Value Investing

Crypto Mania – An-In-depth Sober Analysis

*None of what you are about to read is investment advice of any kind. You shouldn’t buy any cryptocurrency without deep personal research and consideration. Again, this is not investment recommendations.

This is my second post on Bitcoin and cryptocurrencies. I wrote this one, Good Blockchain Primer, back in July.

Bitcoin Fork Bitcoin Gold Trade bitcoin price drop
geralt / Pixabay

For someone who has lived through the dotcom bubble the madness currently unfolding in the crypto space is just plain breathtaking. It is quite awe inspiring to see people make the exact same mistakes they made 17 years ago. Of course, today’s investors are likely different people who, for the most part, have not lived through the dotcom bubble. A lot of people who never bought own an investment are fueling this. They also have no experience whatsoever with losing money in investments. And we know that people are risk averse. That means people are more sensitive to losing money than they are to gains.

Back in 1999 and 2000 the stock market went crazy about anything related to the internet. Everyone was taking part — institutions, high net worth investors and your local retail guy who worked at Walmart or drove a cab. As a matter of fact cab drivers handed out tips of the next hot IPO to their riders. Most IPOs only needed a business idea that was vaguely related to the internet to achieve success.

Bitcoin is really about freedom. Bitcoin is the battle of ideas. It forces the issue of whether people should be as free in their handling of money as they are in their handling of speech or religion. I’ve been following the Bitcoin story from a distance for a couple years. My attitude on Bitcoin has shifted over time. At first I dismissed it. I didn’t see the value in it. Like so many other people, I laughed at it. I ignored it. I never thought it had a chance. But it survived. It thrived. It exploded. Many people like to ignore the irrefutable fact that Bitcoin is still here. The more I read on the subject of Bitcoin and the blockchain the more I realize how it’s a beautiful idea. But it still doesn’t change the fact that you can lose money if you buy cryptocurrencies or Initial Coin Offerings (ICOs).

At this stage Bitcoin’s nature is still very speculative. What’s very interesting is the technology behind the bitcoin, the blockchain. The blockchain technology is more than an evolution. It’s a way of permanently recording and sharing data and transactions without any central authority. The blockchain is a massive open decentralized digital ledger. It is more reliable and secure than a regular centralized ledger.  It cuts the middleman out (brokers, bankers, exchanges etc…). Blockchains can be used to verify records, prove rights, store identities, and digitally certify almost anything including physical and non-physical assets. And again, you don’t need banks, governments, policy makers, or companies in the middle. I don’t know what is going to happen to Bitcoin but the blockchain is here to stay. It’s already being tested in different industries like finance. Major U.S. banks  like JPMorgan Chase and Goldman Sachs just completed a test managed by blockchain startup Axoni to kept track of the swaps contracts after they were executed, recording things like amendments or termination of the deals, stock splits and dividends, and achieved a “100 percent success rate,” Axoni said in a statement.

Even though my opinion on Bitcoin has shifted (progress?) over time, I still don’t think it’s the Holy Grail. I don’t know what is going to happen to Bitcoin but all the innovation and growth that it spurs is here to stay. Bitcoin is the tip of the ice berg. The blockchain is everything under it. Bitcoin also reminds me of Netscape. Of course the Netscape story didn’t end well but what is undeniable is what Netscape did for the progress of the Internet. Or think what Napster did for music. Naspter is not around anymore but its contribution to the way we listen today is undeniable.

Buying Bitcoins as an Investment Trade?

Buying Bitcoins is not an investment. It’s a gamble. To me it’s like going to the casino and betting on red, except I don’t like going to the casino. Can’t remember last time I did. I find it very stupid and I guess this is not very different. Except buying bitcoins is more fun than betting on red at the casino. If you are going to get involved in this, use your play money (money you can lose, don’t bet the farm).

A lot of respected people and people that I follow have strong opinions on the topic. Some see the genius in Bitcoins and blockchains and other think its absolute farce and that one day a lot of people will get hurt once the bubble pops. There are elements of truth on both sides; Bitcoins intellectually makes sense but speculating on price can fire-back on you big time.

Jamie Dimon from JPMorgan famously thrashed Bitcoins. Here’s a few things he said:

Bloomberg

At the same time, Mr. Dimon is betting big on the technology behind ‘fraud’ bitcoin by launching a blockchain-based system with two other banks to reduce global payment transaction speeds “from weeks to hours.”  He’s also quoted saying:

“The blockchain is a technology which is a good technology. We actually use it. It will be useful in a lot of different things,” he said. “God bless the blockchain.”

Today, despite his views, it was reported that JPMorgan reportedly getting into bitcoin futures trading.

