Bitcoin and cryptocurrencies are just the Beanie Babies of the moment

If you invested in the markets circa 1999, it is hard to observe the Bitcoin mania and not experience the feeling that you’ve seen this movie before and know how it will end – in losses and tears. The internet was a great idea that convinced a lot of great minds to invest capital and energy into businesses that have transformed the world – Amazon, eBay, Cisco, PayPal … the list is very long (though in fairness the list of non-survivors is even longer – but they are not here to remind us of their nonexistence).

Rising stock prices of internet companies also brought the unscrupulous people out of the woodwork. In 1999, if a company added dotcom to its name it was an instant guarantee that its stock price would pop at least 20% (I am probably being too conservative) on this non-news. In a slightly later stage of the bubble when internet incubators were in vogue (after the astronomical surge of CMGI), thinly traded companies would announce that they were changing their business model – pizzerias would become “internet incubators” and their stocks would surge a few hundred percent in a day. What does a pizzeria know about the internet or incubating? Nobody knew or cared. Management cashed out on suckers who bought the pop in the stock price.

As I am writing this I just got an email from a friend who forwarded a press release: “Long Island Tea Corp Rebrand as “Long Island Blockchain.” This is what used to be a $20 million market-capitalization company, a $2 stock that is now up somewhere between $6–8 (300–400%) on this press release. I have seen half a dozen stories like this over the last few weeks.

This coin/blockchain mania is not much different than the Beanie Baby mania of the late 90s. Beanie Babies were released in a limited quantity (the key word), and thus the price kept going up. The Beanie Baby company kept making new, limited editions that sold for hundreds if not thousands of dollars (some were “collector’s items,” as though Vincent Van Gogh had graced them with his brush). Predictably, that fad ended just like thousands of others – it went from hot to cold. At some point someone realized that a $100 stuffed doll is not much different from the $2 one you can buy at a flea market.

The “coin” mania of today is not much different. I am not writing this just about Bitcoin – people are shelling out billions of dollars to own other coins, too. At least with a Beanie Baby they got a garage sale item for next year’s spring cleaning – what do you get when you buy 1,200 coins? Really, I have no idea. As I discussed in my previous article on the subject, by owning a coin (Bitcoin or any other), you don’t own the technology.

Also, the scarcity argument worked for Beanie Babies until it did not. At some point the number of people who want to cash in their gains exceeds the number of new suckers who want to buy in. Supply exceeds demand, the price declines, and just as price increases spawned more price increase on the way up, price declines snowball into further price declines – this is how a bubble bursts.

I don’t know when this mania will end. In a month? A year? In the melodrama of 1999 billions of dollars were lost and some fraudsters went to jail (probably too few). This episode is not going to be much different.

About Bitcoin. Paul Isaac was a guest on Jim Grant’s podcast (which I recommended wholeheartedly). Paul made a very good point: Bitcoin as a technology is version 1.0; it is not very efficient, and it’s slow. Future blockchain innovations will be much faster and much more efficient. (I read that mining bitcoin consumes the energy equivalent of a small country like Denmark). So if you are attracted to Bitcoin because it’s a “currency,” know that it’s not even a good one. Future ones will be better. And maybe that is why we have 1,200 other ones competing for the title of Bitcoin 2.0

A bubble is usually a good thing taken too far (as I say this I still cannot grasp what is so great about tulips or Beanie Babies). The internet was an incredible invention and it has transformed global economy, but first it brought us a bubble of enormous proportions … which painfully burst – that is what bubbles do. This coin bubble is going to inflate, and then it will follow the script.

Why am I spilling digital ink on Bitcoin and other coins? I know how this movie will end, and this knowledge brings a weight of responsibility. People will be hurt by this mania, and many of them will not be able to afford their losses.  A friend told me a story about a person who ordinarily would not quality for a $150,000 mortgage borrowing that amount to buy Bitcoin. I have a feeling this is not an isolated story. I saw many people destroy their wealth during the dotcom bubble (though at first their wealth tripled or quadrupled), and this time is unlikely to be any different.

If the fear of missing out is too strong, treat “investing” in Bitcoin like you do gambling. Gambling (especially playing the slot machines) is not a rational endeavor if you look at it only from a financial perspective. The odds are clearly against you. If you play long enough, you’re destined to lose. (That’s why casinos don’t have windows and it’s hard to locate an exit).

