“At the root of all financial bubbles is a good idea carried to excess.”

— Seth Klarman

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December 10, 2024— The re-election of Trump, which this time around came off as a pro-crypto presidential candidate, kicked off a big jump higher for all cryptocurrencies.

While bitcoin, the OG player, got much of the news, topping $100,000, other cryptos have had far better performance.

A new crypto, Peanut the Squirrel, named after a squirrel who was euthanized for being kept as a pet in New York earlier this year, launched at about $0.10, then soared to a high of $2.20 in mid-November. It’s now “down” to $1.10, about a 50% haircut from the top.

But the coin, which has no white paper or solves any real-world cryptographic problem, still sports a $1.1 billion market cap. Why? Why not? Justice for Peanut indeed.

Hailey Welch, a 22-year old who has managed to turn the two words “Hawk Tuah” into about $10 million in licensing deals and a podcast since June, threw her name behind a Hawk Tuah coin that immediately dumped after the ICO (initial coin offering).

One fan reported losing his life savings on the crypto, which, like Peanut, also had no real-world use case. (Never mind that “spitcoin” was right there as a name. What a missed opportunity.) The 14th of the 15 minutes of fame can be rough.

Both these events mark what one broker friend calls “silly season.” That’s when a bull market reaches a point where you can easily see the disconnect from reality.

Sometimes reality catches up, or at least tries to. Tesla Motors had a market cap bigger than all the traditional U.S. automakers combined before it started to really reach its full economy of scale.

But often, it’s more likely that high-flying prices will come back to earth to catch up with reality. And why sticking with cryptocurrencies with real-world use cases, like bitcoin or Ethereum, are relatively safe bets (although their volatility doesn’t make them absolutely safe).

Or with stocks that sought to run at a loss for years before ever hoping to turn a profit, a cornerstone of tech companies that went public during the dotcom boom.

The point is that prices and values aren’t one and the same. And when innovation is involved, it’s easy to get a massive price disconnect between the dollar price value of a perceived activity and a real asset value. Especially in a world where prices are also influenced by money printing, continually devaluing prices.

Grey Swan Investment Fraternity contributor Mark Jeftovic looks at the current crypto mania, puts it in context, and adds the bizarre valuations of another asset class, modern art, to the mix. We’ll let him take on silly season from here. ~ Enjoy, Addison

Catastrophic Boom

Mark Jeftovic, Bombthrower Media

A couple weeks ago I tweeted about that “Duct-Taped Banana” art, that sold on auction at Sotheby’s for $6.2 million:

The punch-line was that a memecoin based on the duct-taped Banana artwork had itself reached a market cap of $144 million (and still holding steady at $146M as I type this nearly two weeks later).

The art piece (dubbed “Comedian”) was bought by Justin Sun, Tron founder, owner of the Poloniex exchange, owner of Rainberry (who invented BitTorrent) and all-around “crypto billionaire”.

On Friday, November 29th, Sun ate the banana.

We are witnessing a flight out of fiat, accompanied by a distinct twinge of “financial nihilism”, a phrase once coined by podcaster Demetri Kofinas.

While there may be no name for the global monetary system on which the world runs today, Russell Napier’s “Non-System” if you will, there is a term for the terminal phase we are in, and the entire world is in it.

Once again, it comes from the Germans – who gave us “Notgeld” (“emergency money”), from the Weimar chapter in history when cities and towns issued their own scrip in an effort to escape the ravages of hyper-inflation; this one is “Katastrophenhausse” – literally “Catastrophic boom”.

It was introduced into the lexicon by Ludwig Von Mises and has been popularized as “crack-up boom”.

The key characteristic of a crack-up boom is that people lose faith in money itself and scramble to convert their money into alternative assets – not because they need those assets, but because they want to get out of the currency.

This creates a self-reinforcing cycle where the increased spending drives prices higher, which causes more people to spend their money faster, driving prices even higher.

You may remember my (horrific) thought experiment analogy of the “burning balloon”:

A group of tourists embark for a hot air balloon tour in India (as I originally heard the story); just after the mooring ropes are released, the pilot sees that the canopy has caught fire and he, realizing the stakes, immediately jumps out of the gondola to safety.

However, this reduces the weight of the balloon, so its rise accelerates. The passengers who grasp what has just happened immediately follow the pilot, deftly jumping overboard while the balloon is still close enough to the ground to do so… however, that reinforces the feedback loop: the even lighter ballon is now rising  faster – the lucky laggards who are next to figure it out abandon ship while they still can, which further accelerates the ascent of the fireball; however soon it will be too high to safely jump, and doom is assured for all those left aboard who did not act quickly enough.

Those are the dynamics of a hyperinflation.

Mises described it as a situation where the “masses wake up” to realize inflation isn’t temporary but rather that the currency is doomed to keep losing value. At that point there’s a rush to convert money into goods, any goods – what he called a “flight into real values.”

In our era, a banana meme coin may not, objectively, be something with real value – but if it’s going up faster than the currency is disintegrating, then it’s a winning trade, if you can time it right (I’ve had no position in BAN and wouldn’t recommend it).

The interesting thing about crack-up booms is that on the surface they can look like prosperity – asset prices soar, there’s lots of activity and spending, and money velocity is robust – but it’s actually the last gasps of a currency system.

What makes it tricky is that as the currency collapses against myriad assets (some faster than others) people think they’re bubbles, but there’s a cheat code that can help you tell the difference:

What’s particularly relevant to our Bitcoin as a “Monetary Regime Change” thesis is that crack-up booms tend to happen in the later stages of a fiat currency decline – which is where we believe we are in the current global monetary system. The rush into Bitcoin, precious metals and other crypto assets is the same “flight into real values” of our era that Mises described in his. ~ Mark Jeftovic, Bombthrower Media

Regards,

Addison Wiggin,
Grey Swan

P.S. CCData reports that in November, crypto trading amounted to $10.4 trillion in volume. And Live Coin Watch shows how the crypto market has added about $1.3 trillion since the election:

While the serious money continues to back bitcoin and Ethereum, the rise of altcoins is upon us, signaling the second phase of bitcoin’s post-halving period that will end with a real speculative peak, likely sometime around September 2025.

We sometimes wonder at the bizarre valuations of some altcoins … as well as some pieces of modern art … but we know at its core that the manipulation of fiat currencies makes the absurd more common than it should be. Playing around with fiat currency breaks the tether to intrinsic value.

We’ll reiterate what we noted yesterday as the crypto silly season kicks into high gear:

Don’t be the greatest fool, especially in volatile assets like cryptocurrencies. And follow your Grey Swan model portfolio as we investigate opportunities in energy production and the building blocks of civilization.

Share your 2025 market forecasts here: addison@greyswanfraternity.com.