Measuring the Mania of Crypto

From the Slope of HopeIt seems everyone is talking about Bitcoin these days. On ZeroHedge, I'd say easily half the articles are crypto-related. And why not? The equity market has become a bore. How much can you say about a market which basically goes up about half a percent day after day until the end of time? I've anchored my life to discussing equity markets, God help me, so having something that actually moves up AND down is exciting and novel after the past eight years.

Of course, daring to predict ANYTHING about cryptos is a fool's errand. Just a few months ago, a Bitcoin trader and "expert" offered up this prediction for the second half of the year:

So - - basically down to "S3" at about $1200 and then a tremendous rally to $3,000 by about now. Of course, nothing like that took place. As I'm typing this, we're around $17,000 or so (click here to see the latest chart) and there was never any big dip - - except maybe for the chap who created the aforementioned chart in the first place.

Some predictions - - maybe even wild guesses - - have been closer to the mark. Way back in December 2013, the Winklevoss twins (of Social Network fame) made the lunatic prediction that Bitcoin would rise to $40,000 (it was $1,000 at the time). Surely that seemed to be stark raving mad, and also quite self-serving, since they had bought $11 million of Bitcoin.

And how foolish they must have looked (and felt) when just weeks after their ridiculous prediction, Bitcoin fell 90% - - NINETY PERCENT!! - - which made it look like it was a ruinous choice. I confess, I'd have been the first one laughing. But he who laughs last laughs loudest, and the Winklevii are laughing their assess off now, since their stake is approaching $2 billion. Their $40,000 prediction is, to some, looking conservative.

BTC

The now-super-rich WInklevoss twins have updated their crazy prediction with, of course, something even crazier, stating that even with the incredible rise we've seen so far, it's going to go up another twenty-fold. In other words, about $300,000 per Bitcoin (let's all remember this launched at a value of 1 penny in 2009, so that's a rise of 30-million-fold in value).

The ascent of cryptos is, of course, unprecedented. People keep talking about tulips. Look, I wrote a book about financial manias, and tulips went up about ten-fold during its mania. Bitcoin has already gone up hundreds-of-thousands-of-fold, so it's not even close. Instead, let's compare it to the one mania we experienced in our lifetimes, which was the hottest stocks of the Internet bubble.

To give us a baseline, let's try to think of a "base" for Bitcoin. It isn't a penny. Instead, I like to think of the price where Bitcoin stabilized after its first big crash (see chart above), which is around $160 to $200 (see two arrows pointing out the double bottom). Let's split the difference and call it $180. So that'll be our starting point.

There were hundreds of new stocks during the initial Internet era, but the two I want to use for this little thought experiment are Amazon and Yahoo, both of which had breathtaking ascents in price. When people remember the Internet bubble, they might think stocks had insane P/E ratios of 100, 200, or 300. Not so. Yahoo, for instance, had a P/E of nearly 2,200 before the bubble burst. (Of course, Bitcoin has a P/E of infinity, but let's not get distracted with the fact it actually isn't a business that could ever produce a profit someday).

So, starting off with Amazon.............

AMZN

The red arrow from the late 1990s show its incredible explosion from about $1.31 to $113, a rise of about 90-fold. Using our base of $180, that gives us a target "bubble peak" of $16,200. Well, although Bitcoin does seem to be stalling and struggling at around the $17,000 level, it seems to me we've already smashed by this lofty target. In other words, Bitcoin has outperformed Amazon's 1990s bubble phase.

Turning our attention to the late Yahoo (now a funky holding company with the unfortunate moniker of Altaba.......):

YHOO

Its rise was even crazier, from .70 to 125, which is 180-fold, giving us a target price of about $30,600. And, since one guess is as good as any other, let's go with that. It's a mere 1/10th what the Winklevii are calling for, and who knows, they may well be right. But at least loony Yahoo in the late 1990s give us SOME basis for just how high the public might bid up a totally new financial instrument before greed gives way to fear, and it all comes tumbling down to something a little less tethered to stark, raving madness.

Comments

AUD Tue, 12/12/2017 - 06:22 Permalink

Fuck that man, this is CRYPTO! This time it's different, a new paradigm, and even if its price doesn't go to the moon, then a permanently high plateau. 

PT AUD Tue, 12/12/2017 - 06:55 Permalink

After tulips crashed and had time to settle, they eventually returned to a - shall we call it "normal"? - value.  Today you can buy tulips for a few dollars (or whatever- I haven't looked), take them home and appreciate them for what they are.So the first question is, what is bitcoin's umm, real?,  "normal" value?  Sure we can't blame the speculative mania for happening, yes it will go Ponzi, but a few years after the dust settles, THEN what will they be worth?  What is there utility?  International Money Transfer?  So what will they end up being worth in that role?  Currency?  Obviously "currency" won't work so well while they're bouncing up and down so manically, but after Bitcoin eventually stabilizes to it's, ummm, "true" value, it will work better as a medium of exchange, worth what?Bitcoin's value also appears to be greatly influenced by geo-political upheavals.  That suggests that Bitcoin is working the way it's supporters say it should.  See!  It's good for moving money out of politically tight areas.  Or is it?  Someone else will have to tell me if I'm right or wrong about that one.So after we analyze all that crap we may be able to figure out Bitcoin's real value.  Then we can talk about the speculative side we are witnessing now in a more intelligent manner.  Except I've just been disturbed so I have to go.  Cheers!

