Cryptocurrencies, the Huge Bubble. Or Is It.
Trees don’t grow into heaven. But in the world of cryptocurrencies, they nearly do. A few years back one single Bitcoin cost a few cents, now some 2,500 dollars. That’s a classic bubble. Must be. Really?
Source: Clem Chambers / Forbes
Published: May 31, 2017
Bitcoin has gone off the dial in the last few weeks, hitting above $2,700 a coin. It has fallen back since, but the other cryptocurrencies have shot up in the aftermath.
Anyone who rode the dotcom boom will recognize the symptoms: up like a rocket and down like a rock.
There will always be bubbles, history is full of them. Greed drives bubbles, and when people see fortunes being made from apparently nothing they ultimately jump in blind to get while the going is good.
This is the end.
Boom, bubble, bust is a cycle we are still in. Equities have boomed and will no doubt bubble at the end of the cycle. Many say stocks are a bubble now, but when you look at Bitcoin charts you will clearly see what a bubble in full flight looks like.
You can’t short Bitcoin, which is probably a blessing in disguise, because the thing about a bubble is, it’s impossible to guess the top and shorting a financial panic, where the crowd is rushing for the entrance not the exit, is a good way to lose a lot of money.
At least with a stock you can see there is an obvious problem with valuations. With cryptocurrency there is no logic or much in the way of history to cling to.
A few things needs to be made clear. The first is that new financial instruments are the authors of financial bubbles. In summary, no one really knows how they work and few can value them correctly. The stampede of greed makes all that moot anyway. With a new financial instrument, be it “options” for tulip bulbs, fiat money in the Mississippi bubble of the 1700s, stock in the South Sea bubble, leverage in 1929 or collateralized debt instruments in the credit crunch of 2007, the problem was the world was behind the knowledge curve of the instrument and the power of greed drove the market wild and finally into collapse.
Bitcoin is a new financial instrument and it is taking the same path.
The second thing is, and this is very important, tulips in Amsterdam remains a billion-dollar industry to this day. The flotilla of new instruments that nearly sunk capitalism in 2007 are still trading in massive quantities today. Wall Street and the Dutch took a painful lesson in how their instruments worked and fixed the problem.
Likewise Bitcoin and numerous cryptocurrencies are here to stay. There are numerous problems. Cryptocurrencies look a lot like CO2. To make a cryptocoin you have to burn energy in what’s called a “proof of work.” Energy is fungible, and unless you are driving your bitcoin mining rig with your own off-grid windmill, somewhere down the chain a Bitcoin is throwing off the CO2 of 40 barrels of oil.
But this won’t stop Bitcoin, nor will a huge crash in its value if it comes. OK, let’s not hedge, when it comes. Cryptocurrencies are here to stay and will be regulated and taxed into shape. Yes, they said it couldn’t happen to the Internet either, but it did.
Crytocurrencies, of which Bitcoin is the leader, will fall back in value and more than the fat drop Bitcoin has already had.
The U.K. has about $100 billion dollars of bank notes in circulation. Meanwhile as I write, cryptocurrencies have about $75 billion in currency out there. That is way too much and will be the driver for a fall back.
Of course, this time it could be different, but that often proves to be the scariest investment position to take.
By the way, don’t forget to load up on Bitcoins a few months after the crash, when everyone says Bitcoins and cryptocurrencies are dead. Because the survivors of the crash, the Amazons and Apples of cryptocurrency, will come back and buying a crash is so much better than buying the bubble, a lesson the new generation of equity investors will some time in the future find out the hard way.
Buying the crash is so much better than buying the bubble.
Post scriptum: What bubble?