Bitcoin, Cryptos and Financial Asset Bubbles

BRUSSELS, BELGIUM - MARCH 9, 2017 : Golden Bitcoins.

By Jack Rasmus

At less than $1000 per coin in January, Bitcoin prices surged past $11,000 this past November. It then corrected back to $9,000, only to surge again by early December to more than $15,000. Given the forces behind Bitcoin, that scenario is likely to continue into 2018 before the bubble bursts. This article will in part address those forces behind Bitcoin’s bubble, and why the bubble will continue to grow near term.


What’s a financial asset bubble? Few agree. But few would argue that Bitcoins and other crypto currencies are today clearly in a global financial asset bubble.  Bitcoin and other crypto currencies are the speculative investing canary in the global financial asset coalmine.

One can debate what constitutes a financial bubble – i.e. how much prices must rise short term or how much above long term average rates of increase – but there’s no doubt that Bitcoin price appreciation in 2017 is a bubble by any definition. At less than $1000 per coin in January, Bitcoin prices surged past $11,000 this past November. It then corrected back to $9,000, only to surge again by early December to more than $15,000. Given the forces behind Bitcoin, that scenario is likely to continue into 2018 before the bubble bursts. As of mid-December, Bitcoin is trading at $17,009 and predicted to surge higher. Some analysts are even predicting the price for Bitcoin will escalate to $142,000, now that trading has gone mainstream on the CBOE and other commodity futures exchanges. The question of the moment, however, is what might be the contagion effects on other markets?

This article will in part address those forces behind Bitcoin’s bubble, and why the bubble will continue to grow near term. But Bitcoin and other crypto currencies are but one case example of financial asset price acceleration underway in global markets that also are either in, or approaching, bubble territory – a condition typical of a late credit cycle reaching its limits.

Other asset bubble candidates include equities markets, especially in the USA, Japan and some emerging market economies (EMEs); corporate junk bond markets globally; and high risk bank loans – particularly in Europe, Japan and Asia – emerging on a base of trillions of dollars of pre-existing non-performing bank loans.

In the following, the determinants and driving forces behind the growing financial asset bubbles are discussed, with special focus of Bitcoin and crypto currencies which have a potential of “contagion” to other financial markets more than most commentators today like to admit.

Less debatable are potential contagion effects from global equities, now approaching bubble territory in some regions like the USA and Japan. Or corporate junk bond markets worldwide. Or high risk leveraged loans, the return of CLOs, and the late-cycle trend increasingly apparent among banks toward covenant-lite lending terms, as the search for yield becomes ever more desperate everywhere.

Red Flags and Forewarnings

There are no lack of “red flags” being raised by various legitimate sources forewarning that the global economy is now producing levels of financial fragility that may lead toward one or more significant financial instability events within the next few years.1


Bank of International Settlements

There are no lack of “red flags” being raised by various legitimate sources forewarning that the global economy is now producing levels of financial fragility that may lead toward one or more significant financial instability events within the next few years.

One consistent source in recent months raising the red flag has been the Bank of International Settlements.  This past summer, the BIS warned in its review that the magnitude of non-financial corporate debt globally was actually far larger than reported by most – especially outside the US, in dollar terms, and often held off balance sheet.

Of course, debt alone is not solely the problem. Debt can keep on rising, but once its cost (interest rate) begins to rise as well, or is not otherwise obtainable or obtainable only on adverse terms. Then the problems begin.  And with the problems come decelerating asset prices that lead to credit disappearing, with eventual spillover to the real economy which then contracts in tandem with financial markets. That latter, real contraction then exacerbates the financial, and the two sectors thereafter feed on each other in a downward spiral, until government policy makers otherwise find a way to put a floor under the asset deflation. That’s exactly what happened in 2007-2009. The BIS is warning the early stages of escalating debt accumulation that leads to just such a scenario may be appearing once again, noting specifically that the central banks since 2008 have been the main culprit with their monetary easing “fueling bubbles in asset prices”.

That the central banks of the advanced economies are the ”fundamental” force and cause behind the debt escalation is irrefutable. Since 2008 in particular, led by the Federal Reserve, the central banks in the USA, Europe, Japan and China have pumped around $25 trillion in QE, QE rollover and traditional bond (and stock and other securities) buying operations into the global economy2. Changes in global financial market structure in recent decades have exacerbated the development, as have technology trends responsible for accelerating money demand, velocity, and development of non-fiat (central bank) forms of money substituting for credit.

This has led Claudio Borio, Director of the Monetary and Economics Department of the BIS, in that publication’s most recent quarterly Review in December 2017, to conclude “The vulnerabilities that have built around the world during the long period of unusually low interest rates have not gone away. High debt levels, in both domestic and foreign currency, are still there. And so are frothy valuations, in turn underpinned by low government bond yields – the benchmark for the pricing of all assets. What’s more, the longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence.”3


Central Bankers and Global Investors

Borio is not alone.  Mohammed El-Erian, Chief Economic Advisor to Allianz, the giant global financial company, and frequent commentator on the global economy, has added that liquidity and volatility risks over the past few months have risen noticeable and “have spread to virtually every corner of the public markets…structurally amplified by the proliferation of certain ETFs”4 – (more on which shortly below).

Mervyn King, former governor of the Bank of England, also recently raised concerns about non-bank debt levels and ratios that are today higher than at year end 2007 at the start of the last financial crisis. King added the dominant theme of the post 2008 period has been the rolling over of debt instead of its deleveraging during a period of excessive low interest rates for eight years. And, as he further noted, once rates rise “we shall see the force of what economist Joseph Schumpeter described as “creative destruction”…that will correct the misplaced pattern of investments induced by inappropriate exchange rates and excessively low interest rates”. King goes on to ominously warn that despite more capitalisation banks “are still vulnerable to runs” and it would take only a “a few interconnected defaults” to set in motion “a reappraisal of the effective leverage of the financial system”– aka a wipeout of valuations by means of massive financial asset price deflation.

The Peoples Bank of China Director, Zhou Xiaochuan, echoed King this past October, warning of trouble and unpopular decisions on the horizon, as the global economy was at risk of entering “a sharp correction, what we call a Minsky moment’..”– after the economist, Hyman Minsky, who wrote that banking under capitalism was inherently unstable and prone to repeated financial crises.6

Former US Federal Reserve Bank Chair, Alan Greenspan, warns of bond prices that are “in a bubble”.  And outgoing Fed chair, Janet Yellen, worried publicly in her most recent press conference about “the US debt trajectory”. Ironically, those central bank chairpersons most responsible to the massive, excess liquidity injections since 1985, that provided the ultimate foundation for the unprecedented debt leverage in financial markets, are the same that now warn of its pending consequences in unsustainable asset prices.

Research department analysts of some of the world’s largest banks have also been joining in raising the alarm. Bank of America-Merrill Lynch’s latest survey of its investors revealed that those indicating equities were over-valued now exceeded those similarly indicating such on the eve of the 2000 stock bust. Similarly, Deutschebank credit analysts have recently calculated that global asset prices are the most elevated ever, including before the 1929 crash.7


Global Business Press Commentators

Increasingly, editorialists in the global business press have begun writing increasingly on the emergence of financial asset bubbles, growing excessive debt levels and ratios, the failure of corporations and households to deleverage since 2008, complacency of investors, failure to see the new causes of the next crisis by looking in the rearview mirror only at the previous one, overly sanguine estimations of future global economic growth, accelerating income inequality and so on.

Perhaps representative of this tribe is the dean of global business commentary, Martin Wolf, at the Financial Times global business daily, who worries of the lack of “no corporate deleveraging” since 2008, the prospect of highly leveraged banks prone to losses, emerging market dollarised corporate bonds exposed to currency risk, non-bank corporate debt growing faster than productive capital, low investment and high indebtedness in general, and high political risks.8


Corporate Chief Financial Officers

Even those players “down in the weeds” of the business world have begun expressing concern about the state of financial asset markets.  According to a quarterly poll of companies in North America with more than $1 billion in revenue by Deloitte in the third quarter 2017, its “CFO Signals Survey”, only 29% of CFOs surveyed expressed optimism, down from 44% in the preceding quarter.9


BITCOIN Bubble: Canary in the Financial Asset Coalmine?

