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).
Rising stock prices of Internet companies also brought unscrupulous people out of the woodwork. In 1999, if a company added dot-com to its name it was an instant bet 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 start-up companies? Nobody knew or cared. Management cashed out on suckers who bought the pop in the stock price.
I just got an email from a friend who forwarded a press release: Long Island Iced Tea Corp to Rebrand as “Long Blockchain Corp.” This is what used to be a small beverage company, a $2 stock that surged as much as almost 300% on Dec. 21, the day of the announcement. I have seen half a dozen stories like this over the last few weeks.
Bitcoin looks at lot like Beanie Babies
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?
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 increases 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 tech meltdown melodrama of 1999, billions of dollars were lost and some fraudsters went to jail (probably too few). I predict that this episode is not going to be much different.
‘Bitcoin 1.0’ leaves room for improvement
About Bitcoin. Arbiter Partners CEO 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. (Mining bitcoin consumes about the same amount of energy per year used by Bulgaria.) 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 write this I still cannot grasp what is so great about 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.
I fear people will lose their shirts
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 dot-com 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.