Crypto’s Sole Support Is a Pillar of Hope

Talk about a conundrum.

I am no fan of central bankers. Nor am I a believer in cryptos.

However, I must confess to agreeing with the Bank of England Governor, Andrew Bailey, on his assessment of cryptos (emphasis added):

They have no intrinsic value. That doesn’t mean to say people don’t put value on them, because they can have extrinsic value. But they have no intrinsic value. I’m going to say this very bluntly again…Buy them only if you’re prepared to lose all your money.

CNBC, 7 May 2021

The crypto faithful’s response borrows directly from Mandy Rice-Davies’ (paraphrased) famous one-liner…‘well he would say that, wouldn’t he?’.

And for a sceptic like myself, I have the same response but for a different reason. He would say that because it’s true…there’s nothing other than belief backing this stuff.

The gulf between the believers and non-believers is as wide as ever. Neither side gives an inch.

Those in control of fiat money appear to be coordinating their responses…

Cryptos are ‘not real currency’, warned the People’s Bank of China.

The ECB’s latest Financial Stability Review likened the rally in crypto prices to those of infamous bubble’s past…‘Tulip Mania’ and the ‘South Sea Bubble’. The ECB’s review said Bitcoin was ‘risky and speculative’ and was possibly connected to ‘illicit’ activity…not to mention, bitcoin’s rather large carbon footprint.

Are central banks circling the wagons to defend their monopolies OR trying to contain a potential trigger for a market meltdown OR maybe a bit of both?

The March 2021 issue of The Gowdie Letter looked at the hidden dangers within cryptos that could threaten a repeat of the subprime meltdown.

Free Report: Economist reveals five stocks he believes you should sell today. Download now.

Here’s an edited extract…

Rampant speculation. A level of euphoria that’s off the chart. The MOST expensive US share market in history. Opaque investments promising higher returns. [Worthless investments] being feted as valuable. Lessons of the past being ignored. Sound advice not listened to.

This looks, smells and tastes like a bubble…so what could be the pin?

According to Kevin Muir of MacroTourist…

“The next crisis will occur in an asset that regulators don’t understand. It will be an asset where they aren’t aware of the amount of leverage being employed. It will be something viewed as a ‘can’t lose’ situation by market participants (much like housing in the early 2000s), and something outside traditional capital restrictions (much like CDOs and other off-balance sheet items).”

What’s an asset regulators and for that matter investors DON’T really understand?

Cryptos…and it’s a sizeable market.

From Forbes on 18 February 2021 (emphasis added):

The broad bitcoin and cryptocurrency market, made up of thousands of digital tokens, is now worth a staggering $1.6 trillion.”

Bitcoin represents around US$1 trillion of the US$1.6 trillion crypto market.

How much gearing (leverage) is behind the US$1.6 trillion crypto market?

Personal loans. Credit cards. Money on the margin. Home equity withdrawals. Corporate debt issues.

No one knows…but where the potential exists for big payoffs, there’s leverage.

To cite a couple of examples…

Flash Loans Are Providing Instant Cash to Crypto Speculators

Source: Bloomberg

[Click to open in a new window]


Microstrategy to borrow $600 million to buy more bitcoin

Source: Reuters

[Click to open in a new window]


The leverage could amount to a few billion or a few hundred billion dollars.

In a nutshell, cryptos are an investment that few, if any, people really understand and prices are being pumped up by an unknown amount of borrowed money…what could possibly go wrong?

Here’s an outlier that may or may not be relevant.

On 1 March 2021, Block Crypto published this article…

JP Morgan

Source: Block Crypto

[Click to open in a new window]

What’s GBTC?

From Yahoo! Finance (emphasis added):

The Grayscale Bitcoin Trust (GBTC) is the world’s largest bitcoin fund and the first investment vehicle of its kind to report financials regularly to the U.S. Securities and Exchange Commission (SEC).

GBTC shares are part of a range of traditional financial products that track cryptocurrency prices offered by Grayscale Investments; the world’s biggest digital asset management firm and part of the Digital Currency Group (DCG) led by founder and CEO, Barry Silbert. DCG is also the parent company of Coindesk.”

