How to recognize manipulation: comparing the silver and cryptocurrency bubbles
From January to December 2017, the price of bitcoin increased from $1,000 to $20,000. Experts predicted bitcoin at $100,000, and investors took loans to buy bitcoin and exchanged cars for ASIC miners. In 2018, the price of bitcoin dropped to $4,000. Some users lost their savings, some of them went into debt.
A similar situation developed in the silver market in the 1970s. The value of the asset increased from $2 to $50 and then dropped to $4. Metal prices were inflated by the sons of Haroldson Hunt, one of the richest Americans according to the New York Times at the time. The subsequent market crash went down in history as Silver Thursday.
The Hunt brothers: billionaires without income
Haroldson Hunt is an American oil tycoon. In the 1940s, he received $1 million a week from 900 oil fields in the United States and Libya.
In the 1960s, Hunt imported Arab oil into the United States and capitalized on the price differential. By 1969, the billionaire lost this earnings: Muammar Gaddafi seized power in Libya and nationalized the oil industry.
Three years later, Hunt's empire began to fall apart: Haroldson developed dementia, and an oil crisis erupted in the United States. In 1973, the OAPEC countries stopped supplying oil to the United States. America cut its consumption of petroleum products, and Hunt lost some of his income.
A year later, OAPEC lifted the embargo and restored supplies. American companies started buying Arab oil: its cost was three times lower than the American one.
Haroldson Hunt's sons were left without a source of income. Herbert and Nielson Hunt assessed the state of the oil industry in the United States and decided to make money on other raw materials.
The Hunts chose silver. In the 20th century, it was used by jewelers and film makers. Companies like Kodak consumed several tons of this precious metal every year.
The oil crisis of the 1960s and 1970s coincided with the flourishing of the American film industry. The number of films shot annually increased by an average of 7%. Hollywood needed film, and its producers needed silver.
The Hunts buy silver. Asset price - $2,9
The Hunts' plan was simple: to monopolize the silver market and sell it at a premium. In 1973, they bought 40 million ounces (1,244 tons) of silver for $116 million. The average asset price was $2.9 per ounce.
By February 1974, silver had risen to $6.4 an ounce. In December of the same year, the Hunts owned 55 million ounces (1,770 tons) of the precious metal - 8% of the world's reserves at that time.
For five years, the Hunts created a silver deficit: they bought up futures, demanded delivery on them, and exported the metal to Switzerland. By 1979, they practically monopolized the market.
The shortage of silver has led to a jump in prices. In two months - from August to October 1979 - consumers and speculators raised the asset price from $8 to $16.
The Hunts' plan worked: the suppliers were hoping for further price increases and canceled the exchange sell orders. This exacerbated the deficit, and in 1980 the price of silver climbed to $50 an ounce.
The Hunt own one third of the world's silver reserves. Asset price - $50
By 1980, the Hunts held a third of the world's silver bullion reserves. In addition, the brothers owned 69% of the futures for April delivery.
Th Hunts hoped for a further rise in the asset price. They did not sell ingots and continued to buy futures contracts.
In early 1980, the Hunt brothers' paper profits were $3.5 billion.
Their futures positions were worth $7 billion, while the Hunt borrowed $6 billion from brokers.
The Hunts' actions were reflected in the jewelry houses and the owners of the silver mines. The former lost buyers due to high prices for jewelry, the latter hedged risks and incurred losses.
Silver consumers and producers feared market capture. They wrote complaints to the CFTC financial regulator and the management of the commodity exchanges, and also covered the situation in the newspapers. For example, in 1980, the Tiffany jewelry house ran an article in the New York Times denouncing the Hunt's greed.
The Hunts sell silver. Asset price - $5
In the early 1980s, representatives of the jewelry industry approached the management of the American commodity exchange COMEX. They asked the exchange to stop the Hunts from accumulating silver.
COMEX employees did not find grounds for freezing the market: the Khanty acted within the law. Then the exchange offered the brothers to sell the April futures at $50, and instead buy the July contracts at $25 or silver coins at $35 per ounce. The Hunts refused.
The Hunts' decision led to accusations of market manipulation. COMEX announced a freeze on futures trading and banned new positions. They could not buy futures and maintain the price of silver. Meanwhile, traders were closing long positions in April futures.
By March 1980, the price of silver had dropped to $30 an ounce. The brokers then asked the Hunts for $135 million in margin.
The brothers did not comply with the demand, and on March 13, the largest lender forcibly liquidated their positions worth $2 billion. Silver prices dropped to $20 an ounce.
On March 27, 1980, the Hunts liquidated the rest of the silver positions. This day was called Silver Thursday: the price of the metal fell by 50% to $10 per ounce.
The Hunt lost $9 billion. The brothers liquidated their futures positions, sold silver in Switzerland and started the family business. Even after that, they had $1.5 billion in debt.
On Silver Thursday, market participants realized that the Hunts would not support the asset price. After the liquidation of their positions, the silver market supply increased by a third.
Over the course of two years, the value of the metal has been gradually falling. In 1982 it returned to the 1975 level at $5 an ounce.
Silver 1979 and Bitcoin 2017: what do they have in common
The 1979 and 2017 market bubbles began with traders' belief that other investors would buy the asset at a price higher than the current one. But the silver bubble and the bitcoin boom have other things in common.
The asset price rose thanks to the infusion of borrowed money. The Hunts raised the price of silver to $50 an ounce thanks to a $6 billion loan. The brothers were going to get it back after selling the positions at a profit.
According to a study by University of Texas at Austin professor Joe Griffin, in 2017, an unknown manipulator bought bitcoins after releasing new batches of USDT. After bitcoin fell in 2018, the manipulator returned unsecured USDT to Tether for burning.
