While it is no doubt abundantly clear that I am pro-bitcoin and pro-blockchain in general, I’ve tried not to write entirely about those things when writing this blog. As most of my career was spent trading, advising, and charting markets in general long before those things existed, I do have other material to draw on. However, these are the things that seem to be the first topic of many conversations, so I think that writing about the possibility of a new financial ‘bubble’ is appropriate, though as usual I hope to provide a somewhat different perspective…or at least get you thinking.
No matter what you read about bitcoin these days, there is mention of a bubble. The reading, or the conversation for that matter, may be “Yes, it’s a bubble,” or “No, it’s not even close to where it’s going.” Either way, the bubble idea enters the conversation. I’ll start by saying that at some point I do believe there will be a ‘monumental’ collapse in price. But I won’t say when or at what price point. I’m a trend follower. I let the market tell me it’s over…and always a bit after it ended. I’m ok with that. As long as I’m not the last one out, or even better, have time to throw on a short position once convinced the rally is over.
The key word in that statement was ‘monumental.’ And what defines monumental? Just last week we had a price decline of $3,000 in one day. This was 30% of the value. Ok, maybe not monumental, but it was in one day so pretty big. There was of course the time when…And that other time when…Oh, and remember…etc., etc. The point is that this is what bitcoin’s history looks like. Large up moves, sharp “corrections,” and the next large, drastic up move. And every one of those rallies has heard the bubble cries, and as soon as it began coming off, the yells of “I told you this would happen!” Then it doesn’t happen. Bitcoin rallies again to new highs…And again…And yes, again.
Of course, the bitcoin bulls and evangelists, the HODL (Hold On for Dear Life) crowd, all say it can’t be a bubble. It’s more important than tulips. I heard that during the NASDAQ bubble. The housing bubble. We can certainly begin to use that ‘bubble’ term here if we believe that at some point bitcoin will rise to a price of “over-valued,” whatever that really means… since value is what people pay, monetarily or otherwise, for something at a particular moment in time. Then of course come crashing down wiping out all but the lucky few. But we don’t know when that is. And we don’t know what the adjustment in its price will be. Probably not to zero. People still pay for tulips, just not what they once did.
Is it ‘different’ this time? I heard something last week from a friend, and unfortunately don’t remember where he said he first heard it. I’d like to give credit. It really stopped me in my tracks and I realized how interesting the statement was (this is the ‘different perspective’ part). He said that the thing that is undeniably different about this occurrence (not calling it a bubble) and previous financial bubbles, e.g. NASDAQ and housing, is that other bubbles have started on Wall Street and when these investments made their way to the average person, or your friendly cab driver was day trading stocks, it was the beginning of the end. This time, it’s the cab driver who’s the new millionaire while the Wall Street hedge funds and traders are hoping to play catch up via new exchange traded futures, and the big banks aren’t sure what to do at all!
So it is different. It began differently and it seems to be surviving differently. And so the most monumental thing going on in this market right now is the game of catch up being played by the money professionals. And that’s just bitcoin. Bitcoin Cash and Bitcoin Gold, to round out that family. Ethereum, Monero, Litecoin, Ripple, Dash. Just a few of the crypto-currencies being traded globally and making people millionaires. Students, millennials of all shapes and sizes, average people, friendly cab drivers. Well, probably ex-“friendly cab drivers”…still friendly, just not cab drivers.
In some situations, it’s easy to label something based on what you’ve seen before. In other cases, it isn’t as easy. What’s difficult to figure out is which one of those it is when you’re living it. This one is no different. I mean, it is very different, but that’s why we don’t know whether the situation is different, or just the names of what’s involved are different. Remember when the internet was new? I do. It was really different. So different, many were in denial. Just another fad. What value is this technology ever going to have to me (there’s that value word again)? And well, today none of us know how we’d live without it. It’s ingrained in our daily existence. How much is that worth if you could price it? Where would its price have started? Would it have been termed a financial bubble at any or all points along the journey to today?
Will this one end differently? Or just become another chapter in The Bubble Book. This I can’t say. What I can say is that when thinking about bitcoin and other crypto-currencies with their value derived from the blockchains behind them, I would suggest thinking more internet than tulip. More disruption than just a prettier color than last year’s version. Then start thinking about whether the asset is over-valued or not. Your own answer may surprise you.