But if it’s a bubble, how do you make money on it?
Let me wipe the egg from my face.
Last Wednesday I published Bitcoin is Bitshoit. This was my hotly anticipated take-down of Bitcoin, following on from the earlier Basics of Bitcoin, and my wild-eyed spruik, Bet the House on Bitcoin. (I’m debating myself, for your benefit.)
But last week I gave the Bitcoin market a mauling. And what happens? Bitcoin surges to record highs, blowing through the US$5,000 mark.
So was I wrong?
Maybe. Maybe not. But I’m not blind to the irony.
The other thing that struck me as strange was that the comments to my for and against pieces couldn’t have been further apart.
When I wrote the pro-side piece, I got 29 comments. That’s a pretty lively conversation.
But when I did the take-down, I got two. That’s a quiet day on the Knowledge Source blog.
What does that mean?
I’m not sure. Maybe people had just moved on. But to me it also seems to be typical of the whole Bitcoin story. When I did my pro-side piece, I just pilfered ideas from bold-horizon cryptopian manifestos, and wrapped it up in talk of technological revolution and infinite upside potential.
It’s exciting stuff. It makes for fantastic blogs.
But when I did the take-down, I actually dug into each of these arguments, and said, utopian dreaming aside, what is actually going on here?
It was more thorough, more grounded, more realistic. And therefore probably more boring. So maybe that’s why I didn’t get any comments. But then where were the people who were singing Bitcoin’s praises the week before?
And I’m not being cheeky. That’s a genuine question. Remember I was doing this as a self-education exercise. I was eagerly waiting for the Bitcoin fans to show me the error of my ways. Show me the holes in my argument.
So I don’t know. Would still love people to show me where my thinking falls down.
The other funny thing about this market is that the internet seems to have polarised into two asymmetric camps – there are the people who love Bitcoin, and people hate Bitcoin, but don’t really get it.
It was REALLY, REALLY hard to find intelligent critiques of crypto-currencies – critiques that were awake to the potential of block-chain technology, but not caught up in the hype of a crypto-future.
It’s a funny market.
But the million dollar question is, is it a bubble?
Look, on balance, I’ve got to say yes. To be fair, once central banks just started printing money with gay abandon, pretty much everything became bubbly to one degree or another. But the key bubble flags are all there when it comes to Bitcoin.
What are the bubble flags?
First, all bubbles have a seed of truth. They have something that did have value at some point, but then it gets blown out of all proportion. The dot.com boom had the digital revolution. The tulip bubble had pretty flowers.
Bitcoin has the block-chain.
This opens the way for the “this time it’s different” narrative to take hold. Old valuation methods are thrown out the window. There is infinite upside potential. Trees will keep growing forever.
In time, the madness sweeps up everyone in its path. Players come to the table knowing that the game is rigged, but it’s the only game in town.
Remember former Citigroup CEO Chuck Prince, talking about his bank’s leverage just months out of the GFC:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
That is, bubbles will draw in the whole financial sector eventually. If your business is to make money for your clients, you can’t sit it out. You need to be outperforming the market. Soon, everyone is dancing.
A few die-hards will refuse to participate. They’ll write blogs and complain as uncritical beginners make fortunes around them. In turn, they’ll all be condemned as dinosaurs.
Remember JK Galbraith:
“Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
He was writing that in the 70s! Before the dot-com boom, before even the 80s stock market bubble.
I know that when I say that Bitcoin is a bubble, people are going to say that I’m just too dense to appreciate what a profound and revolutionary technology the block-chain is.
(Note to self – Idea for a book title: Investors Who Run With The Dinosaurs)
Finally FOMO sucks even the most critical into the fold. At that point, once there’s no greater fool to prop up the bottom of the structure, the whole thing collapses.
It has happened before, it will happen again.
To me, this is exactly what’s going on with Bitcoin. There’s a seed of truth, like any bubble, but after that, the whole thing is built on future expectations of infinite growth, with a this time it’s different narrative at its heart.
Key criticisms (like my last blog), if they are understood by the average investor at all, are glossed over or simply ignored in favour of sexy sales hype.
And now the big funds are getting involved, simply because they have to. They might not like it, but they’ve got to get up and dance.
So what would I recommend?
Personally, I’m looking at betting that Bitcoin will fall. When a futures market is established and it sounds like it’s on the way, then there’s an opportunity to short sell.
The Bit Short.
And that means if you’re up for some short cycle speculation, you could make decent money in the short term. But I’d have my eyes on the exits.
But this is the thing about bubbles. By the time the market is giving you clear signals, it’s already too late. You need to be a step ahead of the herd to avoid getting stomped on.
But herd dynamics are incredibly difficult to predict.
For now, if you’ve got some beer money you want to gamble on Bitcoin, go for it. Why not?
But I really can’t recommend making it a central plank in your wealth strategy.
The risks are just too big.
Anyway, that’s been my exercise in self-education. Hope you found it useful. Still more than happy to be educated if you think I’m missing something.
I’ll keep an eye on it and let you know if I see anything that changes the story here.
And if there’s anything else you want me to look at, let me know. Always happy to throw some half-informed opinions around.
Do you think it’s a bubble? What did I miss?