Big PictureCurrencies & Commodities Investor Psychology
Crypto currency madness
31 Aug 2021
1 month(s) ago
Crypto currency is increasingly looking like an excursion into the Madness of Crowds.
Crypto currency continues to get stranger. Those who hoped that bitcoin and its offshoots would represent an escape from the irrationality of ‘fiat’ currency – a reasonable enough wish given the irrationality of the current central bank money printing, known as quantitative easing – must be very disappointed.
All that has happened is that the irrationality of human emotions in markets has been added to the irrationality of governments who think they can money print their way out of trouble. One layer of unreason has been overlaid on a layer of unreason. The problem, once again, is not too much government fiat but the opposite: the financial deregulation that has been going on for decades.
Altcoins like Cardano, Binance Coin and Avalanche have doubled (or, in the case of Avalanche, tripled) over the course of the last month. The altcoin frenzy is taking place at the same time there has been a deluge of interest (and cash) into non-fungible tokens.
Bloomberg reports that investors are increasingly looking at new types of digital currencies. It’s a jungle out there:
“Fear of missing out (FOMO) remains alive and well in the cryptocurrency world, with lesser-known tokens outperforming again in the wake of recent rallies staged by industry leaders Bitcoin and Ether.
“Cardano has doubled this month, becoming the third-largest digital asset. Binance Coin is also up. A token named Avalanche has tripled in August. Meanwhile, prices for digital photos of rocks with laser eyes and cartoon depictions of cute animals are going gangbusters, sometimes quadrupling in a matter of days.
“Among analysts and investors, there’s little consensus as to what’s driving parts of the frenzy. Some posit that speculators are moving from the mainstays to newer, more exciting offshoots, as they often do after big runs. Others see a world awash in cash and ultra-low rates, which ultimately pushes investors toward ever-wonkier assets. A few tokens are backed by strong narratives, such as technological advances at the Cardano and Solana networks.
“There’s no doubt that there’s a lot of excitement in crypto,” said Yoni Assia, founder and chief executive of online exchange eToro. “You can definitely see it within the numbers in the industry, whether it’s looking at total volumes or looking at growth of companies,” he said, adding that “we’ve seen a lot of exuberance in the market.”
It is always amusing to see highly intelligent analysts try to rationally explain irrational behaviour. Low interest rates. Lots of cash about. Volumes are up. Volumes are down. My dog likes bitcoin.
The fact is that the financial markets have been, for decades, neither logical nor especially sane. Games are being played with money itself, with the obvious attendant dangers. In 2008 there was a massive bank run that nearly caused a total collapse of the Western monetary system. That was avoided because the head of the US Treasury issued a fiat: shutting down all the US money markets and underwriting every bank deposit up to $250,000. He refused to reopen the markets until the panic had subsided.
That is how government fiat is supposed to work. And good government fiat, a fair umpire who enforces the rules of the game, is what has been missing for about 25 years.
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