Why a Bitcoin Bubble Burst Could Blow up Bigger Bubbles

Bitcoin’s meteoric rise is epic, but what’s driving a lot of the rise is what drives many of the riskiest bubbles – debt.

Rising prices do not in themselves pose a systemic risk, but what made the housing bubble pre-2008 a systemic risk was its reliance on debt extended by financial institutions.

Unlike stocks or bonds, one can purchase Bitcoin with credit cards through the most popular platform for purchasing Bitcoin – Coinbase.

Millenials have been particularly active in Bitcoin and Alternative Coins – which some have called glorified gift cards for products that do not yet exist.

One purchases Bitcoin with credit cards > then one purchases Alternatives with Bitcoin > then one purchases one of the nearly 3000 Alt Coins (meme’s are telling and they are.

Briefly on Alt Coins and ICOs; in the overwhelming majority of the cases, the money raised from an Initial Coin Offering goes to the sellers, and in return the “investor”  gets a coin for which you can do very little with except sell to other people.  Unlike stock offerings, you are not purchasing a stake in the company.

It is difficult to say how much has been purchased with credit or how much with by millenials. However, millenials are not wealthy, and over 1 in 4 millenials prefer Bitcoins to stocks, and nearly 40% of male millenials prefer Bitcoins to stocks, according to this Forbes artice.

Total Credit Card debt is at a new high. Credit Card Chargeoffs at banks are already up 25% y/y (from very low levels).  Should credit cards begin to go bad from a blow up in Alt Coins, Banks will likely dial back the amount of credit.

This will make it harder to get credit, and therein goes one source of purchasing power for goods worldwide, not just bitcoins.

This would slow the economy, causing a further pullback in the credit that has kept junk bonds, sub-prime auto, commercial loans, afloat.

It’s common for bubble sectors to burst first, before dragging down the rest of the economy. It is a bit like Dominoes. Right now, everything stands stall, and the question is, what will be the first domino. That first domino could be the biggest bubble of them all – Bitcoin.

 

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