How Bitcoin is Playing “Jenga” With Stocks – And We All Know How That Game Ends

Shah Gilani|November 26, 2021

What if I told you the cryptocurrency craze – inflated by U.S. investors, traders, speculators, and especially by world punters – is just one immense bubble that’s going to burst?

Would you believe me?

What if I convinced you this bubble is real – and that it’s going to pop? Would you then believe me if I told you that this implosion in cryptocurrencies will cause the stock market to crash, too?

Well, let me convince you of the former so I can make you see the risks of the latter.

Here’s what you don’t know is inflating the crypto bubble, why it’s going to burst, the inevitable impact on stocks, and what you must do to avoid the fate of the millions of crypto-crash victims.

The Bitcoin Backstory

Since Bitcoin was created by Satoshi Nakamoto (a pseudonym for who or what we don’t know) in 2009, the ascent of this original algorithmically and mathematically mined mythical crypto has been stratospheric. And it’s been much the same for Bitcoin’s crypto-brethren.

From literally nothing, the market value of cryptocurrencies – meaning all cryptos that are publicly known and traded on an exchange or known platform (there are private cryptos created and disseminated through closed-loop channels) – has traversed the $3 trillion mark.

While that’s a gigantic rise in valuation, that assent hasn’t been a vertical one.

Back in January 2018 – so just four years ago – that market value was $773 billion, says market researcher Statista. It had fallen to $251.54 billion on March 4, 2020, and to $145.97 billion on March 18 of that same year. Just 14 months later, in mid-May 2021, it had remarkably bounced to $2.56 trillion. Two months later – in mid-July – crypto’s market value was almost halved to $1.34 trillion.

Yet here today, we’re at $3.2 trillion – a valuation that exceeds the economy of the United Kingdom.

There are three takeaways from cryptos’ whip-like valuations – two of which, like railroad tracks, are obvious, or soon will be.

The third one I’m betting you’ve never even considered.

But when you do, it will scare the heck out of you.

Cryptocurrencies are volatile (like “duh,” who doesn’t know that). Their price swings are neck-wrenching – even gut-wrenching. Of course, it’s the “up days” that matter to higher overall valuation metrics.

Besides higher valuations from rising prices, there are more cryptos being mined, branched-off existing blockchains, created and traded almost every day. Even at tiny initial valuations all the new coins hitting the market add to total valuation.

And with cryptocurrencies, just as we’ve seen with stocks, a very strong “buy-the-dip” mindset has emerged. That proven strategy has been self-evident in the stock market going back to 2009. It’s no coincidence that this is also the year that the OG Crypto Bitcoin burst upon the scene.

The (scary) third rail cryptos have been riding to high ground is leverage. That’s where the tipping point is – and that’s what’s going to break the camel’s back.

And I’ll bet this is the first you’ve heard of it.

“Leverage in Crypto Land” isn’t a story that’s trickled down to the Main Street (retail investor) level. You haven’t seen it on your favorite cable-news network financial show. And it hasn’t made any headlines on any of the usual investing-news websites.

You haven’t heard about it because there never has been any mention of it – ever … anywhere.

Maybe there’s no discussion of leverage in cryptocurrency speculation (or crypto “investing,” if that makes you feel better) because no-one knows what it is, where it is, or how widespread it’s become.

Since crypto exchanges and platforms don’t currently have to report how much leverage buyers of coins are incorporating, it’s possible that kind of big-picture insight isn’t available.

But the reality is that some (read that to say “most”) U.S. crypto exchanges offer “margin” or loans customers can use to buy cryptocurrencies. International exchanges offer margin, too. What’s scary – given that we lack meaningful stats on leverage in this market – is that some exchanges offer two times leverage, meaning you can buy twice as much crypto as you have cash on deposit. Some offer 5X leverage or 10X leverage. Even 100X leverage is possible.

There are even leveraged coins. Some cryptocurrency products are automatically leveraged between 1.25x to 4x – depending on whether you’re betting on rising or falling prices.