Millions of people gamble every day. They are not all financially illiterate; they find nonfinancial, entertainment value value in the possibility that luck may be on their side during their short encounter with a slot machine. However, rational people don’t pour their life savings into slot machines. They gamble with as much as they can afford to lose. So instead of treating Bitcoin as investing, treat it as gambling.

If you treat Bitcoin as a gamble and make money, you’ll have something to brag about at the next Christmas party, and if you lose you’ll at least be at the Christmas party and not homeless, hugging a trashcan on the street.

 

 

Vitaliy Katsenelson, CFA
Student of Life, CIO

 

I am the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

 

I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (Even in Polish!)

 

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.” (They must have been impressed by the eloquence of the Polish translation.)

 

Not receiving my investment articles? Sign up here.

Comments

johnQpublic Moe-Monay Fri, 01/19/2018 - 08:37 Permalink

Bitcoin, stocks, bonds, paper money, and even gold only have value because people agree they have value. I personally cant actually physically use any of them. A wrench, a loaf of bread, a glass of water, or a nail are things one can physically use. The rest are temporary holders of value to facilitate trade. Temporary. How temporary remains to be seen.

In reply to by Moe-Monay

adr TeamDepends Fri, 01/19/2018 - 10:43 Permalink

How is a Crypto going to make his job obsolete?

Are 1500+ different cryptocurrencies all going to be used that essentially accomplish the same thing?

The distributed application is probably the dumbest concept of the past 100 years. I can run cloud apps for free, why do I need to buy into a crypto to use the exact same app?

Buy our ICO because everyone will want to use our app and you'll get rich because you'll get paid dividends from our revenue created from our free app with no transaction fees.

In reply to by TeamDepends

Gap Admirer adr Fri, 01/19/2018 - 11:08 Permalink

But, but, but....  cryptos are distributed across government networks so they are secure and can't be monitored/tracked/traced/banned/blocked/filtered, or similar, by the government.

Oh, wait...

 

Hilarious the name calling by the coinistas as "arguments," by the way.  "Oh, yeah... you're a stoooopid jealous loser oldbug."  Well, then... now I am convinced that a kid in his mom's basement, who has clicked through 10 minutes of crypro startup menus, has a set of incredibly valuable electronic 1s and 0s worth gazillions of dollars and/or tons of gold.

In reply to by adr

techpriest Gap Admirer Fri, 01/19/2018 - 13:03 Permalink

As always, I've kept the same stance - if someone ask me to set up crypto payments for them, I will do it. If there is enough volume of legit crypto business for it to make sense for me to be paid in crypto, I will accept it as payment (and convert it to something else shortly after).

Otherwise, I haven't kept a horse in this ideological race, and don't plan to.

In reply to by Gap Admirer

Sabibaby NidStyles Fri, 01/19/2018 - 20:05 Permalink

Bingo! Cryptocurrencies are the easiest way to move money across boarders. If you have family in Vancouver, Hong Kong, LA and Australia and you want to move money around throughout the family cryptocurrencies are the way to go. Use Monero and you can do it anonymously. Once Kovri is implemented on the Monero network the traffic will be much more difficult to monitor (I2P Invisible Internet Project -anonymizing overlay network). 

In reply to by NidStyles

New_Meat Sabibaby Sat, 01/20/2018 - 08:28 Permalink

Sabi:

" Bingo! ... Once Korvi is implemented on the Monero network the traffic will be much more difficult to monitor (I2P Invisible Internet Project -anonymizing overlay network). "

Yep, the greedy authorities in all jurisdictions are just too stoopid to figger this next invisible hiding path.  You know, the path with "traffic cameras" at every single hop from you to Auntie Mabel in Oz.  No Sir, no taxing body will ever figger that out.

In reply to by Sabibaby

NoBillsOfCredit johnQpublic Fri, 01/19/2018 - 15:38 Permalink

I get what you are saying and mostly agree except for the part where you contradict yourself. "I personally can't actually physically use any of them." then you say you use them to facilitate trade. Which is it? can't use or do use? I'll cut you some slack, you just didn't think it through before shooting off the email... Money is a tool and we need money to have an economy like we do today or will in the future.  Crypto money (it is not "currency") is here to stay because it solves a problem of crooks (Banksters) gathering the gold or silver up and then buying off the government to protect them from having to pay it back to all those holders of current notes. We have been through this cycle over and over with untold human misery when the scheme blows up and the Banksters start over to repeat the game. The Cryptographic money system represented by Bitcoin, Litecoin, Monero, and other blockchain technology is an excellent way to solve the problem that could not be solved before this technology was developed. The people are taking back the control of their money in a way that precious metals never could. 

