Here’s wishing you a wonderful weekend!
In brief (TL:DR)
- U.S. stocks slipped at the end of the week on surging coronavirus numbers and and on risk that a stimulus deal would fall through with Republicans stonewalling, the S&P 500 (-0.35%), tech-centric Nasdaq Composite (-0.07%) and blue-chip Dow Jones Industrial Average (-0.41%) were all down on the news.
- Asian stocks ended the week lower, with the prospects of a vaccine and stimulus outweighed by concerns over a worsening pandemic.
- U.S. 10-year Treasury yields edged higher to 0.946% from 0.922% despite the possibility that any stimulus deal would fall through (yields rise when bond prices fall).
- The dollar continued to recover as investors expecting fresh stimulus may be disappointed.
- Oil rose sharply with January 2021 contracts for WTI Crude Oil (Nymex) (+1.53%) at US$49.10 from US$48.24 as OPEC+ indicated that they would be more aggressive in managing supply.
- February 2021 contracts for Gold (Comex) (-0.08%) slipped to US$1,888.90 despite a rise in other commodities as the prospect of fresh stimulus fades with political haggling in Washington.
- Bitcoin (+2.57%) soared to US$23,450 into the weekend as outflows from exchanges surged ahead of inflows (outflows typically suggest that investors are looking to hold Bitcoin in anticipation of price rises).
In today’s issue…
- Speculation Has Become a Pandemic Way of Life
- Cheap Credit Could Turn Costly
- Bitcoin’s Back Baby
1. Speculation Has Become a Pandemic Way of Life
- Retail speculation in stocks has driven valuations past 2000 bubble levels, before the dotcom crash
- Speculation no longer driven by retail investors but by institutional investors as well given low interest rates and a low yield environment
2. Cheap Credit Could Turn Costly
- Companies gouging on cheap credit may find themselves unable to service their debts should interest rates rise
- Yield-hungry investors have had little option other than to pour into high-yielding debt, and while some companies may survive the pandemic because of this debt, they may not survive the recovery
3. Bitcoin’s Back Baby
- Without traditional metrics for valuation, it’s almost impossible to say if Bitcoin is cheap or expensive at US$23,000 or even what the upside is
- As an unconstrained asset that is susceptible to a variety of narratives, Bitcoin is driven primarily by narratives, making it the ultimate speculative instrument
And finally, any discussion over speculation wouldn’t be complete without mentioning Bitcoin.
Up over 200% this year on a wave of new money, many believe that the cryptocurrency’s time has come, while there are still those on Wall Street who believe that it’s just the latest sign of irrational exuberance pervasive throughout the entire market and all asset classes.
It’s hard to ignore the fact that Bitcoin’s rise has come at a time when stocks are trading beyond bubble levels and IPOs of loss-making firms are making a splash on the markets.
While Bitcoin’s inherent volatility makes it a hard pill to swallow for all but the most iron-stomached of investors, the likes of JP Morgan Chase (-0.49%) and Nomura Holdings (-0.58%) have noted plenty of interest in the cryptocurrency from both family offices and trend-following quantitative hedge funds.
Bitcoin is surfing a wave of speculation on long-duration assets, assets which investors believe will last well beyond the pandemic and represent a stake in the technology of tomorrow, regardless of valuation (or lack thereof).
Unlike any other asset class, traditional metrics of valuation don’t apply to Bitcoin.
As an unconstrained asset, Bitcoin’s dollar value is reflective of at times at odds narratives, but the fear of missing out isn’t over yet with some investors willing to pay a premium of as much as 34% to participate in one of the few regulated Bitcoin investment vehicles – Grayscale Bitcoin Trust.
Such dislocations mean that large institutional investors and retail traders alike must fork out massive premiums for shares in regulated Bitcoin vehicles instead of buying the underlying cryptocurrency outright.
As experience and comfort in dealing with cryptocurrencies grows, that premium may start to whittle down, but for now at least it shows the seemingly insatiable appetite for Bitcoin.
Novum Digital Asset Alpha is a digital asset quantitative trading firm.
Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.
The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.
It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.
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