GBTC provides investors the opportunity to invest (or speculate) in bitcoin, without buying it directly.

Therefore, the investor avoids the hassle of organising safe storage from hackers and having to remember the password.

The Grayscale Bitcoin Trust has proved popular with institutions…

“…nearly 20 institutions already filed paperwork with the U.S. Securities and Exchange Commission last quarter, showing they invested in the Grayscale Bitcoin Trust (GBTC)…”

Forbes, 6 August 2020

Apparently, institutions favour GBTC over holding bitcoin directly due to the transparency in the chain of custody…it makes it easier for auditors to verify the institution is actually holding what it says it’s holding.

This product feature is why GBTC was Wall Street’s preferred option for bitcoin exposure…and why the fund traded at a premium to its net asset value.

What’s the big deal about the GBTC premium collapsing from 2530% down to zero?

Weekly Premium of GBTC

Source: Block Crypto

[Click to open in a new window]

Glad you asked.

GBTC will issue new shares to institutional investors for ‘more or less’ par value with one restriction…the shares must be held for a minimum of six months.

Over the course of the past two years, an institution could buy a US$1 share that on average, could be sold for $1.25 six months later.

Money for jam…so why not borrow to get some of this ‘all-but’ guaranteed action?

With the evaporation of the GBTC premium, Kevin Muir wonders whether some institutions might start to face margin calls…which could bring more downward pressure on the price.

We’ll have to wait and see.

But it does raise a bigger question.

Subprime debt was a US$350 billion market built entirely on the belief the US had never experienced a nationwide fall in property values.

The crypto debt market (of which the size and the counterparty risks tied to it are unknown) has been built entirely on the belief cryptos are the new medium of exchange.

What happens when Charlie Munger’s wisdom…“Bitcoin reminds me of what Oscar Wilde said about fox hunting. He said it was the pursuit of the uneatable by the unspeakable,”…starts to dawn on some people?

They become sellers. Does that selling activity trigger margin calls or a scramble to exit to repay other forms of debt?

If the crypto market loses only half its value around US$800 billion this is twice the size of the subprime fiasco.

And as we saw in 2008/09, the fallout in one sector DOES NOT remain contained in that sector.

With the amount of margin debt (adjusted for inflation) in the US share market well and truly exceeding the levels of the two previous bubbles, this is a market highly vulnerable to falling crypto values.

FINRA Margin

Source: Advisor Perspectives

[Click to open in a new window]


If the liquidity in the crypto market dries up, then investors needing to raise cash to meet crypto margin calls or to pay back debt, will look to sell individual shares, ETFs and/or redeem from managed funds.

That selling activity, in turn, generates margin calls for geared share investors…forcing them to sell or stump up with more cash.

At this heightened state of market euphoria, I accept this “possible pin” scenario sounds so far out of left field, it’s almost laughable.

However, I do recall former Fed Chair Ben Bernanke saying in 2007 something like “subprime would likely be contained”.

Pins tend to be hiding in plain sight…it’s only after they appear that people become aware of the danger that exists in an underregulated and overgeared asset class.

The rapid unravelling of Greensill…has again shone a harsh light on the dangers of little understood financial products.

When you are driven by greed to borrow to invest in stuff you don’t understand, it invariably ends badly. 

Could it be that cryptos and leverage will be the Kryptonite to the Fed’s superpowers?

Quite possibly.

Since that was written, the premium on GBTC has given way to a substantial discount…MINUS 18%…some selling pressure perhaps?

Weekly GBTC Premium

Source: Block Crypto

[Click to open in a new window]


Anyone who thinks crypto is an uncorrelated asset class is living in a fool’s paradise.

Cryptos are part and parcel of the same FOMO and TINA (there is no alternative) mindset that’s overtaken investor psyche.

When people realise the value of cryptos rest on a solitary pillar of hope, then the whole edifice is at risk of collapsing.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion