2017 was an exciting year, especially in the cryptocurrency markets, where Bitcoin rose about 12x, Ethereum rose about 82x, and other smaller coins and tokens rose even more. Commodities were very active, with palladium surging 38% while coffee fell 19%. Bonds and most currencies were lower, while major stock indexes were higher.
The only national currency to finish the year higher was the Euro, which rose 1.1%. The US Dollar fell the most, dropping 11.2%. Short term bonds fell even more than USD cash, dropping 11.6%, while long term bonds fell 4.0%.
Although gold stocks fell 6.8% for the year, all the major stock indexes were higher, led by the Dow Jones Industrial Average, which gained 11.8%. The S&P 500 rose 6.8%.
Metals were very active, with palladium and copper climbing 37.7% and 16.5% respectively, while platinum and silver fell 9.6% and 7.2%. Palladium crossed over platinum to become the more valuable of the two metals, while platinum itself made new all-time lows near the end of the year. Coffee had the largest losses of any asset class, dropping 18.6%. Crude oil finished the year little changed, up just 0.6%.
Let's take a closer look at the Cryptocurrencies. The two coins tracked here, Ethereum and Bitcoin (the two largest by market cap) both had banner years. Ethereum started 2017 worth about 0.22 grams and finished the year at 18.2 grams, a gain of 8,172%. Bitcoin started the year at 26.3 grams (just under one ounce of gold) and finished at 333.9 grams (a bit over 10 ounces). Along the way, Bitcoin hit a high of 479.5 grams. Although this growth is astounding, keep in mind that during 2013, Bitcoin's value grew by 100x. These markets are actually maturing and become less volatile as they see wider adoption and more hedging.
The crypto space overall evolved greatly during the year as well. Looking at the market capitalization of all coins and tokens, the space grew in value from about 0.5 kt (kilotonnes, or in SI terms, gigagrams) to a peak of 15.3 kt, before ending the year at 13.9 kt. For comparison, this is about 7.5% of the above ground supply of gold, estimated to be 187 kt – which curiously, is also roughly the estimated value of cash (bills and coins) in worldwide circulation.
In addition to the market's growth in size, it has also evolved in composition. As the year began, Bitcoin represented about 87% of the market cap, while Ethereum was 4%, and all other cryptos combined were 9%. By the end of the year, Bitcoin was 38%, Ethereum was 12%, and all other cryptos were about 50% of the market.
It will be interesting to see what 2018 brings! As electric cars take more of the transportation market, demand for platinum and palladium may decline, but copper and silver could strengthen. The cryptocurrency markets will continue to evolve, with many coins and tokens becoming worthless, while the market discovers the true price for those with real utility. I expect that Bitcoin and Ethereum will continue to be among the survivors, but I doubt they will see the kind of growth they enjoyed in 2017. If the trend towards higher interest rates continues, bonds will continue to decline, and as total debt rises, national currencies may also see further declines. All of these trends put the stock market into a precarious position; currently priced for perfection, what happens as portfolio allocations to gold, commodities, cryptocurrencies and cash rise? Forced to compete with rising bond yields, but paying higher rates for new financing, can equities maintain their lofty P/Es?
Whatever comes, I wish you the very best in 2018!