The Bitcoin And Cryptocurrency Bubble

I actively traded the internet stocks during the late stages of the internet/tech stock bubble in 1999 – from the short side. I will admit that I did take a few long-side day trade rides on a few internet stocks. I remember one Chinese internet stock that I bought in the morning at $10 after its IPO free’d up to trade and sold it about 2 hours later at $45.  To this day I have no idea what the company’s concept was all about  – I think it was one of those incubators. I doubt that company was in existence after 2001.  As such, the crypto-currency craze reminds me of the internet stock bubble.

The cryptos certainly are a heated debate. The volume from the Bitcoin defenders is deafening, the degree to which I’ve only seen near the peak of bubbles. I had a subscriber cancel his Mining Stock Journal subcription after sending me an email explaining that he canceled because he was pissed off that I was not a Bitcoin proponent.  He accused me of discouraging people from buying Bitcoins. His loss, he’s missed on out some high rate of return trade ideas in a short period of time like Banro and Tahoe Resources.  I’m not trying to discourage anyone from buying anything. I’m simply laying out the “caveat emptor” case.

Having said that, there’s truth to the proposition that the inability to short Bitcoin contributes to its soaring valuation.  I’d like to have an opportunity to see what would happen to the value of gold if the ability to short gold via the paper gold mechanism was removed from the equation.

Is it “Bitcoin” or “Bitcon?” The cost to produce, or “mine,” a Bitcoin does not imbue it with inherent value, as some have argued. It cost money to produce Pet Rocks in the 1970’s and they took off like a Roman Candle in popularity purchase price. Now if you own a Pet Rock, it’s nearly worthless. It costs money to produce and defend dollars. We know the dollar is headed for the dust-bin of history.

I’m not saying you can’t make money on cryptos. A lot of people made a small fortune on internet company stocks in 1999. But I’d bet that 98% of the internet stocks IPO’d during the tech bubble no longer exist. Currently cryptos are fueled by the “greater fool” model of making money. Most buyers of the cryptos are buying them on the assumption they’ll be able to sell them at a later time to another buyer at a higher price.

Cryptos are de facto fiat currencies. Perhaps there’s a limit to the supply of each one individually. But that proposition has not been vetted by the test of time. I do not believe that anything in cyberspace is 100% immune from hacking. Just because there have not been reports of the Bitcoin block-chain being hacked yet does not mean it can’t be hacked. It’s also possible that, for now, any breach has been covered up. Again, the test of time will resolve that. However, as we’ve seen already, the quantity of cryptocurrencies can multiply quickly in a short period of time. Thus, in that regard cryptos are no different than any fiat currency.

Finally, all it takes is the flip of a switch and your Bitcoin is unusable. But all these flaws are, for now, covered up by the euphoria of the mania. This is no different from every flawed “investment” mania in history. The current wave of crypto buyers are buying them with the hope of selling them at higher price later. “Hope” is not a valid investment strategy. “Hope” is the heart-beat of a speculative market bubble.

Perhaps one of the most definitive signals that the top in Bitcoin is imminent is this snapshot taken by the publisher of the Shenandoah blog at johngaltfla.com:

This picture was snapped in Florida. The sign says “got bitcoin? Passive income and no recruiting. Earn up to 1% on your money Monday – Friday.”

I recall reading about the process by which Bitcoins are “mined.” Anyone can get started but it involves an upfront investment plus the ongoing expense of the considerable amount of energy used to power the computer system required to engage in the mining process.

Let me guess, the creators of Bitcoin will be happy to assist you with buying the equipment and software necessary to get started?  How is this any different from a high-tech-equivalent of a multi-level marketing scheme?  As johngaltfla asserts: “When someone implies that it is ‘easy money’ it isn’t, it is a bubble.”

I’m not here to criticize anyone attempting to profit from trading Bitcoin. I am suggesting that it is not a good idea to get married to the trade. I regret not loading up on Bitcoins in 2012.

Without a doubt I believe there is legitimacy to the cryptocurrency concept. However,  I can envision a Central Banking-led attempt to implement the crptocurrency model as means of centralizing the process of removing cash currency from the system. But that also means the eventuality that Governments collude to remove competing cryptos from the internet. This is just surmisal on my part.  Again, the test of time will determine the ultimate fate of cryptos.

Speaking of time-tested money, it’s worth noting that China is going to roll out a gold-backed yuan oil futures contract – not a cryptocurrency-backed yuan contract. Perhaps one of the major Central Banks will eventually roll out a gold-backed cryptocurrency. That’s where I believe this could be headed.

29 thoughts on “The Bitcoin And Cryptocurrency Bubble

  1. Dave, if you had loaded up on Bitcon in 2012 and your “wallet” is now worth $300000, then good luck cashing out. From what I have researched, no bitcon exchange will send you a check or wire the money to your personal bank account (beyond trivial amounts) because they don’t hold $$ and many of them are fraudulent. And anything above $10K will apparently alert the IRS.
    Tell that to any bitcon fanatic and they will say you are betraying the ideal by going back into fiat. They will recommend using the profits to buy Ethereum, Dinero or Veritaseum,
    The whole thing is a huge con, starting off with the imagery of bitcon as a golden disc, and then the implication that a limited supply of digital nothings in itself confers value. And mining bitcon is as futile as digging trenches and filling them in, while consuming a lot more energy.

      1. Most of it was extracted from the comments section and links in Zero Hedge posts, for example this one (but there have been very many in the last few months):

        http://www.zerohedge.com/news/2017-09-13/bitcoin-tumbles-below-4000-down-21-record-high

        check out the comments of ET, Anopheles, EITerco.

        This link was cited:

        https://www.sitejabber.com/reviews/www.coinbase.com

        Apologies for the 85% substandard comments on ZH but the rest are often quite useful.

        I have often posed the question in forums “how do you convert high appreciated values of Bitcon in your electronic wallet to USD in your bank account” but never got a straight answer. It seems there are only two possibilities: an exchange or a back alley. The exchanges require a host of personal information and photo ID to even open an account.

    1. Raging Debut,

      That’s interesting; I wonder how many have gotten accepted fiat currency [physical or digital dollars, euros, etc.] when they wanted to sell their crypto?

  2. Jamie Dimon: “Bitcoin is a fraud”

    http://www.zerohedge.com/news/2017-09-12/bitcoin-tumbles-after-jamie-dimon-calls-it-fraud-would-fire-anyone-trading-it

    John McAfee : “I’m a bitcoin miner. We create bitcoins. It costs over $1,000 per coin to create a bitcoin. What does it cost to create a U.S. dollar? Which one is the fraud?”

    https://www.youtube.com/watch?v=xxScg1t0eZI

    Max Keiser : “Bitcoin makes banks, essentially price gouging intermediaries and socially unacceptable leeches, obsolete. Bankers rightfully fear for their jobs as bitcoin replaces them”

    https://www.rt.com/business/403290-bitcoin-bubble-jpmorgan-dimon-keiser/

    1. Arthur,
      IMO Keiser is a pumper and dumper. Has been forever. Don’t get suckered by the libertarian sales pitch. I remember many years ago when he was selling the idea that we could break the back of the financial cartel by buying silver – silver to $500. Uh-huh.
      Re: McAffe another non-sequitur. Greater cost does not give it greater value.

  3. The person that created that advert on the back window of
    the car, using the Jim Carey character from the movie “THE MASK”
    could have just said, “BITCOIN IS SMOKING”
    When Bitcoin crashes the same advert using the same character
    could be reworded to read, “Bitcoin Smoked”.

  4. I agree Dave that a gold back crypto currency would be the way to go. That would offer two major advantages. 1st The gold element would solve the problem of the unlimited fiat paper currency we have today. 2nd the digital element would be easy to use for evey day transactions.

    People have got used to using plastic cards backed by fiat for their day to day lives. The idea people are going to all go back to keeping, and carrying around gold and silver for every day use is unlikely. Unless the world comes to an end, and we are starting off from scratch. (That is not to say owning precious metals for storing wealth is not a good idea. It is. Particularly in these very uncertain times.) but for everyday use in a modern digital world?