These “products” automatically leverage up and de-lever themselves based on price movements. Unfortunately, leveraged crypto products are accompanied by the proverbial “fine print” (which no one reads anyway), explaining how crazy they are, how they’re priced, and how they can and do blow up.

The Hits Just Keep Coming

Did you know there are derivatives on cryptocurrencies?

Besides the “spot” market for cryptos – meaning the cash market where these coins or tokens trade for cash, including leveraged-cash trading – there are futures on cryptos, options on futures, and options on cryptos on some exchanges and platforms. There are also swaps on cryptos, and bespoke structured derivative products that banks whip up for so-called “sophisticated investors” like hedge funds – kind of like the credit-default-swap derivatives the subprime mortgage market was famous for.

And all of these are meant to be traded with their inherent leverage – or added borrowing – to amp up bets.

Back in June, for the first time ever, the value of the daily volume of exchange-traded derivatives on cryptocurrencies exceeded the value of the daily volume of cash trades. And we haven’t looked back.

The problem with all this leverage is that there are good cryptos (actually tied to worthwhile tokens or a blockchain that does something useful) and then there are joke coins. Jokes like dogecoin, which is a joke on Bitcoin, and Shiba Inu, which is a joke on dogecoin. And there are other purely made-up trash tokens that too many people believe are something they’re not – or are capable of becoming something that they’ll never be.

These, too, are becoming more widely held. And these, too, are becoming more widely speculated on – with leverage.

Sometimes, Bitcoin brings down the crowd, sometimes the crowded closet of cruddy con-coins brings down Bitcoin and the likes of Ethereum.

We see that in a lot of big price drops on weekends. That’s because, in thinly traded weekend positioning, short-sellers work to knock down prices. When successful, the cryptocurrencies end up hitting stops, which lowers prices, which results in margin calls – which can’t be met on weekends because banks are closed. So exchanges and brokerages automatically liquidate positions. That hits prices more – deepens the dip.

We usually see buyers come in when Asian markets open on Sunday. Sometimes they buy those dips, sometimes they don’t. One day, these “buyers” won’t buy anything – they’ll sell, and maybe hard.

Many different things could ignite this hard-selling – be it an existential threat to the cryptocurrency market, a regulatory volcano blowing, or the legs of the camel finally giving out, just as we saw with a leveraged subprime mortgage market that was rife with derivative excesses no one could calculate.

It’s going to happen.

And when it does, it will infect the stock market in an-almost-instantaneous, contagion-like manner.

I say this because there is “common ownership” of hot stocks and hot cryptos. That’s right: Cryptocurrency bettors are wagering on meme stocks and buying every dip in the stock market, with more leverage on top of their already-leveraged-up gains.

And it’s not just the investors who are leveraged – many companies are, too. So many listed companies are dabbling in cryptos, whether they’re buying them to hold on their balance sheets, like Tesla has done, like Coinbase has done, like Greyscale Bitcoin Trust has done – to the tune of almost $50 billion.

A nasty slide in the cryptocurrency space will topple the stock market – like when that unlucky person pulls that final Jenga block from the already-teetering tower.

So, do what you will with your cryptocurrencies. But when it comes to the stock market, make sure you’ve got stop-loss (“profit-target”) orders down on all your positions.

And since the fallout will be fast and furious, buy the first 15% dip by buying shares of the Invesco QQQ Trust (Nasdaq: QQQ), the ETF that tracks the Nasdaq 100 Index.

Then buy more Qs when stocks are down 20%. And if the decline is more than that, leverage your buys at lower levels with everything you’ve got – including the proverbial “farm.”

I’m kidding a bit with that last comment – but only a bit.

Because that slice of the Nasdaq includes the stocks of the very types of companies we want to invest in – real ventures with real products and real sales and real profits. These are the leaders, the companies of the future, and the ones we want to own.

And that makes the QQQs the kind of high-percentage bets investors should be making – the very type of bets that “leverage” our futures.

Shah Gilani