The asset price was growing due to manipulative actions. The Hunts maintained the value of silver due to the previously created deficit. According to Griffin, an unknown manipulator in 2017 bought bitcoin on drawdowns, accumulated a position and did not allow the price to fall below the previous lows.
The rise in the price of the asset caused panic in the society. In 1979-1980, Americans sold silver bars from remelted cutlery, coins and jewelry to dealers. The thieves took silver from the houses and did not touch other things.
In 2017, the media covered the rise of Bitcoin and Ethereum. This attracted newcomers to the crypto market, who took out loans for trading on crypto-exchanges, buying coins and devices for mining.
Silver 1979 and Bitcoin 2017: what's the difference
The Silver and Bitcoin Bubbles followed a similar scenario, but had several differences. This is due to the lack of regulators on the crypto market in 2017.
The silver bubble burst due to the intervention of the exchange, bitcoin - after the depletion of demand from large investors. The COMEX stock exchange stopped trading in silver due to suspicions of market manipulation. There was no such regulator on the crypto market. The Bitcoin bubble burst when large investors closed their purchases and the asset price fell 25%.
Silver fell 80% in two months, bitcoin in a year. After the COMEX decision, the Hunts could not maintain the silver price. Other traders closed positions and brought down the market. New investors bought silver due to the freeze in trading.
Crypto exchanges continued to work after the fall in the price of bitcoin. Newbies bought bitcoin, while speculators made a profit.
At the moment, the role of regulators in the crypto market is partially played by technical problems on the exchanges. Trading cores fail to keep up with the number of orders during market panic. At such times, traders cannot place new orders, and the exchange manages to execute liquidations.
The Hype Cycle: From Bubble to Mass Adoption
The emergence of the market bubble is partly described by the hype cycle - a pattern that research firm Gartner investigated in 1995. The hype cycle consists of five stages:
- Technological trigger - a new technology is talked about in the media, but there are no commercially successful products based on it;
- The peak of excessive expectations - success stories of early investors fuel interest in the technology, while analysts cannot correctly assess its prospects;
- Getting rid of illusions - the disadvantages of technology prevent its mass use. The first investors take profits and exit the market. The cost of technology drops sharply;
- Overcoming disadvantages - the technology is used by commercial projects, and it makes a profit;
- Productivity plateau - the technology becomes widespread, its price stabilizes.
The hype cycle. Gartner draws a plateau as a straight line. In fact, the development of technology leads to a gradual increase in prices.
Several blockchain technologies have gone through the hype cycle in whole or in part:
- Bitcoin. In 2013, investors invested $10 billion in bitcoin. The price of the cryptocurrency on the Mt.Gox exchange reached $260. The trading core of the exchange was frozen due to high load. This led to a panic and a drop in the price of bitcoin to $45. The plateau stage began in 2015, along with the improvement of crypto exchanges;
- Cloud mining. In 2015, companies appeared that leased mining power. In 2018, the price of bitcoin dropped and cloud mining ceased to be profitable. The technology hit a plateau in 2019 thanks to the rise in the price of bitcoin and the emergence of more powerful ASIC devices;
- ICO. In 2017-2018, investors invested $28.4 billion in tokens of blockchain startups. Projects raised funds in ETH, so by January 2018, the price of Ethereum rose to $1400. In 2018, interest in ICOs declined, and the cost of Ethereum dropped to $90. The technology is in the process of overcoming obstacles;
- Ripple. In August 2018, Ripple promised to talk about partnerships with banks at the Swell conference. Before the conference, the price of XRP token rose from $0.32 to $0.76, but then fell to $0.37. The plateau came after the introduction of the RippleNet platform in 200 financial institutions;
- DeFi. Decentralized finance became the trend of 2019: cryptocurrency loans, deposits in stablecoins, decentralized exchanges and profitable farming. The technology is at a stage of excessive expectations.
Gartner warns that not all technologies are hitting a productivity plateau. Products like smart glasses and 3D TVs are not being used commercially. Such technologies die at the stage of getting rid of illusions.
How to recognize a stock market bubble
As a rule, bubbles occur in a small sector in which large investors are interested. It is always a market with limited supply: raw materials, real estate, companies with new technologies or assets with a fixed emission.
The formation of market bubbles begins with publicizing the success of investors in the media and coincides with the stage of the technological trigger in the hype cycle.
The hype cycle is not suitable for predicting the beginning and end of market bubbles, but it can help you choose the moment to invest:
- at the stage of a technological trigger - to make money on the bubble;
- at the stage of overcoming obstacles - to make money on the stable growth of the asset.
Gartner defines a technology trigger based on the following criteria:
- You first hear about a growing market or asset;
- The media position the asset as a means for quick earnings - 100% or more in a few months;
- Clone companies offer the same asset in different wrappers;
- The price of the asset rises in a parabola without significant corrections below recent lows.
It is easier to identify the stage of overcoming obstacles: commercial projects make money on the properties of the asset, and not on the growth of its price. For example, Ripple makes money on international transactions using XRP. The XRP rate does not affect the size of transaction fees and the company's profit.
The events of 1970-1980 on the silver market showed that people without a clear plan with $6 billion of borrowed funds can form an exchange bubble. In the stock market, regulators are struggling with this, and cryptocurrency users have to independently take care of the safety of investments.
Investors expect too much from new technologies. They invest money on the wave of hype and form market bubbles. And the safest moment for investment comes when the technology has proven its worth.
When choosing a project for investment, consider at what stage of the hype cycle it is. If the technology trigger is passed, you risk losing money in a bubble.