Everyone – and I mean everyone – is talking about Bitcoin. (That in itself is usually a pretty good sign that a fad has reached its peak – remember when everyone had a hula hoop or a pet rock?) People either have bought Bitcoin or are wondering whether it is too late to invest in it. It had by far the best price performance of any investment in 2017 – except for some other obscure cryptocurrencies. The emotion sweeping investors, then, is FOMO – fear of missing out.

 

Let me start by saying that the title of this piece is misleading because no one can “invest” in Bitcoin. It is not an investment. Bitcoin is a perfect example of a speculation. That is not to say that you cannot buy it and possibly achieve capital gains. Speculators often make money – even big money. But that is not investing. Investing is buying a security that has value which can be estimated if you have the necessary expertise and enough information. For example, a stock represents part interest in a business that has assets and cash flow. The value of a company’s shares can be estimated. Gold is something physical you can touch and store in a safe. And they are not making any new versions of gold. In contrast, Bitcoin is just an idea….and some data stored in a network of computers. And, unlike gold, there are hundreds of other cryptocurrencies with new ones being created all the time. Also gold, unlike Bitcoin, cannot be “hacked” and stolen or electronically lost.

 

Bitcoin seems to be drawing investment funds away from gold, especially on the part of millennials. But I think Bitcoin will turn out to be good for gold. Many of the reasons why people are buying Bitcoin apply to gold as well. But millennials are computer savvy and want to do things over the net. However, once they experience a reversal in Bitcoin and other cryptocurrencies, they probably will switch to gold to accomplish the same objectives, recognizing finally that gold has been a store of real value for centuries.

 

Why expect a reversal for Bitcoin? I have often said that the best thing anyone can have for investing is experience – nothing can replace experience. Millennials unfortunately don’t have much experience with bubbles. They probably did not even have any money in the market when the bubble popped in 2008, and certainly they were not around for 2001 or 1973.

 

Bubbles are fed by market manias. In the late 1960s, growth stocks were simply going to grow to the sky. But in 1973, the market dropped 48% as reality set in. In the late 1980s, Japan was going to take over the world. But in 1990, the Japanese market dropped by 50%. In the late 1990s, the technology bubble drove dot com stocks to nosebleed levels. (My partner even lost clients because he would not buy Nortel for them at the peak.) By October of 2002, the S&P 500 was down 48% from the 2000 high of 1,500, while Cisco dropped 86% and Nortel collapsed by 89% between August 2000 and March 2001. And in 2007, everyone was convinced that house prices could only go up. But by October 2008, the S&P 500 was down by 57% due to the subprime mortgage financial crisis.

 

If you have enough experience to properly assess a chart of the Bitcoin price this year, you can see what is  clearly a bubble. It has been compared to the price of tulip bulbs in 1636-37. It could keep going higher but, when the correction comes, you don’t want to be there. Are you smart enough to get out at the top? How many people do you know who sold at the 2000 high of $124.50 for Nortel?

 

Bitcoin is clearly a bubble. Nothing goes straight up the way Bitcoin did in 2017 – certainly no investment does. On top of that, there is no way to value a cryptocurrency like Bitcoin. There is no underlying asset and no government sponsorship as there is for various sovereign currencies. Bitcoin is based on nothing but the faith of those participating in it……there is no link to the real, physical world. Meanwhile, you have to dig gold out of the ground and, once it has been refined, you can see and touch it. What the Bitcoin phenomenon tells me is that there is too much liquidity (money) sloshing around in the markets. Watch out if the money supply tightens up or another liquidity crisis develops.

 

Finally, people confuse Bitcoin with blockchain. Blockchain is a computer-based processing system (distributed ledger) that was first used to create Bitcoin. Everybody is talking about blockchain too, and rightly so. This new technology is already changing the way many companies do business. But, so far, it has not been possible to invest directly in blockchain. Instead, various companies are implementing this technology and thus enjoying its benefits – including perhaps competitive advantages – but there is no single company that only deals in blockchain per se that we can invest in, to my knowledge. For the many companies developing or implementing this technology, it is a minor part of their enterprise (take VISA for instance).

So learn to love blockchain and try to invest in companies that are early adaptors of this important technology. Buy you buy Bitcoin at your own risk because I smell a bubble and we are not in the business of speculating.

 

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Markets Inc. 2020