Bitcoin: The Future of Money or a Mania From the Past?
The cryptocurrency market led by bitcoin and ethereum, has just undergone a significant correction down anywhere from 40% to 60% in only a few weeks. The total market capitalization of the cryptocurrency market peaked at approximately $2.5 trillion before falling to $1.3 trillion in less than a month. That number is significant because even after a massive correction, the value of the market is equal to the entire GDP of Australia,the world’s thirteenth largest economy.
It seems wherever you go people are talking about bitcoin, ethereum and the rest of the cryptocurrency market. Some are bragging about the money they have made, others are lamenting never buying in the first place and some suspect that the whole thing is nothing but a scam. Some see this fall as a buying opportunity; others as the beginning of the end.
Proponents of cryptos point out that they are the future of currency and that the US dollar, which they contemptibly refer to, but not altogether wrongly, as fiat currency. Thanks to the blockchain, the technology underpinning bitcoin, the central banks will all be destroyed and the world economy will enter an anarcho-capitalist utopia in which poverty is banished and people will only work if they want to. There are skeptics left who still have the courage point out that cryptocurrencies are literally based on nothing of intrinsic value. They feel that the crypto craze is just another money mania in the tradition of the Tulipmania of 1637, the South Sea Bubble of 1720, the stock market crash of 1929, the Japan real estate and stock bubble which crashed in 1989, the dot com crash of 1999 and of course, the US housing and financial crisis of 2008.
Who will end up being right? Will bitcoin, ethereum, or some other crypto eventually replace the US dollar as the world’s reserve currency or will this turn out to be another bubble/debacle where investors lose large amounts of money and then demand that governments bail them out and arrest anyone they imagined took advantage of them. The suicide of bitcoim advocate John McAfee may be a harbinger of a reckoning.
I have been asked about cryptocurrency many times. That is likely because after forty years in the markets, I have seen a lot, studied a lot and even wrote a thing or two. I’ve seen many “next big thing" turn into a financial slaughterhouses and the world literally change with the advent of the Internet. Ironically, most of the time I piss people off with my opinion. When I’m wrong I am ridiculed. When I have been proven right, I have been detested and ostracized with far more vitriol than when I blew it.
Bitcoin is seen as an eventual replacement of the US dollar as the world’s reserve currency. Frankly, cryptocurrency enthusiasts are not economic historians nor do they seem to understand what money is. The US dollar replaced the British pound as the UK declined and America became the dominant power after World War I. Although, one could argue the US is in decline, the dollar will not fall to bitcoin. A reserve currency needs to be somewhat stable. Bitcoin can quadruple or crash by over 50% in a few weeks. If you’re a manufacturer in Germany and supply a buyer in Malaysia, you are not going to want to be paid in a “currency" that can drop 50% in value by the time you get paid. The Millennials in the cryptocurrency cult do not understand this. And yes, it has turned into a cult as enthusiasts seem to attack anyone questioning the future of bitcoin.
Only about 300,000 sales transactions per day are paid in bitcoin. In total, there are almost 370 billion transactions a day in fiat currency. Fiat currencies trades total over $5 trillion a day compared to about $80 billion in cryptocurrency. Sorry to all the cryptomaniacs. Maybe some cryptocurrency will eventually take over from the US dollar but it won’t happen until someone can figure out a way to stabilize it and convince the market it’s safer and as efficient as the dollar. Personally, I would love to see currencies based on the market and free of central bank manipulation based on the blockchain or some other technology but that will take a while.
Still the Millennial crypto cult continue their hysterical speculation. They are convinced that long debunked chart reading “sigmals" will make them billionaires. Every market move, up or down, confirms their biases. Buy a rising market so you don’t miss out, buy a falling market because it’s cheap. They think this is a new way of thinking and there were never speculative bubbles in the past. Like all generations of speculators, they believe: “this time it’s different.
They argue that the Boomers simply don’t have the tech savvy to understand crypto. I had the same experience with the structured note market pre-2008 which led to the sub-prime mortgage bubble. I was told that I wouldn’t buy these instruments because I didn’t understand them. It turned out, I understood bullshit when I saw it.
There’s always something new and unique in investing. In reality, there’s just new minefields out there. Only the camouflage becomes more sophisticated. The traps become even more deadly. It could be tulips in the 17th century, Canadian mining stocks in the 1970’s, Japanese stocks in the 1980’s, Internet stocks in the 1990’s or cryptocurrency today.
However, if you going to trade cryptos, make sure you have a proper risk management trading system which will avoid large drawdowns and make your you really understand your behavior in emotional situations. Cryptocurrency investing is no more an investment vehicle than Texas hold’em is, but a top player can make a lot of money. Just make sure you leave with your winnings before the cops raid the game.