In reply to by AUD

Erek PT Tue, 12/12/2017 - 07:36 Permalink

As it looks to be a product of "The Matrix", BitCoin and cryptos in general, will become a prime contolling factor in the third-party control of your finances and your life. People say all the time how "safe" cryptos are and they can't be hacked, can't be controlled by thied parties, etc, etc... This thing has only started. Governments around the world are falling over themselves trying to find ways to "control and tax". The very essence of the desired "cashless society" where every transaction , even a tip in the cup of a beggar, is recorded somewhere.Beware.

In reply to by PT

HowdyDoody Erek Tue, 12/12/2017 - 08:53 Permalink

What are the Banksters going to do when they have manipulated the price of Au/Ag to unrealistically low levels? They can't make the price go to zero as that would give the game away to even those unware of the rigging. They need a new game to take ownership of physical (which they are on book for). Is BTC the new rigged game in town? Would 'BTC to Infinity' (TM) be sufficient to drive the most determined Ag/Au owner to sell?

In reply to by Erek

IH8OBAMA steve2241 Tue, 12/12/2017 - 12:23 Permalink

The advantage to crypto is the same as the disadvantage.  There are NO FUNDAMENTALS to analyze.  Crypto is intrinsicly worth nothing.  There is just nothing to analyze.A stock, even a penny stock, has something to weigh against the stock price.  Something to draw the investor back to reality.  Crypto has none of that.  It's like religion - the entire price is a matter of faith.  Faith that the next guy will buy crypto and nobody will sell.  Faith is a wonderful thing.  But outside of religion it can also be very dangerous in the end -- Once everyone who is going to has gained the faith.

In reply to by steve2241

PT Erek Tue, 12/12/2017 - 09:00 Permalink

The average yob can't be bothered learning how to read the underlying code to make sure it works as advertised.  Mind you, the average yob can't be bothered learning how their MasterCard works so they can be sure it is as secure as advertised either.  ALL electronic money has, as its foundation, an absolute Megaton of TRUST.  Trust, at some point, will always be abused.  (There have been some cases already of banks abusing that trust.  Amazingly, the rest of the populace has not got to the point of caring.)  Convenience VS Trust.  Something like that.  The occasional fox eats the occasional rabbit but in general, the rabbits still believe in the infallability of the electric fence.

In reply to by Erek

Iconoclast421 PT Tue, 12/12/2017 - 08:18 Permalink

It has no real value. Too much energy is consumed in each bitcoin transaction. This energy is ultimately the same as a fee. How useful would Visa or Mastercard be if the fee was 6% or 10%? They would be replaced by something with a 4% fee, and then replaced by something with a 2% fee.

In reply to by PT

iconoclast63 PT Tue, 12/12/2017 - 17:56 Permalink

The tulip bubble was not driven by speculation so much as by powerful people re-writing contract laws. The underlying value of the flowers remained largely unchanged while the market was made by bankers using leverage on futures contracts. These contracts were later rendered meaningless when the contract holders were no longer legally obliged to cover but a tiny fraction of their value.  The tulip bubble was a bankers bubble just like almost all bubbles in history. When/if Goldman and the boys get into the game and try to corner the market, which is the only way they can attempt to control Bitcoin, they will end up driving the prices so high it would defeat the purpose. 

In reply to by PT

doctor10 Tue, 12/12/2017 - 06:23 Permalink

Traditional currencies really aren't worth all that much in a surveillance society -which essentially all big governments are today. All opportunity for arbitrage is stolen by the sociopsyopaths pre-occupied with going through everybodies bank accounts, real estate holdings, telephone and email records, tax returns and health records seeking "opportunity". Not much business can be done profitably. At the end of the day its why interest rates -at least in 100% traceable accountable taxable regulatable and ultimately takable currencies are basically 0% give or take a few fractions of a percent-worldwide. FWIW if you want to borrow BTC -at BitBond today  interest rates can be 22%!! "value" is anonymity and privacy in conduct, thought and action-one of the consequences of which is enhanced ability to keep the fruits of your own labor. It also is the ONLY means through which individual productivity can increase-and thus increase productivity across an entire nation. Electronic/digital currencies actually fulfilling those needs will be the most valuable-there is yet to emerge one that clearly does so. Ask East Germany and the Soviet Union exactly how well a surveillance society worked out during the 20th century. The 21st is no different in that regard-except that surveillance is cheaper and more intrusive and consequently more deleterious to society.  It is a cancer

PumpherDumper Tue, 12/12/2017 - 06:28 Permalink

Fail.  Epic Fail. You are mixing standards from two totally different worlds.  Yahoo's run exisited in the totality of inflationary fiat.  Bitcoin is a deflationary asset.  Not comparable. 

Singelguy Tue, 12/12/2017 - 06:52 Permalink

Since the total number of bitcoins ever to be mined is capped at 21 million based on the algorithm design, the price will at that point be purely dictated by demand which will in turn be dictated by the rate of adoption in the marketplace as a real currency. Unlike gold, which can still be mined for a very long time, supply will no longer be part of the equation. As such, the Winkelvos prediction does not sound that crazy.

Michigander Kefeer Tue, 12/12/2017 - 09:23 Permalink

Redemption limits are by nature, part of the KYC rules and the regulations to prevent money laundering. Remember only the banks get to do that. I had a 15,000 weekly limit at Coinbase. I asked for a 250,000 dollar weekly limit so I could begin cashing in to pay off my mortgage and it was granted. So I could cash out 12 BTC immediately at market price and pay their 1 1/2% commission, or I can go to their GDAX exchange and do it through limit orders and save the 1 1/2%. So the short answer is, with just a little forethought and planning, you can cash in very quickly.

In reply to by Kefeer

ItsAllBollocks Tue, 12/12/2017 - 07:11 Permalink

Bitcoin's value is based solely on it being a cryptocurency but similar to a virus, Bitcoin futures has attached the US dollar to the value of cryptocurrencies and enabled cyrptocurrencies to be valued in US dollars. If it were my hard drive, my antivirus would have detected the intrusion and deleted it in seconds but as the price of Bitcoin is now set daily in the City of London (not London city), would that not mean Bitcoin is now owned by the Rothschild family? Think about it.

Kefeer Tue, 12/12/2017 - 07:19 Permalink

There are no real price discoveries in rigged/massively controlled markets.  BitCOiN's end value is zero given a long enough time-frame.The end game is the world goes digital and all people will be "chipped" if they want to buy & sell.  We can't be but one, maybe two generations away...the globalists must be drolling all over.

Rhal Tue, 12/12/2017 - 08:16 Permalink

All the charts in the world won't reflect the feeling you have to hold a truly global currency in your hands that no bank can hold over you like a carrot on a stick.I never realised that I hated banks until I bought some.

Rhal Pooby Tue, 12/12/2017 - 08:39 Permalink

Virtually speaking, ya.Holding dollars seems more tangible, but the bank and government legaly own them "in your name".That's what's driving the mania: the realization that the banks don't own the cryptos, and that is why the cryptos are the deathnell of the banks.

In reply to by Pooby

LawsofPhysics Tue, 12/12/2017 - 08:51 Permalink

LMFAO!!! NO, daring to predict the "price" of ANYTHING (including cryptos) in the absence of a mechanism for TRUE PRICE DISCOVERY is a fool's errand!!!Fixed it for you you stupid fuck.

PT Tue, 12/12/2017 - 09:06 Permalink

People need the money of the realm in order to pay the interest on their loans, including the interest on the land on which they live / run a business.  At least in theory, you can pay for everything else through barter.  A major turning point will be mortgages and rents paid in Bitcoin.  Given the 21M limit, an interesting twist will be when noobs agree to borrow Bitcoin to buy land plus pay interest in Bitcoin.  Wanna see sharks in a feeding frenzy?  That will be one you'll want to view from a safe distance.

LawsofPhysics PT Tue, 12/12/2017 - 09:13 Permalink

perhaps, but when a system no longer has the consumable calories it needs to sustain itself, ALL loans/bets are off.get your tribe in order because possession will be the only "law", and laws that cannot be enforced don't mean shit.in the meantime..."Full Faith and Credit"

In reply to by PT

DjangoCat PT Tue, 12/12/2017 - 11:51 Permalink

IMO that will not happen until you have universal acceptance and the value stabilises.  To borrow Bitcoin today is a bit like shorting it.  You better have a super high yeilding place to put the proceeds, otherwise you will never be able to pay back the loan.

In reply to by PT

PT DjangoCat Tue, 12/12/2017 - 20:26 Permalink

A couple of intelligent, rich people find a system that works well for them and so they use it.  Some of their friends discover the system, like it and copy it...Some poor dumb people see the rich guy's system and try to use it too.  But they have absolutely no idea why the system works and no inclination to find out.  They are working purely on TRUST.  Eventually the smarter poor people have to adopt the new system or they end up worse off than the dumb poor people.  But now we no longer have a system that works because all users have verified that it works.  We have a system that is good enough for the large, dumb crowd and it runs purely on TRUST.  Then things get "interesting".Any questions?Think about the introduction of Credit Cards to the world.

In reply to by DjangoCat

rbianco3 Tue, 12/12/2017 - 14:09 Permalink

Thought provoking article. I was hoping somone would do a comparison like this.True, stocks, bonds, real estate, precious metals aren't that interesting to talk about when there's almost no volatility. Political articles are still a little fun and I could do without fear porn entirely. What else is the ZH to write about?