’t be pretentious enough to suggest that I know the answer. However, I will say that whatever the answer is, it’s very complicated and it will most likely make a vast amount of people very unhappy. Hence, it won’t be politically viable, especially, in an election year.

Layoffs

On the 20th of November, there was a nice little piece on Livemint that quoted Cabinet Secretary KM Chandrashekhar, “Most of our productions are based on domestic demand. As long as domestic demand remains reasonably strong, I don’t think there would be any large-scale job cuts in India,” he said. Domestic demand for many goods and services is growing but is it growing enough to keep up with supply?

The article also went on to describe how Jet Airways was “asked”, by the government, to take back all of the 1,900 employees that they had laid off in October 2008. As a business, Jet Airways has every right to hire and fire the people they need to in order to stay competitive, and profitable. However, the Indian government, must also do what they can to avoid mass layoffs across large, high profile, Indian companies. Mass layoffs across Indian industry will have a devastating affect on the economy. However, how many additional companies can the Indian government “ask” NOT to layoff people before companies start feeling intense pain?

Smaller companies are laying people off and some are even shutting Indian offices. Zapak, a mobile games company, recently announced that they would be shutting their Bangalore office. In the Business Section of the Hindustan Times (Saturday, November 22, 2008 Edition), HSBC is predicted to layoff approximately 200 employees across India. Dell has decided to scale back their hiring of new employees. These are just large companies.

About ten days ago, I had spoken to an executive at a premium tissue maker in India. They said sales have fallen dramatically. People have switched from using premium tissues and toilet paper to non-premium essentials. If the current sales numbers continue, not drop, they will probably have to layoff some people.

When I told a family business exporter of garments that he must be happy since the USD has climbed dramatically against the INR, he told me that he’s more scared then ever. He told me that orders are being cut by his clients, some of them have begun renegotiating contracts to pay in INR rather than USD because they feel that the Rupee can only depreciate against the US Dollar. I’m not quite in agreement in that statement but it highlights a very important fact – sales are down globally, not just in the West.

Real-Estate

The real-estate sector in India has slowed. There’s no questioning that statement even if developers/builders in your neighborhood are still jacking up rates. They generally see the downturn but don’t want to make a loss on their investment. Just wait it out and eventually, they will cave in. How can I say that, well, it’s simple. They made some profits from other deals. Those profits allowed them to get funding from a bank. They have a mortgage to pay and at some point, probably six months, they will feel the excruciating burden of carrying the property and will realize that they have no choice but to cut their losses and run.

Investments in second and third tier cities have dropped dramatically. Indian and foreign investment firms are finally stating the obvious, “The Indian Real Estate market is slowing”. Many projects from large RE developers like DLF and Unitech have been put on hold indefinitely. Indiabulls sees a 15% correction in the real-estate market over the next six months. I’d put the number a bit higher, closer to a national average of 25%. Marriott recently decided to shelve building a 250 room hotel in Pune, by at least two years.

For now, gone are the days when your driver or plumber is quitting his job to become a real-estate broker or a handyman is quitting his job to become a real-estate developer/builder.

Stocks

The BSE Sensex is at a three year low. Confidence is shaky at best. Corporate earnings look ok (on a relative basis) but earnings growth appears to worrying investors. Most companies are no longer expecting 20% or 30% growth rates for 2009. Info Edge (Naukri.com) has said that they see fiscal Q209 revenues to be half of fiscal Q208. Earnings growth is slowing. The question to ask is, “Is the rate of deceleration increasing?”.

The BSE has failed to rally after two very big days of gains for the Dow. People in India are still bullish on the market and the Indian growth story so why hasn’t the BSE soared like the Dow did on November 21st and November24th? There’s still too much uncertainty and the Indian stock market is telling us that cautious optimism is warranted.

Currency

The Rupee is at an all time low against the US Dollar (though a one week high, as of November 25th, 2008). There are a great deal of challenges that India faces in the next two years – much like the whole world. I look at the Rupee relative to the US Dollar and I think that they INR should settle somewhere around INR 49 per USD by the second half of 2009. The US also faces great challenges but the Indian scenario is quite a bit more precarious in many ways. GDP deceleration, inflation (currently at 8.56%), rising import costs, FX reserves are much too low for comfort. Morgan Stanley expects the Rupee to depreciate to 57 before it appreciates. They may be right but the USD is going to be under a great amount of strain considering how much additional debt is going to hit US tax payers in the pockets.

It’s hard to say what will happen. All we know is that many many things can change, very drastically, fairly quickly. I believe the next two years are going to be very difficult, globally, and we should be prepared for it – financially and psychologically.

Related Posts:

The Financial Crisis and India

BarCamp Delhi has been going on this weekend. I don’t think anyone took any video of the presentation but I turned into a bit of a pig and took up three speaking slots.

Sorry to Netra, Sukhdeep and every one else for taking up their slots!

The presentation is available as a download below as well as on Slideshare.

So far, there are posts on BarCampDelhi5 coverage on Webyantra and the BarCampDelhi Blog.

Related Posts: