Bitcoin Bailing? Maybe Millennials

Bitcoin’s “halving” wasn’t so much a bang as it was a whimper, as a flood of trading volume saw Bitcoin’s price fall to its lowest in weeks, before recovering again. But were Millennials to blame?

Brandon Walsh was unusually cautious for his age. Coming from a middle class suburb just outside Chicago, Illinois, Walsh led a life remarkable only for its mediocrity.

With an interest in everything but excelling at nothing, Walsh graduated high school and found himself at a local community college learning about subjects he’d never use, for a job he’d never apply for.

But whenever Walsh had an iota of free time — he’d trade the stock market.

Introduced by his classmate to a zero-fee trading app with a slick user interface, Walsh was immediately interested at the prospect of easy money and when he started to actually make some, day trading stocks of some of the biggest companies in America, he was instantly hooked.

So when the news ticker on his phone told of how oil had fallen to record lows because of a supply glut and a recent spat between major oil producers Russia and Saudi Arabia failed to set production cuts for oil, Walsh took a bet and called a bottom on oil.

Using the super slick app on his phone, he joined hundreds of thousands of other Millennials in calling the bottom for oil and buying into the United States Oil Fund (USO).

But what Walsh and hundreds of thousands of other young investors (speculators) hadn’t bet on, was that zero is not the theoretical bottom for oil — there is no theoretical bottom.

In the wake of the coronavirus pandemic and an almost overnight fall in demand for oil, with oil storage facilities bursting at the seams, oil went into negative prices for the forward month’s futures contracts, blindsiding both Walsh and hundreds of thousands of other young speculators.

In a raft of panic, Walsh and countless others who bought low sold even lower, decimating many a college fund and wiping out their trading portfolios.

But why were young investors drawn into a volatile commodity tracker fund, which even sophisticated investors avoid, despite repeated warnings from both regulators (and the trading platform itself), that these risky products are unsuitable for retail investors?

This One’s For All The Marbles

There are a couple of reasons.

First, Millennials, believe that their economic prospects are likely to be far worse than that of their parents or grandparents.

Given looming college debt and poor employment prospects except for those from the most elite universities, many are susceptible to taking ill-advised risks, believing that betting it all is their only ticket out of a poverty-debt trap.

Second, a majority of Millennials believe (mistakenly) that an ETF or exchange traded fund is inherently less risky despite offering no built in risk management.

Such a misconception is a recipe for disaster, especially when it comes to commodity-linked ETFs like the USO, which behave differently to stock market ETFs.

Investors counting on an eventual rebound in oil prices (because cars still exist right?) were drawn to the apparent simplicity of these products, that on first blush appear to track the price of oil, but gloss over the inherent risks in their investment structure.

One of those risks is known as “rollover risk” when the ETF has to sell expiring oil contracts and buy the next month’s.

In times like these, where the spot price for oil is below its price for future delivery, known as “contango” (because it takes two to tango), funds like the USO can be exposed to potentially unlimited losses as they roll to the next month.

To make matters worse, many of these commodity-linked ETFs allow investors to bet on leveraged products that multiply gains and losses and come loaded with steep management fees.

By way of an example, say you only have US$100, but if you’re allowed a leverage of 10 times that amount, that amount can control a US$1,000 contract, which is great if the contract rises to US$1,100 — you sell and you’ve essentially doubled your money.

But if the contract falls to US$900, your position is immediately closed and you’ve lost 100% of your stake — just like at the casino.

That’s the thing about leverage, what you put up, is the volatility that the instrument will let you stomach.

And with commodities as volatile as oil, any investor’s holdings can disappear at the drop of a hat.

Slick As Oil, Slippery As Oil

But with new and inexperienced investors pouring into stock trading apps such as Robinhood, E*Trade and SoFi invest, which offer their users slick interfaces, low (or in some cases zero fees) and near instant account opening, it’s no surprise that something like this was bound to happen sooner or later.

And it didn’t just happen for USO, it happened for cryptocurrencies as well.

Both Robinhood and SoFi offer cryptocurrency trading and some cryptocurrency exchanges offer as much as 100 times to even 1,000 times leverage on investments in cryptocurrencies.

All these platforms offer the same “gamified” interface that Millennials have grown to expect, and the slick almost one-click buy and sell experience that they’ve grown up with, using e-commerce apps such as Amazon.

And the coronavirus-induced lockdown created a literally captive audience of young investors, looking to bet on something and that something turned out to be Bitcoin’s “halving.”

As greater media hype was generated around the impending “halving” of Bitcoin, the halving of Bitcoin rewards for securing the Bitcoin blockchain, trading volumes for Bitcoin soared overnight, but instead of the large spikes in price that one normally witnesses in retail-led Bitcoin fever, seasoned Bitcoin traders and bots were selling large amounts of Bitcoin to retail investors.

The more the mainstream media hyped up Bitcoin’s “halving,” the more newbie investors were determined to get their hands on it — which is why Bitcoin tested US$10,000 (a strong level of resistance) on numerous occasions, only to see seasoned traders selling into strength from retail interest.

And with many investors leveraged up to their eyeballs in long Bitcoin positions, eventually the rally turned into a bloodbath, with Bitcoin plummeting all the way down to as low as US$8,200 at one stage, before recovering slightly as these same seasoned investors bought back into Bitcoin again.

Once again, new and inexperienced Bitcoin investors (speculators) bought into Bitcoin on the hype and sold on panic — losing millions of dollars in the process.

Because what many investors fail to recognize is that if everyone knows the information that is responsible for any instrument rising or falling in price — that doesn’t affect its price any more, it’s already baked in.

That’s why I said last week that the “halving” doesn’t matter — if nothing else, it presents an excellent opportunity for traders who collected Bitcoin at lower prices to sell into the hype of “halving.”

Less of anything doesn’t automatically make it more valuable. Less Bitcoin is not more valuable unless one accepts Bitcoin’s inherent value — and the jury is still out on that one.

Similarly, it’s not at all clear whether the only way for oil is up. Skies have never been more blue and the climate challenge posed by oil means that it’s uncertain oil demand will ever return to pre-coronavirus levels.

Bitcoin’s “halving” or a “bottoming of the oil market” or any other number of factors that are well-known and well-documented can’t cause anything because they’re already known, which means that odds are the market has already priced in this information.

But inexperienced investors don’t know that and when you’ve been locked away in your house or apartment for over a month, suddenly anything can look like a good investment.