Summary The Buffett Indicator suggests a potential market correction, with U.S. stocks trading above 2 standard deviations of the historical trend. Speculative fever in cryptocurrencies, particularly Bitcoin, is high, driven by Wall Street ETFs and Trump's election, despite concerns over elite control. Government ownership of Bitcoin remains unclear, with Trump's support for crypto miners and DeFi companies facing skepticism from financial experts. El Salvador's BTC adoption faces challenges from the IMF, and geopolitical implications of U.S. Bitcoin adoption could provoke reactions from countries like China. I last wrote about Bitcoin ( BTC-USD ) in January at the arrival of exchange-traded funds (ETFs). I was wrong in expecting it to fall but am more upset I said it ahead of the all-time highs. Regardless, I believe the Bitcoin hype train has arrived with ridiculous speculative assumptions flying around. The huge elephant in the room I've been writing some short calls, including on the Nasdaq Invesco fund ( QQQ ) recently, as I believe a correction is coming for stocks. It may a bigger risk than I thought after seeing the "Buffett Indicator". This was an indicator once noted by Warren Buffett as a reliable one for him, but he later played down his ties. The Buffett Indicator is a simple division of the Total stock market value and the U.S. GDP. As of September 30, 2024 the ratio values are shown as:Total US Stock Market Value = $60.86TAnnualized GDP = $29.24TBuffett Indicator = $60.86T/$29.24T = 208% The chart is easier to understand because since 1950, U.S. stocks have never traded above 2 standard deviations of the historical trend. Buffett Indicator (CurrentMarketValuation.Com) Worse still, each failure at 2 standard deviations, has corrected below the historical trend. We can also see that the internet bubble burst tested the line but the financial crisis of 2008-09 was not even a true bubble on this marker. That is also a worry for the expected market rally from Donald Trump's inauguration. The late 2021 market high above the 2-Std line led to a 75% correction in Bitcoin as tech stocks stumbled on the Russia-Ukraine conflict. Speculative fever has gone 'to the moon' Bitcoin As with all periods of market extension, speculative fever can be high and that is true of cryptocurrencies. Market experts called for further highs in 2021 that failed to materialize. As I noted earlier, I was wrong about the adoption of ETFs, but retail investment is often high as I noted in my tech stock article recently. I also noted that markets were ignoring some broad-based failures in commercial adoption and growth rates of artificial intelligence. The rally which I believe is a speculative trap has been driven by Donald Trump's election and Wall Street ETFs. As I said in my previous BTC article, "The Wall Street Takeover is Complete," even if my call was wrong, further highs only mean further elite control of Bitcoin. Cryptocurrency's early adopters have always touted the coin as a decentralized savior of world finance but now it is already hugely controlled by Wall Street. According to some recent data , the top five holders have around 10% of the supply of the world's Bitcoin reserves. Coinbase ( COIN ) and BlackRock( BLK ) are in the top three holders and growing. Bitcoin Trading Volume (CoinMarketCap.Com) According to data from CoinMarketCap, Bitcoin's trading volume has surged around fivefold from $22 billion to almost $100 billion since BlackRock's ETFs began trading. ETFs have also been popular, with $10 billion of post-Trump election win flows , taking yearly assets under management close to $113 billion. Government crypto ownership is still murky One of the takeaways from a Trump speech was support for crypto miners and decentralized finance ((DeFi)) companies. The most ambitious goal for Trump was said to be a strategic reserve holding Bitcoin. Former U.S. Treasury Secretary Larry Summers said that the ideas "crazy" and "merely political". Unlike gold and oil, he added that Bitcoin was a "sterile" asset and its hard to see why a reserve would be a strategic win. El Salvador, which has long been seen as the poster child of BTC adoption has just bowed to International Monetary Fund pressure to water down its plans in order to accept a loan from the group. Another factor we should consider is what other nations will do if Trump did adopt Bitcoin. “If we don’t do it, China and others are going to be doing it,” Trump said at a Bitcoin rally in July. But slapping huge tariffs on China may not be the best way to get them to sign up for a new plan for U.S. dollar hegemony. Trump also said that he would apply 100% tariffs to so-called BRICs nations if they created a rival currency. We are still not aware of what kind of market turmoil could occur if he expects China and Russia to bow to dollar and U.S. dominance. Black swan risks If a market correction was about to happen then Bitcoin has not really been stress-tested against certain failures. Some commentators have previously said that the power grid is susceptible to cyber-attacks and similar events. It is an interesting take when companies have been ramping up data center energy usage and turning to ideas for nuclear power, owned by corporations . Finally, Alphabet's ( GOOG ) update on the Willow quantum computing chip has raised fears that Bitcoin's cryptography could be under threat. That brings us back to country risk, where Chinese scientists have been reported to have cracked RSA cryptography. Risks to the thesis I think I have laid out some of the important risks and investors should be wary of joining the Bitcoin hype train at these levels. I would suggest taking profit or waiting until Trump has been inaugurated in January. Around that time, we will get more clarity on tariffs and any actual plans for adoption. The obvious risk is that Trump's second term will start smoothly and his plans for government adoption come to fruition. However, as I noted, I am not sure that U.S. government ownership was ever the intended plan for Bitcoin. Conclusion The key takeaway from my article is that U.S. stock markets are at risk of being overvalued at levels that have led to substantial downturns. I will be taking a cautious approach to the markets before the January 20th inauguration and I am still skeptical about the need for a strategic reserve and also a small amount of Bitcoin being controlled by a small amount of hands, which includes corporations. Companies are not immune to hubris and risks in other markets that took down the likes of Bear Stearns . I was able to call the high in 2021 in BTC and that led to a 75% drop. The same speculative fervor is back and investors should be cautious at these levels.
