Bitcoin Equals Beanie Babbies?

If you invested in the markets circa 1999, it is hard to observe the Bitcoin mania and not experience the feeling that you’ve seen this movie before and know how it will end – in losses and tears. The internet was a great idea that convinced a lot of great minds to invest capital and energy into businesses that have transformed the world – Amazon, eBay, Cisco, PayPal … the list is very long (though in fairness the list of non-survivors is even longer – but they are not here to remind us of their nonexistence).

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Rising stock prices of internet companies also brought the unscrupulous people out of the woodwork. In 1999, if a company added dotcom to its name it was an instant guarantee that its stock price would pop at least 20% (I am probably being too conservative) on this non-news. In a slightly later stage of the bubble when internet incubators were in vogue (after the astronomical surge of CMGI), thinly traded companies would announce that they were changing their business model – pizzerias would become “internet incubators” and their stocks would surge a few hundred percent in a day. What does a pizzeria know about the internet or incubating? Nobody knew or cared. Management cashed out on suckers who bought the pop in the stock price.

As I am writing this I just got an email from a friend who forwarded a press release: “Long Island Tea Corp Rebrand as “Long Island Blockchain.” This is what used to be a $20 million market-capitalization company, a $2 stock that is now up somewhere between $6–8 (300–400%) on this press release. I have seen half a dozen stories like this over the last few weeks.

This coin/blockchain mania is not much different than the Beanie Baby mania of the late 90s. Beanie Babies were released in a limited quantity (the key word), and thus the price kept going up. The Beanie Baby company kept making new, limited editions that sold for hundreds if not thousands of dollars (some were “collector’s items,” as though Vincent Van Gogh had graced them with his brush). Predictably, that fad ended just like thousands of others – it went from hot to cold. At some point someone realized that a $100 stuffed doll is not much different from the $2 one you can buy at a flea market.

The “coin” mania of today is not much different. I am not writing this just about Bitcoin – people are shelling out billions of dollars to own other coins, too. At least with a Beanie Baby they got a garage sale item for next year’s spring cleaning – what do you get when you buy 1,200 coins? Really, I have no idea. As I discussed in my previous article on the subject, by owning a coin (Bitcoin or any other), you don’t own the technology.

Also, the scarcity argument worked for Beanie Babies until it did not. At some point the number of people who want to cash in their gains exceeds the number of new suckers who want to buy in. Supply exceeds demand, the price declines, and just as price increases spawned more price increase on the way up, price declines snowball into further price declines – this is how a bubble bursts.

I don’t know when this mania will end. In a month? A year? In the melodrama of 1999 billions of dollars were lost and some fraudsters went to jail (probably too few). This episode is not going to be much different.

About Bitcoin. Paul Isaac was a guest on Jim Grant’s podcast (which I recommended wholeheartedly). Paul made a very good point: Bitcoin as a technology is version 1.0; it is not very efficient, and it’s slow. Future blockchain innovations will be much faster and much more efficient. (I read that mining bitcoin consumes the energy equivalent of a small country like Denmark). So if you are attracted to Bitcoin because it’s a “currency,” know that it’s not even a good one. Future ones will be better. And maybe that is why we have 1,200 other ones competing for the title of Bitcoin 2.0

A bubble is usually a good thing taken too far (as I say this I still cannot grasp what is so great about tulips or Beanie Babies). The internet was an incredible invention and it has transformed global economy, but first it brought us a bubble of enormous proportions … which painfully burst – that is what bubbles do. This coin bubble is going to inflate, and then it will follow the script.

Why am I spilling digital ink on Bitcoin and other coins? I know how this movie will end, and this knowledge brings a weight of responsibility. People will be hurt by this mania, and many of them will not be able to afford their losses.  A friend told me a story about a person who ordinarily would not quality for a $150,000 mortgage borrowing that amount to buy Bitcoin. I have a feeling this is not an isolated story. I saw many people destroy their wealth during the dotcom bubble (though at first their wealth tripled or quadrupled), and this time is unlikely to be any different.

If the fear of missing out is too strong, treat “investing” in Bitcoin like you do gambling. Gambling (especially playing the slot machines) is not a rational endeavor if you look at it only from a financial perspective. The odds are clearly against you. If you play long enough, you’re destined to lose. (That’s why casinos don’t have windows and it’s hard to locate an exit).

Millions of people gamble every day. They are not all financially illiterate; they find nonfinancial, entertainment value value in the possibility that luck may be on their side during their short encounter with a slot machine. However, rational people don’t pour their life savings into slot machines. They gamble with as much as they can afford to lose. So instead of treating Bitcoin as investing, treat it as gambling.

If you treat Bitcoin as a gamble and make money, you’ll have something to brag about at the next Christmas party, and if you lose you’ll at least be at the Christmas party and not homeless, hugging a trashcan on the street.

The post Bitcoin and cryptocurrencies are just the Beanie Babies of the moment appeared first on Vitaliy Katsenelson Contrarian Edge.

So, how does one invest in this overvalued market? Our strategy is spelled out in this fairly in-depth article.

Vitaliy Katsenelson is the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

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About the Author

VintageValueinvesting
Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…