Bitcoin, Sour Grapes, And The Institutional Herd

Authored by Charles Hugh Smith via OfTwoMinds blog,

The point is institutional ownership of bitcoin is in the very early stages.

If I had a bitcoin for every time some pundit declared bitcoin is a bubble, I'd be a billionaire.

There are three problems with opining that bitcoin and cryptocurrencies are bubblicious:

1. Everything is in a bubble now: stocks, bonds, housing, heck, even bat guano is bubblicious. Exactly what insight is being added by yet another guru repeating the BTC is a bubble meme?


2. What's the value proposition in declaring BTC is in a bubble? Spotting bubbles is like shooting fish in a barrel; the value proposition is in identifying the price/time tipping point at which bubbles pop.


3. Declaring bitcoin is a bubble is starting to sound like sour grapes. Sour grapes defined: those who missed the 10-bagger (never mind the 100-bagger) feel better by dismissing the whole thing as a fad and a bubble, but as BTC continues marching higher, it looks like they missed the boat but are too proud to admit they didn't grasp the significance of cryptocurrencies and BTC in particular.

For those who don't know what the fuss is about, here's a one-year chart of bitcoin (BTC). Note the increase from $500 to $5,000 ($4.500 as I write this). Some initial coin offerings have made gains that make this mere 10-bagger look like small change.

This might look like a speculative side-game, but for institutional money managers, it's getting serious. As we all know, it's becoming increasingly difficult to manage money such that the returns on the managed money exceed the return of an S&P 500 index fund.

If a passive index fund does better over five years than an actively managed fund, then what the heck are we paying the fund managers big bucks for?

This is a question that occurs to everyone with money in a pension fund, mutual fund, insurance company, etc. Why are we paying these guys and gals annual salaries of $250,000 plus bonuses if they're missing out on the big winners like bitcoin?

Let's stipulate up front that no institutional money manager can speculate in the cryptocurrency equivalents of penny stocks, i.e. ICOs (initial coin offerings). The risk management rules of serious money funds preclude this sort of rampant speculation, no matter how potentially lucrative.

But bitcoin is different. It's been around the longest, and has survived all the slings and arrows of outrageous fortune tossed at it. Despite a much-dreaded hard-fork (greetings, BTC Cash), the original bitcoin still operates by the initial conditions set by the creator(s): there can only be 21 million bitcoins issued, and the management of the blockchain is not controlled by a central agency (though some miners are more equal than others--but that's a thicket to explore another time).

Bitcoin is tailor-made for institutional ownership. While it is inherently volatile, it is stable and transparent; there is no "insider trading" or financial trickery (such as bogus financial statements) to be wary of. Unlike many other investment vehicles, it's highly liquid.

Once exchange-trade funds (ETFs) based on direct ownership of BTC are widely available, this opens the door wider to both institutional and mom-and-pop investors.

All of this puts pressure on institutional money managers to buy some bitcoin so they don't look like they missed the investment vehicle of the decade. Never mind when you bought it, or at what price; better to get in now before the price jumps even higher. Going forward, it will be this simple: either you own bitcoin or you're out of a job.

This is the same reason virtually every institutional money fund owns Apple (AAPL)--if you don't own Apple, then you missed out on the decade's greatest investment story. So if your fund lags index funds, and has no ownership of Apple, Facebook, Netflix, Amazon and Tesla-- here's your pink slip, buddy--you blew it.

But wait--I bought bitcoin at $3,000, and added at $4,000! Hmm. Smart move. Maybe there's hope for you yet.

The point is institutional ownership of bitcoin is in the very early stages. As bitcoin continues to advance, institutional money managers will be forced to buy in, just to avoid the fate of those who failed to buy Apple.

Money managers buying now at $4,500 will look like geniuses when it hits $10,000, and everybody who dismissed BTC as a bubble at $5,000 will face a bleak choice--either get some bitcoin in the portfolio or prepare for a pink slip.

When the institutional herd starts running, it's best not to get trampled.

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tmosley BaBaBouy Mon, 09/04/2017 - 12:56 Permalink

Bitcoin will probably fill the gap dow to $3000, causing the peanut gallery to become a bukake forum. Their cries of victory will be silenced when it breaches $10000.All this has happened before, and until the market has moved into the space in a significant manner, it will keep happening again and again.Sour grapes indeed.

