Volatility in Cannabis, Crypto Appropriate, All Things Considered

James West
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Chicken Little is on the loose again. With Cannabis stocks having shed almost half their value in just over a week, and crypto reflecting the same performance, panic and despair have set in. But while the convergence of two market segments correcting at the same time have created the impression of a broad market rout, such is potentially not accurate.

Consider, in the case of Cannabis stocks – especially the Canadian ones – that the top performers doubled in value during the first month of 2018, after tripling in value, on average through the second half of 2017. That kind of nitrous-fuelled rocket-launch in valuation has no choice but to reverse course when the funders of these companies take profits off the table as the hold periods come off of financings.

And do you think they want to refinance these sudden unicorns at top valuations? Hell no. They would much rather the stocks correct on profit-taking selloffs, which, with the trigger of stop loss programming and the increased number of short sellers that such volatility attracts, accelerates and exacerbates the selloff.

Is it likely that, given that fear has now spread to other sectors as fear has a habit of doing, the correction will continue in the following week?

Absolutely.

But does that mean this is the revaluation we predicted as imminent for the Cannabis space in December has now arrived?

Not necessarily.

Consider that BMO, Canada’s 4th largest bank, has just entered the Cannabis space through its participation in a $200 million financing at $34.60 a share, which closes on February 7th. That was announced on January 17th, days after Canopy touched a record high of $44 for Cannabis stocks. So of course the market is going to sell the stock down to at least the offering price.

But as I pointed out, a plunging stock attracts shorts who see the opportunity inherent in the stop loss triggers that will take a stock much lower than its financing price when it is as widely held as Canopy. As for the others, they too have been rushing to close large bought-deal financings in the euphoric price environment that characterized the opening days of January.

But other banks are not even in the game yet, legalized recreational marijuana still isn’t here yet, and the expansion into overseas markets is just really getting up a head of steam. So for cannabis, at least, this is a correction, not a wholesale stampede for the sidelines.

Crypto has a different set of problems…

Cryptocurrencies, on the other hand, have an entirely different set of factors adding momentum to the sector’s downdraft.

Using Bitcoin as the bellweather for digital currencies everywhere, this is a full-blown stampede for the exits, as the realization begins to set in among the more sophisticated market players that it is highly unlikely any cryptocurrency is going to be capable of retaining any of its differentiating features in the face of gathering regulatory momentum internationally, and problems with hacking, frauds and thefts plaguing the space with increasing frequency.

Just look at the Tether/Bitcoin scandal now threatening to overtake even sexual misconduct and the buffoon president in the news cycle.

In case you’re not paying attention, there is an uproar surrounding Tether’s apparent pattern in which hundred million dollar orders for Bitcoin are placed using Tether as the purchasing currency, but only when Bitcoin is dropping.

Observers and investors (and I would wager regulators now too) are wondering whether Tether’s claims to be tied, or tethered, to the U.S. dollar on a one-for-one representation, are in fact, fraudulent.

If it is, that means that Bitcoin’s price ascendance to US$20,000 may have been largely driven by fraudulent buying intended to manipulate investors into believing there is more support for Bitcoin – and therefore, by extension, cryptocurrencies – than there actually is.

Since the process of originating and governing cryptocurrencies is unregulated (that’s supposed to be a plus), nobody can really be certain how faithful the operators of the servers that run these cryptos are to either their origination protocols or even their policy statements.

Let me suggest how this is likely to play out.

The governments are allowing this experiment to unfold so that they can amass as large and incriminating a money trail as is possible. Then, as increasing instances of fraud, hacking and losses pile up, so too will the howl go up for government regulation. The governments, likely led by the U.S., will step in and inflict such an egregious set of rules on non-government crypto currencies that it will soon be clear to all that the cryptocurrency experiment is nearing its end, except that the government will essentially become the sole operators of digital currencies that will be very tightly regulated, and will be centralized, not decentralized, with identity assured, not anonymized.

In fact, the very features that the cryptofounders touted as the main differentiators and benefits of crypto from fiat, central bank-issued currencies, will no longer be allowed. The public record is already replete with stories of crypto used for black market activities, and this will only continue until the boom is lowered completely. And this has only one possible outcome, the monetary supply always having been the sole jurisdiction of government for obvious reasons.

A cryptocurrency is, and can only ever be, a proxy for the fiat, central bank-issued currency in which it is bought or sold. And if the fiat, central bank-issued currencies become digital themselves (which, if you think about it, they already are in large part).

The 50,000 foot view

So if you step back, and look at the ersatz wealth created in crypto, and very real wealth created in cannabis, by sheer volume alone, you can perceive that there are a gazillion more paper millionaires and billionaires competing for business class seating than there were at this time last year.

At the end of the day, that kind of market effusiveness has only one possible outcome, which is the one we are currently experiencing.

But aside from cryptocurrencies, which I for one, do not see as viable over the long term in their current unregulated, anybody-who-can-program-can-create-money form, most asset classes are devoid of fundamental drivers to justify more than a correction.

Corporate profits are coming in robust, and while yes the threat of interest rates rising in response to emerging signs of inflation might be considered a negative, this too might be seen as natural market forces balancing themselves out. While a return to exponential price appreciation such as that experienced in crypto and cannabis in the last year might not be an imminent threat, the sky is definitely not falling, and everybody needs to chill the f%%k out.

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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