At around $9,640, Bitcoin is more than 50% higher than its dip at the beginning of March. But I wouldn’t chase the price up by speculating on the cryptocurrency now.
All kinds of markets have been shooting up since the coronavirus crash. For example, look for proof in the prices of oil, gold, copper, iron ore, the FTSE 100 index, and the Dow Jones Industrial Average.
Almost everything is going up
In some ways it all seems nuts. Some of those markets are ‘supposed’ to be counter-cyclical to each other. Such as gold going up while shares go down, and oil price falls boosting share prices.
However, this kind of exuberance almost across the board does tend to happen when markets have experienced a sudden and dramatic shock. For example, with the credit crunch in the noughties, all markets plunged seemingly together. There’s good logic in that. Nobody knew what would happen, or how badly events would affect individual markets, so there was a tendency to just sell everything.
A similar thing happened when the coronavirus hit. Investors first reaction was to dump almost everything and that’s why we saw the stock market crash along with many other markets.
Perhaps it’s rational for many markets to rise now. After all, we know more about how lockdowns are lifting and how economies are sputtering back into life. But I can see one potential problem. Rising markets tend to beget rising markets. Investors see the rises and start panic-buying for Fear of Missing Out (FOMO).
FOMO-buying will run out of steam
But FOMO-buying tends to lead to irrational buying divorced from the underlying value of a market, and it won’t last forever. Indeed, just as panic-selling can cause shares and markets to undershoot reasonable valuation on the downside, panic-buying can cause an overshoot of reasonable valuation on the upside.
And that makes markets such as Bitcoin look vulnerable. Because of a dearth of fundamentals, it’s hard to pin a fair valuation to Bitcoin. So speculation alone is probably driving the price. An overshoot looks practically assured to my eyes. And I wouldn’t want to be holding Bitcoin when the buying runs out and the reversal occurs.
A mixed stock market
However, the stock market is a bit more mixed. Some sectors are clearly struggling, such as travel, hospitality, airlines, and other cyclicals. It’s a stock-picker’s market and even Warren Buffett has turned his back on the airline companies and sold out of his holdings in the sector.
I wouldn’t touch bank shares with a bargepole either. But as Jim Cramer pointed out recently, some sectors are roaring ahead and there’s sound logic behind their advance in a world with Covid-19. My top five sectors, which I reckon are well-stocked hunting grounds, are healthcare, IT, food and consumer staples, drinks, and technology.