In reply to by BaBaBouy

NoDecaf Mango327 Mon, 09/04/2017 - 14:21 Permalink

MBS and CDS were "serious business" by institutional investors too, so was

Do I wish I got in at the 10 bagger? Yes
Do I wish I got in at the 100 bagger? Yes also

But 4k is way out of my entry point and is also for most of humanity.
So let the institutions run wild and you early adopters enjoy the ride! Really I mean that, no sour grapes here. But you don't have to be a genius to see that the mean reversion is going to be one hell of a drop. Hope your timing before then is as good as it was in the beginning.

In reply to by Mango327

runningman18 NoDecaf Mon, 09/04/2017 - 16:00 Permalink

Charles Hugh Smith's arguments sound like almost the exact arguments made by the shoe shine boy daytrading "Dow to 30,000" crowd.  The critics are just "sour grapes" because they "missed the boat", they say.  The thing is, crypto valuations are irrelevant to their actual "value".  Yep, it's still tulips, Charles.  When anyone and their uncle can create a cryptocurrency just like bitcoin and have the valuations skyrocket overnight, THAT is a bubble, you dope.  That is a fad.  The only reason Bitcoin is getting so much attention is because the banksters and the media outlets they own are pumping it like a discount hooker.  Goldman Sachs and Morgan Chase are deeply entrenched into cryptocurrencies because they want a cashless society with zero privacy, and blockchain technology is the perfect mechanism for them to achieve this.  The perceived value could go to $10,000 per coin and it doesn't mean a thing as far as what Bitcoin is really worth in terms of legitimate demand or utility.  Cryptos are the enslavement of trade, not the savior of free markets.        

In reply to by NoDecaf

toknormal runningman18 Mon, 09/04/2017 - 18:00 Permalink

That whole "anyone can create a cryptocurrency" nonsense was an argument for 2010, not for 2017 when over 1000 other cryptos - most with vastly improved technological features - have come and gone and not even made a dent in Bitcoin's market cap. As the last 8 years have shown, the market is perfectly capable of arbitrating over a diversity of digital assets and deciding the which, why and how of what it wants to pick as an optimum for store of value, optimum for supporting decentralised applications, optimum for merchant adoption and you-name-it other corners of an investment portfolio. The distinctive monetary properties that separate one cryptocurrency from another are far more significant than the distinctions between one metal and another, be it "precious", "semi-precious" or just plain old plumbing material.

In reply to by runningman18

runningman18 toknormal Mon, 09/04/2017 - 18:24 Permalink

No, you are wrong on every point.  Bitcoin's only notoriety is that is was the first in a long line of cryptos that are almost exactly like it.  There have been no great improvements that make any of the other cryptos superior, either.  They all operate on the same basic blockchain technology.  So, again, the question remains - what makes bitcoin special?  Answer:  NOT A DAMN THING.  So, why do people buy Bitcoin over something like Litecoin?  Well, why did people used to pay hundreds of dollars and even kill each other for Michael Jordan sneakers?  FAD.  That is what drives bitcoin.  Beyond that, I noticed that you didn't dare confront the reality that the international banks are piling into Bitcoin among other cryptos and broadly supporting them through promotion of the fad.  That was smart of you to avoid that argument.  Hell, even Ben Bernanke is the keynote speaker at the Ripple Conference.  Bitcoiners are only helping the central bankers by promoting blockchain technology while stupidly thinking they are "fighting the man".  You are dupes and rubes, that is all.       

In reply to by toknormal

toknormal runningman18 Mon, 09/04/2017 - 18:56 Permalink

Really ? Well try selling your gold as a "bearer instrument" to someone on the other side of the globe in minutes. Historically, gold had a monetary function as a token capable of supporting 2 aspects of the trade, not one:

• ownership
• possession

Since the bulk of the world's monetary exchange volume migrated from physical to electronic platforms during the large part of the 20th century, metals were largely pushed out of this role since they have a slight problem with travelling through wires. Hence it was only a question of time before a pure digital bearer asset, free of counterparties was invented.

Feel free to continue the delusion that it's simply a "fad", "tulip frenzy" or "mania" as you wish. As it happens, propensity for "tulip mania" is actually a necessary property of money. It just has to possess a few other key properties alongside to be sustainable - which bitcoin does, and does better than precious metals. In particular - liquidity since it doesn't require a counterparty to be traded and delivered electronically.

By the way. For your information:

Bitcoin: is a digital asset which is held for no other purpose than to store value and serve as a monetary bearer token. It has value if the market "picks" it to serve as such and requires no other distinguishing property (just as 'valueless' plastic ride tokens at a fairground carry a monetary premium over their material cost since the operator appointed them as a monetary medium).

Ripple: is a decentralised clearing platform for banks. It isn't a bearer token in its own right other than the speculative value it attains from potential deployment in clearing fiat transactions. If banks adopt it, it may have some value as long as it's in use. It's therefore nothing like bitcoin in terms of a speculative proposition and has very different commercial drivers.

In reply to by runningman18

Green Bastard tmosley Mon, 09/04/2017 - 13:27 Permalink

Never got into cryptos becasue I simply didn't undersstand them.  After some reserach I think I get it now, and I see the value and possibilities of crypto/blockchain.  I also see how cryptos can be a risky proposition.  I am ready to take a relatively small, longer term position in cryptos.  I think I have decided on the currencies, exchanges, wallets I'll pursue.  I'd be interested in privately hearing your opinion on a couple of items before I do, simply for added context.  Hoping you can indulge my curiosity, thank you.

In reply to by tmosley

Iskiab stacking12321 Mon, 09/04/2017 - 22:05 Permalink

Gold, bitcoin and cash are pretty similar; the only difference is the medium and how long they've been around. I guess another difference is bitcoin isn't backed by governments, and gold and cash are.

They each have no value except faith people put in it. Cash is just a piece of paper, bitcoin is just a ledger in cyberspace and gold is just a metal. The government can print cash at will, bitcoin is finite but some gets added from mining, gold is expensive to mine but more will be added if the price goes up.

Here are my thoughts on how they will shake out:
1. Cash is being devalued because of central banks, it's just a matter of time until inflation hits through the entire economy instead of just rich people's assets
2. Gold historically is used as a hedge during a recession/poor times so will pick up when economic news turns bad
3. Cryptos should be acting like gold, but they aren't. It's being pumped by by 'irrational exuberance' and is acting like a bubble. There's a lot of money being put into it now because of historical returns. I'd bet as soon as speculators get out and there aren't hundreds of ICOs we'll see a correction and consolidation, having hundreds of cryptos makes no sense.

Just like with with browsers at the beginning of the internet there are lots of options, then there was consolidation and now google is the biggest player, and wildly profitable. Most of these ICOs will be worthless soon, but bitcoin as a long term play will probably do well. Within a year who knows, every time it passes 4500 there's a lot of profit taking.

In reply to by stacking12321

Surging Chaos ET (not verified) Mon, 09/04/2017 - 12:40 Permalink

Inventories are shrinking? Gold and silver sales are down 50% this year!… Schiff talked about this on his Youtube channel not too long ago. He said that all the conservatives that were panic buying during Obama have all stopped buying now.On the flip side, this means it's a good time to buy PMs.

In reply to by ET (not verified)

Surging Chaos Mon, 09/04/2017 - 12:37 Permalink

This is the same reason why so many people on this site hate Bitcoin and crypto in general.While I like gold and silver, let's be honest, you're a bagholder if you bought into them at their ATHs in 2011-2012. And a lot of people thought gold was going to $8k and silver was going to $300+ when they bought the top. So it's natural to have sour grapes and get really angry seeing PMs languish for years while crypto has had an unprecedented runup.

The Cooler King (not verified) lester1 Mon, 09/04/2017 - 15:49 Permalink

No, instead, what there are are 2^160 potential bitcoin wallet holders... & whereby, nobody really knows if there is a single entity (or 3) that might hold, say a million different wallets EACH, that could be used IN CONCERT to manipulate price levels... All I know so far are 3 things: 1. There is NO END to the stupidity of bitcoin holders FAILING to consider the mathematics of this potentiality that they cannot deny2. HOPIUM is a helluva drug3. I'll get JUNKED by 15 year olds (whose 'exquisite' understanding of life experiences trumps EVERY KNOWN historical pattern), for stating the obvious

In reply to by lester1

VD (not verified) tmosley Mon, 09/04/2017 - 13:15 Permalink

the gov will do far worse to Tulipcoin; every crash unleashes another leg for gold and at some point the system loses at which point crypto as "currency" or whatever you want to label it will further be devalued. sure, blockchain has many merits, but as a currency it will fail. as a clearing system it will be just fine a la an ecrypted safeguard to be used by the status quo. the same myopic lack of vision you had for silver is even more pronounced with your pumping of crypto-"fiat". i am in no hurry and am well diversified. i refuse to touch crypto knowing full well that it's deep state trial balloons and tech same as social media, etc.

In reply to by tmosley