Discussion of the forces driving the Bitcoin bubble – as well as the numerous emerging other crypto-currencies – requires distinguishing between causal factors that are “fundamental”, “enabling”, or just “precipitating”.  That’s true not only for Bitcoin and cryptos, but as well for other emerging bubbles in equities, junk bonds, high risk bank lending and low quality, dollarised emerging market debt – i.e. the other emerging financial bubble candidates.

The key fundamental forces driving Bitcoin’s bubble are technology and excess liquidity. Bitcoin is both software tech and fintech.


Blockchain as Technology Driver

The technology is called “blockchain” which serves as the underlying platform for Bitcoin and emerging crypto-currencies. Blockchain provides global peer-to-peer transactions over the Internet, cutting out middlemen, and thus saving business and consumers significant costs.  It is software that in effect creates for users an “online digital wallet”.  It is blockchain software tech that is giving rise to digital currencies, the hottest new area of fintech.  Software tech companies doing Blockchain development create their version of crypto currency, often giving it in exchange to an investor funding the company.  A crypto currency developed by the software tech company thus serves as a kind of de facto “digital equity offering”.10 And investors are rushing in. A kind of investor herd mentality has emerged. The hottest business conferencing product today is explaining Bitcoin and cryptos opportunities to would-be investors, as well as to other senior managers who want to avoid being blindsided by the new technology.

Discussion of the forces driving the Bitcoin bubble – as well as the numerous emerging other crypto-currencies – requires distinguishing between causal factors that are “fundamental”, “enabling”, or just “precipitating”.

The potential market for blockchain is immense – $134 trillion of transactions in the global banking sector alone.  Given the huge potential for cost saving across industries, Blockchain software development companies are proliferating globally at a rapid rate, and speculative investors are throwing record funding at them in hope of striking it rich with the one whose version of Blockchain becomes the quasi-standard and/or is early to market.

In the process, the Blockchain tech companies spin off their version of digital currency. Some cryptos, like Bitcoin and Ethereum, are considered “blue chip”, while many others are “small cap” cryptos.  As of several months ago there were at least 200 such companies, most of which were engaging in, or preparing, an initial public offering to raise financing, an ICO (initial coin offering).

Given the herd mentality, media hype, and demand, multiplying ICOs result quickly in IPO initial prices rising. Bitcoin’s price appreciation is serving as a kind of potential and benchmark for the “me too” ICOs. The latter’s price appreciation then spills over, driving up the price of other cryptos and Bitcoin.  The ICOs are feeding off of each other.


Enabling Forces Driving Bitcoin-Cryptos Bubble

If Blockchain and software tech company ICOs are driving Bitcoin and other crypto pricing, what’s additionally creating the bubble?  Bitcoin prices started off 2017 less than $1,000 a coin. But have accelerated through 2017. So what’s behind it the past year?  Who is buying Bitcoin and cryptos, driving up prices, apart from early investors in the companies?

Initially, pre-2017, it was mostly “retail” buyers from the tech community who believed government “fiat” money was going to be eclipsed by digital currencies. It shared some similarities to pre-2000 herd investing in anything that had an “e” or a “com” associated with it. It was analogous perhaps to a day trader becoming obsessed with “social media” or Facebook, except now the objective was money and not communication. It was cultural and even philosophical.

The absence of government regulation and potential taxation of speculative profits from price appreciation has served as another important driver of the Bitcoin bubble bringing in still more investors and demand and therefore price appreciation.

But that initial techie demand source was soon eclipsed by buyers who realised that speculative profits from accelerating Bitcoin prices were not taxed by government. And without a central clearing house it was not likely the government would soon regulate and tax.  So the absence of government regulation and potential taxation of speculative profits from price appreciation has served as another important driver of the Bitcoin bubble bringing in still more investors and demand and therefore price appreciation. No regulation, no taxation has also led to price manipulation by “pumping and dumping” by well-positioned investors.