In reply to by johnQpublic

LaugherNYC johnQpublic Fri, 01/19/2018 - 17:25 Permalink

WRONG.

A stock - at least one in a real, utile company - is ownership of a company that makes things, or engages in activities, that people want or need. A utility stock, for example, is an ownership interest in a company that provides electricity to people to heat and light their homes, cook food, and browse the internet. These are mostly things they NEED. They pay money for this electricity, and their profit is what's left after expenses. The stockholder owns a claim on that profit, and usually much of it is paid to them in the form of a dividend.  THAT has utility and value. As long as that money is accepted by the government, which owns all the tanks, missiles and bombs, to pay taxes so that they will protect you from people who want to take your home and rape your kids, it will have some value. Cryptos? Until they're accepted to pay taxes, don't bother me with "value." They don't heat my home or feed me. If people wont give me money for them, they're ephemera - a trading phenomenon. That's fine -- until it's not.

 

He who commands the army and the heavy arms controls the unit of exchange. Simple math.

In reply to by johnQpublic

silvermail johnQpublic Fri, 01/19/2018 - 19:12 Permalink

The financial nature of gold is that gold itself is a value, - as a material for making jewelry.

Bitcoin and all the other so-called crypto-currencies have two components - technological and financial.

- The technological part Bitcoin - it is a technological shell. That is, it is a wrapper (mask) in the form of blockchain technology, in which the financial nature Bitcoin is packed (hidden).
- Financial nature Bitcoin - it is a pyramid, - the Ponzi scheme.

Because the growth of the imaginary value of Bitokin, is due solely to the influx of new idiots into this financial pyramid.
The growth of the imaginary value of Bitcoin is not due to anything else.
The growth of the value of the asset solely due to the influx of new idiots into the Ponzi scheme is the main sign of all financial pyramids.

But as soon as you try to explain it to any member of the Bitcoin witness sect, they will immediately start dragging the conversation into the plane of Bitcoin technology.

They, like any sectarians blindly believe and therefore do not want to talk about the most important thing - about the financial nature of Bitcoin.
They are ready to talk for hours only about Bitcoin technologies.
That is, they are ready to talk only about that high-tech wrapper, which wraps (hidden) the usual financial pyramid Bitcoin and all others usual financial pyramid, in the shape of all the others so-called crypto-currencies.

(Pseudo crypto + pseudo currency) =  (usual financial pyramid), which is just hidden in the an unusual high tech mask packed.

Nevertheless, the very idea of ​​obtaining wealth without difficulty, at all times successfully enslave the consciousness of the mass of fools. And various ingenious swindlers, at all times, have successfully used this feature of the stupid masses of the people.

In reply to by johnQpublic

RovingGrokster Yellow_Snow Thu, 01/18/2018 - 22:40 Permalink

Just what, exactly is the fallacy of stating the obvious, which is that BitCoin are no different from stock certificates - they have no intrinsic value, none at all.  They can be bid up to the sky by punters rushing in, and they can crash to zero if more are selling than buying.

The value of Bitcoin is in the (mostly) secure transactions, and the ability to pay or execute contracts at at distance. And what does the recipient do with the payment? Mostly convert back into local currency or hard assets that he can turn around and sell for more BTC.

Enjoy the ride up, powered by the greater fools, and may you have the grace and the luck to get out before they start to flee.

Dow 26,000, BTC 17,000: What difference, in they end, does it make?

In reply to by Yellow_Snow

Snaffew RovingGrokster Fri, 01/19/2018 - 09:23 Permalink

stocks are backed by companies producing items, services, revenues and earnings.  Cryotos have no such value and are backed by nothing.  No revs, no earnings, no assets of any kind.  Credit cards are much more efficient at performing transaction...on the magnitude of 1,000 times faster and are comparatively just as safe.  The "blockchain" is a digital tool---and I use the word tool in the most egregious meaning.

In reply to by RovingGrokster

Kafir Goyim Snaffew Fri, 01/19/2018 - 13:19 Permalink

 Credit cards are much more efficient at performing transaction...on the magnitude of 1,000 times faster and are comparatively just as safe.

