November 2021 Foodman website and JD Supra

I Predicted the Subprime Lending Bubble’s Collapse. The Signs Are The Same For Cryptocurrency.

When I predicted the bursting of the housing market’s subprime lending bubble in 2006, a lot of people called me crazy.

And some of the people getting rich in cryptocurrency will say the same when I tell you that the Bitcoin bubble could burst at any time. Big-time.

One need only look at the parallels. Common sense and history will back me up.

Cryptocurrency investors are more and more optimistic and have kept buying. But their exuberance doesn’t necessarily mesh with economic reality.

Smart people with a lot of money, who can afford to drive the marketplace, are controlling the crypto economy. When they decide to take their profits, the-you-know-what may hit the fan, leaving lots of very unhappy people in their wake.

Will “leverage” be a downfall of Crypto?

The answer is maybe. It depends on how leveraged it becomes. When one crypto becomes overvalued, history says a sell-off will occur and money will flow to perceived undervalued crypto.

Take for example, the Bitcoin ATMs in Winn-Dixie and Harvey supermarkets, Walmart stores and other outlets. People can use their crypto wallets to convert their crypto into fiat currency. If they receive more fiat currency for the crypto than what they paid, they will have a taxable transaction.

Once Uncle Sam requires full reporting regulation of crypto exchanges, Bitcoin exchanges will be required to report their transactions to the  IRS  – provided that the taxpayer’s dollar volume of crypto transactions reaches a yet-to-be-determined threshold.

Until crypto becomes widely accepted for goods and services, it’s just another hyped asset to lure naive people into investing.

Questionable Transparency

Transparency within the crypto space is questionable at best. Until exchanges are required to report crypto transactions, it may be virtually impossible to measure the quantity of leverage in blockchain trading.

Given the fact that we can’t measure the leverage driving the market values in the crypto space, danger lies ahead. 

There are crypto investors who purchase and sell crypto with the assistance of what is known as leveraged trading. That’s usually done with capital borrowed from crypto exchange brokers, and it can wipe out an investment if there is a margin call. Moreover, derivative products such as swaps are usually traded on unregulated exchanges, which currently are not easily monitored or measured. 

Large institutions and VC funds are artificially driving up the price of crypto through the amount purchased with leveraging.

Parallels to 2008

This is what happened when brokerage firms manipulated subprime lending, precipitating the housing market crash.

Banks and mortgage lenders, including the Federal government, made loans to unqualified borrowers. These purchases caused inflation in the housing market. The unqualified buyers (flippers) sold their homes at inflated prices. The new buyers repeated the process, ad nauseum.

Once banks realized they were holding inflated paper, they sold it to the securities market. The securities market repackaged the mortgage paper into securities which were then sold to other investors. Rating services provided unsustainable valuations for the repackaged securitized loans, effectively creating a giant pyramid scheme.

When no more purchasers could be found for the inflated house prices, and mortgages could not be paid, the residential real estate market collapsed – as I told Bloomberg Small Business during my television interview in 2006.

When one examines the run up to the 2008 housing market bubble bursting, the parallels to today are clear.

  • The price of various types of crypto is being inflated by large investors who are creating market values, bringing more buyers into the market and increasing demand for digital currency.
  • Just like with the housing market, crypto is being used as a safe haven for laundered money.
  • At some point, the value of certain cryptos will reach a price where only the wealthiest class of people can afford to purchase them; adversely affecting overall market prices.

Right now, people are flowing into the marketplace to take part in a hyped opportunity which looks very much like what happened with real estate in 2008.

More reasons for the Bitcoin bubble to burst:

Notwithstanding its volatile speculative nature, a single bitcoin is trading at around $63,000 (10/25/21) with demand growing despite the fact that:

  • The SEC, the U.S. Treasury, the DOJ, OFAC and the FATF are all getting ready to tighten and restrict the cryptocurrency world,
  • A steep sell-off in May 2021, and again this month
  • China’s announcement in September 2021 that it would ban all Crypto transactions, in order to create its own national, government-controlled crypto 
  • Possibility that crypto has hit an all-time high, in which case, financial experts would state that this is the least ideal time to buy,
  • Its use is complex
  • It is perceived to facilitate illicit transactions and utilized as a money laundering tool.

Is the demand driven by “higher adoption”?

Some experts believe that as long as Institutional availability continues to grow, demand (buy in/adoption) will grow (adoption of digital assets has surged over 880% in the past year). Mastercard launching a partnership with Bakkt to expand its cryptocurrency offerings for banks, merchants, and financial technology companies in the U.S., including the issuance of crypto based credit/debit cards creates headlines.  As more investors adopt Bitcoin (which is limited in supply), supply-side driven price inflation will continue.

Here’s my advice if you’re going to invest:

  • Do your crypto homework
  • Only invest in what you understand
  • Consider a Buy/Hold Strategy for tax implications
  • Don’t Invest more than you can afford to lose
  • Understand and plan for crypto taxation