Another factor driving price is that Bitcoin has become a substitute product for Gold and Gold futures. Buyers who were highly speculative and risk taking, who might have otherwise invested heavily in gold and gold futures trading, see Bitcoin and cryptos as a better speculative play.  Gold has become less volatile, and speculative profits come from volatility.  Gold no longer has it; Bitcoin does. Bitcoin is thus “as good as gold”, and in fact even better as a speculative play.  As a gold substitute, Bitcoin and cryptos may therefore be diverting investment from gold, further driving demand for the former by sucking it away from the latter. That may explain Gold’s recent chronic lack of price volatility, at least in part. Like Gold, Bitcoin is therefore more a commodity, as well as a kind of substitute for stock in initial public offerings by software tech companies.

What Bitcoin is not, as yet, is a form of general currency, except in very select cases.  It is still accepted for transactions by relatively few.  As a medium of exchange, a basic characteristic of currency and money, Bitcoin is still in development stage. But as a volatile commodity, highly profitable speculative play, it has already established itself. And in today’s world of ever-desperate search for yield, as markets begin to “top out” late in the credit cycle, Bitcoin has become something of a kind of “commodity lodestar” for investors conditioned to high risk and high profitability success in financial markets since 2009.

But what’s really driving Bitcoin pricing in recent months well into bubble territory is its emerging legitimation by traditional financial institutions.  This has come in various forms. First is the imminent acceptance of it by the commodity clearing houses, in particular the CME and CBOE.  This means that futures and derivatives trading on Bitcoin are set to begin in December 2017. Bitcoin ETFs are likely not far behind. Thus further speculative profit opportunities appear on the horizon, which stimulates its initial demand. And it’s this derivatives investing opportunity that mainstream finance is interested in. The “shorting” of excessive Bitcoin price appreciation by mainstream big investors now looms large. The CME and other clearing houses on the horizon thus make basic Bitcoin speculation legitimate, and that’s pulling in more demand.

Reportedly, big US hedge funds are also poised to go “all in” once CME options and futures trading are established. Declarations of support for Bitcoin has also come lately from some sovereign countries and plans to develop widespread markets for it – as in Japan. That also legitimises it. Other sovereign players, like Mexico and Indonesia, have raised their opposition – no doubt fearful of cryptos currencies’ potential long run threat to their controlling their own fiat money supply and therefore interest rate central bank monetary tools.

Among traditional commercial bankers a form of legitimation, albeit cautious, has also recently emerged, serving to justify Bitcoin demand.  While CEOs of big traditional commercial banks, like JPM Chase’s Jamie Dimon, have called Bitcoin “a fraud”, they simultaneously have declared plans to facilitate trading in the Bitcoin-Crypto market, no doubt as an initial step to later more direct participation.


Government Regulation

A question remains whether government regulators will soon intervene to regulate Bitcoin and other cryptos in the near term. The answer is “not so long as Bitcoin et. al. remain a commodity speculative play”, in this writer’s opinion.  The winds of financial regulation are dissipating, especially in the USA. That works against it.  Moreover, the fact that the US government has given the green light to the CME and other clearing house to establish trading in options strongly suggests the government will wait and see what transpires.  Should Bitcoin expand its development into a transactions based currency, however, that will precipitate government intervention.  Should it fail, it would mean a loss of control of the money supply, a problem also growing for the Fed and other central banks due to other technological and global forces.  Governments will protect their fiat currencies.  In fact, more likely is that they will eventually issue their own official “digital” currency at some point. Thereafter, other digital currencies will in effect become counterfeit and illegal tender.


Bitcoin as “Digital Tulips”

Bitcoin demand and price appreciation may also be understood as the consequence of the historic levels of excess liquidity in financial markets today. Like technology forces, that liquidity is the second fundamental force behind its bubble.  To explain the fundamental role of excess liquidity driving the bubble, one should understand Bitcoin as “digital tulips”, to employ a metaphor.

The Bitcoin bubble is not much different from the 17th century Dutch tulip bulb mania. Tulips had no intrinsic use value but did have a “store of value” simply because Dutch society of financial speculators assigned and accepted it as having such.  Once the price of tulips collapsed, however, it no longer had any form of value, save for horticultural enthusiasts.