Just what a credit card company shill would say!

No, I don't believe you're a shill.  But you are, effectively throwing up your hands and saying that transmission of value electronically must always be done through mega-corporations that sell your data and cut off your funds (wikileaks, colorado marijuana farms, companies with too many charge-backs) if they decide that is what they want to do.  I hope you're a good little sheep, so you don't have your livelihood taken from you.   Way to submit to the control structure, sheepy.

For the rest of us non-sheep, we have an opportunity in crypto-currencies to fuck the bankers and credit card mega-corporations hard up the ass.  Is bitcoin slow and expensive?  Yes it is.  But Digibyte isn't.  MAIDSAFE won't be.  Many others as well, probably.  Sorry sheepy, but the rest of us don't want to be held hostage by mega corporations and governments.  You should pray we win, not be gloating and hoping we get pulled down into the muck with you, because if we win, we'll pull your sheep ass out of the muck as well.

In reply to by Snaffew

vulcanraven Yellow_Snow Fri, 01/19/2018 - 02:24 Permalink

I personally know somebody (not me) who took a 100k loan against his business from Paypal in order to buy Bitcoin. So yeah, the examples that he gave in the article are not isolated. Best of luck to people who know how to take profit in this market, but there are plenty of greater fools out there who are going to get their faces ripped off... same as it ever was.

In reply to by Yellow_Snow

OutaTime43 Yellow_Snow Fri, 01/19/2018 - 04:27 Permalink

The author needs to read a little more on blockchain, smart contracts, sharding, data storage on the block chain, etc. before making such wide reaching conclusions. Yes, 98% of those token coins out there are trash and will not survive (just like the dot com era). The rest are society changing that will be worth many hundreds of billions.. maybe trillions. 

The technology may also someday result in many middleman jobs on wall street and main street being obsoleted.  Why go through a real estate broker when an Ethereum based smart contract can do exactly the same function. 

By the way, Bitcoin will be replaced by Ethereum. Many new people are putting their money on the wrong horse. 

In reply to by Yellow_Snow

silvermail OutaTime43 Fri, 01/19/2018 - 19:42 Permalink

Thank you for your wonderful example and brilliant exposure of what I wrote above:

"The growth of the value of the asset solely due to the influx of new idiots into the Ponzi scheme is the main sign of all financial pyramids.

But as soon as you try to explain it to any member of the Bitcoin witness sect, they will immediately start dragging the conversation into the plane of Bitcoin technology".

In reply to by OutaTime43

Eclipse Agstacker Fri, 01/19/2018 - 09:21 Permalink

Mr. Agstacker, right you are. I not only upvoted you, but logged in for the first time in YEARS to comment. Having been a "Wealth Manager" for 25 years in my former life, I can tell you that the Crypto-denial will remain strong with anyone who manages money at the retail level, because the entire developing Crypto Ecosystem is only a threat to their business. I doubt this guy saw 2008 coming if he was an advisor then, and it is clear her doesn't see the next bubble popping, which isn't Cryptos, but the US Dollar and the deb-based fiat system of the planet. If one is day-trading Cryptos, you could call it gambling - but at the deepest level, the Crypto-Universe evolving is the escape hatch out of a dying currency paradigm! (Nothing wrong with Ag-stacking too!)

 

Cheers!

In reply to by Agstacker

Blythes Master Thu, 01/18/2018 - 21:20 Permalink

Agreed.

 

All the bitards out there are whistling past the graveyard.

 

Also, casinos do not have any clocks for the same reasons mentioned.

 

His name was Seth Rich.

Bunga Bunga Thu, 01/18/2018 - 21:30 Permalink

Big differences: dotcom was totally mainstream, stocks were pushed on TV 24/7, economists cheered the tech boom, no one saw a bubble, everyone bought fancy tech companies into his existing brokerage account/401k/IRA like Exxon or General Electric.

Bitcoin is a completely new asset class, mainstream has been branding it as a bubble for years, economists warn of the bubble, you can't buy bitcoin with an existing brokerage account/401k/IRA. You have to open an exchange account, get verified (takes weeks), learn the concepts, learn to use a wallet aso. Mainstream is still in the beginning of the learning curve.

It will be a bubble when Cramer has a daily crypto show, brokerage account/401k/IRA allow buying cryptos like stocks and the economists cheer the new crypto boom.