    I don’t buy the argument that Cryptos are exempt from govt interference. I keep hearing their supporters claim that the Internet can not be switched off. Sorry, I would not believe that. Fact is , govts don’t need to do anything to cryptos or the Internet to sink them. They just go after the end users. Wallmart & Amazon & every retail outlet. Threatening them with the IRS or the local tax authority if they accept them. What use will they be if no major or middle size corporations will accept them?

    If people want to speculate in them in the same way they buy antique furniture or classic cars or art works fine. But I don’t see them as a currency at the moment. They are far too volatile. Try building say a car, as a giant car manufacturer, and buying all your materials… steel, plastic, rubber in crypto , and then selling the finished product a few months later. Who knows what the crypto/fiat exchange rate will be worth from week to week?

    1. The creation of the bitcoins is decentralized using blockchain as technology to do it.
      I wonder how you can create and back a currency with gold in a decentralized way ( to escape central bank , gov .. control) like crypto ccy does.

    2. If they were interested in curbing reckless speculation, TPTB would have taken measures long ago against BTC. Instead, they have played coy and given mixed messages because it helped to take the sheen off of gold.

  5. I think the only way gov, central banks, and big banks can try to control crypto ccy is by popularise them with etf, futures, options etc.. and start the same war as they did with gold, ( betting on the short side like there is no tomorrow).

    1. Most cryptocurrency investors take delivery so the price is based on the cryptocurrency and not the derivatives. So if the govs want to control crypto they would have to buy it and compete in the free market. You get the picture to what would happen to the price of those cryptos I guess?

  6. Mark Ward from Metal Zoom Energy (some sort of crypto-gold startup) gave an interesting interview with Elijah Johnson recently, describing his suspicions that (surprise surprise) that BitCoin is rigged. https://youtu.be/S_sPj16tUFA

    He didn’t get into any specifics, other than to say that it’s run by algorithms (which I highly agree is true) but he did say something that really raised my interest: the fact that the word “BitCoin” has the same numerological equivalence to “Money” through the practice of Gematria (an ancient numerology-type superstition where letters are assigned number values). You can confirm his claim here by looking at the English Gematria values for “BitCoin” and “Money” through the calculator: http://www.gematrix.org/

    Now honestly, I’m not really into this mumbo-jumbo, and perhaps it’s pure coincidence that two related, but different words so happen to have identical numerological values in a complicated number system. However, given what I little I know about sinister secret societies and their obsession with numerology…this is a red flag. Anagrams of Satoshi Nakamoto…meh; anyone can rearrange letters in tons of ways. But a pre-fixed number system where two related, but different words, match? HIGHLY SUSPICIOUS!

  7. I am a MSJ subscriber and undoubtedly am unhappy that junior miners with excellent prospects languish while Bitcoin and its ilk soar like a falcon. However, I never thought you were at fault for not recommending Bitcoin. There is nothing one individual can do about collective madness except to wait it out.

  8. A gold backed crypto currency makes no sense. It has no advantage over some sort of gold redeemable note. Moving the note around via blockchain instead of plain old accounting buys you nothing except extra scrutiny. There’s no guarantee that the backing physical gold is in the note issuer’s vault so how you do the transaction accounting is irrelevant.

    The value proposition of cryptocurrency going forward is the ability to get around capital controls and seizures, in my opinion. I think Monero might get big. Monero anonymizes transactions while bitcoin is inherently public. The ability to move value across borders without state permission and traceability could be huge.

    The endless comparisons between crypto, gold, and government fiat are obtuse and annoying. Obviously no crypto currency is going to persist for centuries. This is a new thing that must be understood on its own terms. The value of a crypto currency is in the network itself. Yes, these networks will be transient, unlike gold. So what? Sure there will be huge pull backs, but this is not a flash in the pan: it will continue to be a big deal for many years. I can also imagine major governments start demanding taxes in a cryptocurrency, which would change everything. These “gold is money” people are silly. Money is whatever the taxman demands in payment: shells, tally sticks, green backs, federal reserve notes. Nobody ever used gold or silver as money until military empires figured out it was a good way to pay troops and contractors, and then tax it back from the imperial subjects. Gold is pretty useless and will not be the basis for trade unless governments decide to restore it to that role. They are as likely to go for some sort of crypto.

    BTW, the gold backed yuan thing is fake news.

  9. I have one question for you Dave:

    How can something be in a bubble when no-one I know has bitcoin or knows anything about crypto currencies? During the internet bubble of the 90’s I had people coming in my office telling how much money they had made on internet stocks. Now with crypto currencies, nobody has any, nobody knows anything about them and nobody has a clue how to buy them. Your analysis and comparison is way off. Your loss if you ignore the new block chain technology

    1. Dave shows a picture of a van advertising BitCoin, yet you object because it wasn’t from anybody YOU knew? C’mon, GLP. Perhaps you’re just hanging out with the wrong crowd.

      Truth be told though, anecdotal reports are not enough to qualify something as a bubble. I didn’t know anyone who owned beanie-babies, yet the mania phase was patently obvious. In the case of cryptos, Dave is right to compare this to the Dot.com bubble since it’s ultimately all software anyway, and hardly anyone is buying cryptos for their intended purpose (as transaction-settlement systems). Instead, most buyers seem interested in finding the next willing sucker for their virtual “coin” or whatnot. If this had happened in the gold and silver market, or any other market, he would be right to call this out too.

      Just like in the housing bubble, dot.com bubble, etc, you have a bubble when it becomes clear that the majority of buyers are not using the good as it was originally intended. Beanie-babies are kids toys; not investment vehicles. Houses are meant to house people; not be flipped in perpetuity. Similarly, websites are meant to market goods and services; not be virtual casinos for wallstreet speculators. Cryptos, finally, are meant to settle transactions without the assistance of the big banks; not to become yet another get-rich-quick scheme for Joe Six-Pack.

      1. Darkwing,

        You ignore my point entirely. In the dot com bubble, virtually everyone I knew were buying or talking about tech stocks. Today, when I discuss crypto currencies, as I said before, nobody can even understand what Bitcoin is let alone even think about buying any. The learning curve is so steep, the public will be left in the dust when this sector really takes off. Anecdotal ? How bout this. The entire crypto sector is now only valued at 125 Billion. Apple alone is valued at 650 Billion. Bubble? It’s laughable. The bubble is in the multi quadrillion fiat sector……..inflate or die…….

        1. GLP, has it occurred to you that perhaps your population sample is no more or less relevant than anyone else’s? Yes, anecdotal evidence is crap. It speaks nothing about the underlying fundamentals of any market. But since you want to focus on anecdotal evidence so much…then my observation of crypto-trades is that the vast majority of all buyers are attempting to flip their purchases. Hardly anyone appears to be using “coins” for their intended use: which is to trade for actual goods and services outside fiat systems. Instead, the impression I and many others are getting is that it’s being marketed as a get-rich-quick scheme. Mind you, there are billions of people in the world with internet access; just because you and I don’t see them, doesn’t mean they aren’t buying on the hype.

          Likewise, comparing dollar-values speaks nothing about fundamentals either. For example, Bernie Madoff’s market cap was nowhere near Apple’s; does that mean it was wise to invest with him? If you’re going to argue that BitCoin is not in a bubble because its market cap is relatively less than others…then you’re going to have to tell us exactly what ratio constitutes bubble-territory then. It’s basic math. Is it one third of apple? Twice the cap of Microsoft? It’s pretty fair to ask since you brought this up.

          To be fair, I like blockchain technology…but everything is susceptable to a mania with enough false-advertisement. In the end though, it’s still software…so buyer BEWARE.

  10. We can only view the world from our own eyes. I experienced the real estate bubble in the 80’s and the tech bubble in the 90’s. From my perspective, cryptos are not anywhere near bubble territory.

    This could go on forever, so all I can say is if you don’t want to invest in crypto currencies then don’t. That is what I tell anyone who pushes back on FinTech, I say, “then don’t buy any”.

    I will continue to invest in them.

    What’s to argue about…? You do you thing, I will do mine.

  11. Dave, with all due respect, please start to use and get educated about cryptocurrencies. While we may (or may not) be in a bubble, your articles about cryptocurrencies are cringe-worthy because they are riddled with approximations.

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