What fundamentally drove the tulip bubble was the massive inflow of money capital to Holland that came from its colonial trade in spices and other commodities in Asia. The excess liquidity generated could not be fully re-invested in real projects in Holland.  When that happens, holders of the excess liquidity create new financial markets in which to invest the liquidity – not unlike what’s happened in recent decades with the rise of unregulated global shadow banking, financial engineering of new securities, proliferating liquid markets in which securities are exchanged, and a new layer of professional financial elite as “agents” behind the proliferating new markets for the new securities.11


Central Bank Excess Liquidity as Fundamental

The second “fundamental” factor behind the Bitcoin and crypto-currency bubble therefore is the massive amount of liquidity injected into the global economy by central banks in the US, Europe and North Asia in recent decades. Today far more money capital exists worldwide than can be, or is being, invested in making real goods and services. The excess does not remain idle. The combined liquidity injection since 2008 by the major central banks of US, Eurozone, Britain, Japan and China alone amounts to nearly $25 trillion since 2008. Led by the Fed, the central banks of the major economies noted have injected much of that $25 trillion directly themselves by means of their “Quantitative Easing” programs.  The chronic low interest rates that followed for eight years have allowed non-bank businesses to issue trillions of dollars (and dollar equivalent) corporate debt in the form of corporate bonds, commercial paper, etc.12 

Along with record corporate profits, also in the trillions since 2008, they’ve distributed to shareholders trillions of dollars by means of stock buybacks and dividend payouts.  In the US alone buybacks-dividends have exceed $1 trillion every year for the past five.  Rates have been so low for so long, multinational corporations have issued record bond debt to pay dividends and finance buybacks – in the process keeping nearly $3 trillion in their offshore subsidiaries in order to avoid paying US taxes.

At the root of it, the foundation of it, has been central bank monetary policies of QE and zero bound interest rates that have created a mountain of excess liquidity – far more than is investible in real assets in the advanced economies.  Accumulating within the investor class, trillions of dollars, euros, yen, etc. are still on the sidelines.  Institutional investors in particular must find an outlet for the liquidity.  Much of it goes into financial asset markets. (Other offshore to emerging markets, the rest hoarded on balance sheets or diverted to tax shelters).  As traditional stock and bond markets “top out”, the need for yield is diverting a significant portion of the excess liquidity into fintech, and some of that into cryptos. And as the primary blue chip crypto, increasingly into Bitcoin today and, tomorrow, into futures, options, and other derivatives based on it.


Bitcoin Bubble Potential Contagion

A subject of current debate is whether Bitcoin and other cryptos can destabilise other financial asset markets and therefore the banking system in turn, in effect provoking a 2008-2009 like financial crisis.

Deniers of the prospect point to the fact that Cryptos constitute only about $400 billion in market capitalisation today.  That is dwarfed by the $55 trillion equities and $94 trillion bond markets. The “tail” cannot wag the dog, it is argued.  But quantitative measures are irrelevant. What matters is investor psychology.  A big enough crash in cryptos could provoke a move out of other financial assets as a precautionary action. As other financial markets themselves surge into near, or actual, bubble territory investors increasingly look for a timing event to “cash in” and move to the sidelines. And the higher the rise of equities – especially in the US and Japan – goes the greater the potential psychological sensitivity to any major financial asset contraction anywhere.

A bitcoin-crypto crash could have a contagion effect on other commodity prices; or on ETFs in general and thus stock and bond ETF prices.

A Bitcoin and cryptos severe price devaluation event could provoke such a response, especially as other traditional financial institutions – commercial banks, hedge funds, clearing houses etc. – become more deeply involved in crypto markets as investors, facilitators, or in other ways.  For example, should cryptos develop their own ETFs, a collapse of crypto ETFs might very easily spill over to stock and bond ETFs – which are a source themselves of inherent instability today in the equities market.  A related contagion effect may occur within the Clearing Houses themselves.  If trading in Bitcoin and cryptos as a commodity becomes particularly large, and then the price collapses deeply and at a rapid rate, it might well raise issues of Clearing House liquidity available for non-crypto commodities trading. A bitcoin-crypto crash could thus have a contagion effect on other commodity prices; or on ETFs in general and thus stock and bond ETF prices.