Goldman Sachs CEO Lloyd Blankfein is more neutral on Bitcoin:

The oracle of Omaha, Warren Buffett, said in 2014:

“Stay away from it. It’s a mirage basically. It’s a method of transmitting money. It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?” I hope bitcoin becomes a better way to do it. But you can replicate it a bunch of different ways. The idea that it [bitcoin] has some huge intrinsic value is just a joke in my view.”

Bitcoin Mania

What is fueling this bitcoin mania? Right now there are two major forces: Driven by greed and fear. These driving forces that are not going away anytime soon:

  • Greed is here to stay. Sometimes the cause for higher prices is higher prices.
  • Speculation is not going away. The idea of earning easy money really quickly is contagious. It can also mess with your mind. A parent recently told me that his teenage kid made $800 “investing” in a week betting on cryptocurrencies. Making easy money doing nothing can really screw up a person, especially at this early stage. Now how do you get the  kid to get a minimum wage summer job?
  • The fear of missing out on future gains is a real pressure.
  • Low interest rates. Do I need to point out how much money you are getting at the bank or on your bonds?
  • Hardcore believers in the Bitcoin currency are not going away. This is is very faith based investment (like goldbug investors). A lot of people don’t believe in government issued currency. There is also a deep mistrust of the banking system. The scars of the Financial Crisis are still fresh.
  • Remittance payments are not going away. Bitcoin is about creating a world where transactions can move globally for free. It’s about freedom.
  • For money laundering, bitcoin is a gem.
  • Bitcoin as a mean to store value. Or a hedge against the non-utility and failure of currencies. Look at Venezuela or Zimbabwe’s currency. Or India when the government woke up one morning and said your money is gone with demonetization.
  • Oppressing regimes, capital control, government confiscating money is still a thing. Bitcoins if properly can’t be confiscated and that has tremendous value for a lot of people around the world. If you are running away from an oppressive regime, Bitcoin is also easier to transfer across borders than gold or suitcases full of cash.
  • The adoption of Bitcoins as an asset class over time will growth as more people learn about it (going mainstream).
  • The big money is only starting to pay attention.

Because Bitcoin is still new, it’s in a state of flux everywhere. One force that could squash bitcoin is the government. The government is the big cloud over this. Government could wake up and squash this, like China did with ICOs. Or it could put conditions in place for its adoption and growth, like Japan. But world governments are playing catch up here. They are still trying to figure out what it is still all about. We all are in a sense. How do you regulate cryptocurrencies without stifling its innovation and growth? The one thing governments are really after is money laundering which contributes to the facilitation of all kind of horrific crime like drug trafficking and terrorism. The government is caught between allowing money laundering one hand and permitting innovation in the other. My opinion is that something as powerful as Bitcoin to escape regulations entirely is naïve. I can’t imagine Bitcoin going mainstream without some kind of regulator weighting on it. The likeliest scenario is that the two elephants in the room (US, EU) issue some sort of regulatory framework for ICOs and cryptoassets in general. Don’t you go to prison if you trade securities that are not properly following regulation? The crypto place is filled with some undesirable characters. There are a lot of poseurs and scammers too. There are a lot of conflicts of interest, self-serving hype, and obfuscation. Because it’s the wild wild west, are regulations going to bring a bigger sense of confidence to Bitcoins?

Conclusion

It’s really easy to dismiss Bitcoin as a fad, or Ponzi scheme. It’s not backed by gold. You don’t have equity or any ownership rights like a stock. It’s not supported by the full faith of the government. You cannot put your hands on it. It’s just 0s and 1s to the naked eye. It’s complicated. It was something born out of geeks, computer scientists, and gamer. There is no cash flow. No dividends. No annual report or earning calls. It’s not even useful as jewelry like gold. How can you take this idea seriously? Etc…On the other hand, you have a world with Wall-Street, governments like Washington and North Korea, central banks…so who do you trust?

Where is this Bitcoin story going? I have no clue. It’s like trying to predict where the Internet would be like back in 1994. My suggestion is go ahead and learn about it. Buy a little bit with play money, not the farm. Why? Because it’s fun.  By having skin in the game you will learn a lot more. You don’t have to buy a whole bitcoin. You can be part of this very interesting story. Maybe you will make a little bit of money but be aware that you might lose it. Again this is not an investment advice. You can buy fractions of bitcoins. You can buy $10 worth of bitcoins. Also be aware that you won’t get rich with it. The fortunes have already been made with the early adopters. The only way to make money with Bitcoin is to have somebody else buy it at a more expensive price than you bought it at.

Again let me repeat: None of what you are about to read is investment advice of any kind. You shouldn’t buy any cryptocurrency without deep personal research and consideration. Again, this is not investment recommendations.

If you want to learn more here are some interesting links: