The Bitcoin And Cryptocurrency Bubble…”all it takes is the flip of a switch and your Bitcoin is unusable”
Dave Kranzler
InvestmentResearchDynamics.com
September 14, 2017
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.
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