The Cost of Coin (Updated)

Lotto Tickets of Desperation

In January, I wrote a note “The Cost of Coin” that showed to what lengths people are going to buy bitcoin during its historical run.

In this note, I underlined that the bitcoin hysteria became so great that the fear of missing out caused those to purchase bitcoin on there credit card. Not only were people willing to endure bitcoin’s volatility but pay double-digit interest on the purchase (not including transaction fees).

Here is “The Cost of Coin”:

Bitcoin has been very un-bitcoin-like. The parabolic nature that sucked so many inexperienced investors and those in need of a lottery ticket has died down, unable to reach a new high since December 17 print of $19,891. It’s now down almost 47 percent since then.

The sheer panic to buy bitcoin on its epic run-up in 2016/17 has caused people to take out student loans and mortgages to buy the invisible asset. People have even resorted to maxing out their credit cards to do so.

Various surveys suggested that the frenzy is seriously messing up financials of those in search of insta-money. For instance, LendEDU conducted a survey where 18 percent of those surveyed bought bitcoin using their credit cards. What is even more horrifying is that 22 percent of those weren’t able to pay off their balances after doing so.

As if the outlook couldn’t get more drab, 90 percent of those that used a credit card to buy bitcoin expected to payoff their balances via profits by selling the purchased bitcoin.

The problem with this is that the moves seen in bitcoin are one in-a-lifetime. Bitcoin soared 1,400 percent last year, and was regarded as the least volatile year for equities on record. That’s troubling considering up to the new year, bitcoin and equities were tightly correlated.

Bitcoin, or other cryptos, could make a resurgence. However, people are risking financial ruin to take a levered bet in hoping that’s the case. Survey after survey, including those done by the Federal Reserve, show that Americans have less than $1,000 in savings; and up to 70 percent will find it difficult to cover an emergency expense of $500.

Loosing 30, 40, 50 percent on a bitcoin bet is no solace, especially if the economy begins to deteriorate. The ability to cover even the most basic expenses while waiting for a new bitcoin high may be too difficult.

We are already witnessing credit card delinquencies at financial crisis levels for smaller financial institutions by assets. Noticeable ticks higher in larger banks also inclining from bottoming.

Since then, banks are now making it more difficult to purchase bitcoin on their credit cards. The top five credit card issuers (JP Morgan, Citigroup, Bank of America, Discover, and Capital One) have all banned such purchases, and it’s in their best interest.

As noted above, borrowers planned on paying off the balance due on assumed profits; and, depending on the date of purchase, they remain underwater.

Furthermore, credit card delinquency rates at major banks (top 100 by assets) have began to rise from a bottom but still low at 2.49 percent; charge-offs are at 3.46 percent. Not worrying, but it’s worth noting.

Now, delinquency rates for banks that aren’t in the top 100 by assets are going parabolic, currently at 5.34 percent. For perspective, this metric topped out at 5.61 percent during the heart of the financial crisis. Charge-offs are 7.93 percent opposed to 8.52 percent recorded just after the financial crisis officially ended.

This data lags and, currently, represents data from Q3-2017 (just before buying bitcoin on credit began to hit the newswires).

Perhaps it is just speculation, but I expect smaller banks to continue to have to add to loan loss reserves as borrowers cannot pay off their crypto-binge.

I don’t believe it is just a bitcoin-on-credit story, but it is one of a weakening consumer looking for a lotto ticket.

One of my key macro themes for 2018 was “buy gold, sell bitcoin.” Though the volatility in bitcoin can offer trading opportunities, gold offers the steady as she goes value. Since the year started, gold is up 3.94 percent opposed to bitcoin’s (Bitstamp) 25.58 percent loss.

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