Stated more speculatively, as Bitcoin and other crypto-currencies continue to ‘go mainstream’, will the new financial asset play the role similar to the toxic ‘Subprime Mortgage Bond’ in 2008? Just as subprimes precipitated a crash in the derivative, Credit Default Swaps (CDS) at the giant insurance company, AIG, in September 2008 – setting off the global financial crash that year – could the Bitcoin and crypto-currency bubble precipitate a collapse in the new derivative, Exchange Traded Funds (ETFs) in stock and bond markets in 2018-19, ushering in yet another general financial crisis?


Concluding Remarks & Predictions

In an increasingly integrated global financial asset markets world new forms of potential contagion may be lurking yet unforeseen.  Financial fragility should not be underestimated throughout the system, especially as it appears the credit cycle is nearing its peak, when historic capital gains have been reaped, and the psychology of investors looks increasingly at whether to “time the market”, cash in and move to the sidelines and wait.  It wouldn’t take much, or a very large market, to precipitate such a move. And once the momentum began, no government or central bank counter-action could stop it next time.

The US and global economy today are approaching the latter stages in the credit cycle, during which financial asset bubbles begin to appear and the real economy appears to be at peak performance (the calm before the storm?). This scenario was explained in this writer’s 2016 book, “Systemic Fragility in the Global Economy”. And in my follow-on book, “Central Bankers at the End of Their Ropes”, I predict should the Federal Reserve raise short term US interest rates another 1% in 2018, as it has announced its intent to do in 2018, it could very well invert the US Treasury “yield curve” and set off a credit crash leading to Bitcoin, stock, and bond asset price bubbles bursting.


About the Author

Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression, Clarity Press, July 2017, and the previously published “Systemic Fragility in the Global Economy, also by Clarity Press, January 2016. For more information: He teaches economics at St. Marys College in Moraga, California, and hosts the radio show, Alternative Visions, on the Progressive Radio Network. He blogs at and his twitter handle is @drjackrasmus.



1. (2016). For this author’s quantitative index of financial fragility as predictor of instability, see the appendix equations in Jack Rasmus, “Systemic Fragility in the Global Economy”, Clarity Press, January.
2. Jack Rasmus. (2017). “Central Bankers at the End of Their Ropes?”, Clarity Press, August. See the review of this book by Dr. Larry Souza in this issue of the European Financial Review.
3. Claudio Borio.
4. Mohamed El-Erian and Huw van Steenis. (2017). “Economic prospects caught in a tug of war”, Financial Times, October 19, p. 18.
5. Mervyn King. (2017). “Warning Signs About the Global Economy”, Wall St. Journal, September 25, p.R6.
6. Gabriel Wildau and Tom MItichell, (2017) ‘Zhou’s ‘Minsky Moment’ see as reform signal to party elites’, Financial Times, October 23, p. 3.
7. Adam Samson. (2017). “BofA raises fears over “irrational exuberance”, Financial Times, November 15, 2017, p. 20; and Deutschebank, Global Financial Data, September 19.
8. Martin Wolf. (2017). “Fix the roof while the sun is shining”, Financial Times, December 6, 2017 p. 9.
9. Ciara Linnane, “Finance chiefs are becoming increasingly pessimistic about the future”, Marketwatch, Sept. 23.
10. For a survey and tutorial on blockchain, see “Blockchain Security and Demonstration”, by Yao Yao, Jack Rasmus-Vorrath, and Ivelin Angelov.
11. (2016). See chapters 11 and 12 of “Systemic Fragility in the Global Economy”, Clarity Press, which addresses the proliferating of unregulated shadow banking, new securities, and new highly liquid financial asset markets worldwide, and the relative shift to financial asset investing (from real asset) that has been underway in the 21st century.
12. In the US alone, more than $6 trillion in corporate bonds have been issued

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