Baupost CEO Seth Klarman Warns About The Bitcoin Bubble

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The bitcoin price has plunged yet again, falling below $8,000 before hitting bottom and rising back above that level. However, there’s a bigger concern for the cryptocurrency space than just falling prices. It also turns out that the overall market capitalization of the major cryptocurrencies has tumbled, signaling that investors may be starting to exit the market. Baupost CEO Seth Klarman seems to think that such a withdrawal is long overdue.

Bitcoin is just a temporary “craze”: Seth Klarman

ValueWalk obtained a copy of Baupost Limited Partnerships’ year-end letter for 2017 recently, and the cryptocurrency craze was one of the topics Klarman addressed in it. He sees bitcoin and the rest of the crypto market as a massive bubble and even compared it to the printing of paper money by central bankers. However, unlike printing paper money, he sees the bitcoin bubble as just a temporary fad that will burn out.

“Cryptocurrencies, including the most widely-known example, Bitcoin, are usable in a nascent but rapidly growing market for online financial transactions,” Klarman explained. “While we have long had our own concerns over the tendency of central bankers to debase paper currency by printing more and more of it, the proliferation of hundreds of virtual currencies seems far more likely to be a craze than a permanent feature.”

How bitcoin is like catnip

The Baupost CEO also explained the attraction to bitcoin, which could explain why the bitcoin price skyrocketed so high so fast.

“Bitcoin, which uses a caning-edge blockchain technology, is ‘mined’ by solving computing problems,” he said. “This makes Bitcoin like catnip for techies because of the allure of a new computer-based and fully electronic currency and its signaling of the primacy of technology over government and regulation.”

Seth Klarman also described cryptocurrencies as “tulip bulbs for the digital age,” a reference to the tulip bubble which occurred during the Dutch Golden Age, when prices for certain tulip bulbs skyrocketed before suddenly collapsing after the bubble popped. He certainly wasn’t the first to compare bitcoin to the tulip mania, and he probably won’t be the last.

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Cryptocurrency market caps are plunging

Although this Baupost letter is dated the end of 2017, Klarman’s commentary on cryptocurrencies is particularly timely right now because market capitalizations within the space are diving. Oanda analyst Craig Erlam told MarketWatch that the tumbling value in the total market cap of the cryptocurrency space signals a widespread withdrawal of capital from digital currencies.

In fact, he said that it’s starting to look like the “path of least resistance” for the bitcoin price is downward rather than up. He warned that if the bitcoin price continues to trend lower, it could eventually retest the February low, which was below the $6,000 mark. For now though, data from Coin Market Cap reveals that bitcoin’s market cap remains well above where it was in February, at $138.1 billion, while it was closer to $105 billion last month. According to Seth Klarman, bitcoin’s market cap was at more than $220 billion at the end of 2017, so it has come down quite a bit since then.

A warning about cryptocurrency funds

As the bitcoin bubble grew larger and larger, hedge funds started looking in earnest for a way to get a piece of the action. In an apparent reference to the dramatic increase in preference for passive funds which follow major indices, Seth Klarman basically warned that a cryptocurrency’s inclusion in a major index or fund doesn’t make it a safe bet:

“In a development that simultaneously illustrated the froth of the moment and the absurdity of the indexing trend carried to excess, hedge fund indices were considering the inclusion of cryptocurrency funds,” the Baupost CEO said. “The irony is that the bigger the cryptocurrency bubble grows, the more investors in such indices will be exposed to it.

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