The Bitcoin And Cryptocurrency Bubble – Dave Kranzler

September 13, 2017

I actively traded the internet stocks during the late stages of the
internet/tech stock bubble in 1999 – from the short side. I will admit
that I did take a few long-side day trade rides on a few internet
stocks. I remember one Chinese internet stock that I bought in the
morning at $10 after its IPO freed up to trade and sold it about 2
hours later at $45. To this day I have no idea what the company’s
concept was all about – I think it was one of those incubators. I doubt
that company was in existence after 2001. As such, the cryptocurrency
craze reminds me of the internet stock bubble.

The cryptos certainly are a heated debate. The volume from the
Bitcoin defenders is deafening, the degree to which I’ve only seen near
the peak of bubbles. I had a subscriber cancel his Mining Stock Journal
subcription after sending me an email explaining that he canceled
because he was pissed off that I was not a Bitcoin proponent. He
accused me of discouraging people from buying Bitcoins. His loss, he’s
missed on out some high rate of return trade ideas in a short period of
time like Banro and Tahoe Resources. I’m not trying to discourage
anyone from buying anything. I’m simply laying out the “caveat emptor”
case.

Having said that, there’s truth to the proposition that the inability
to short Bitcoin contributes to its soaring valuation. I’d like to
have an opportunity to see what would happen to the value of gold if the
ability to short gold via the paper gold mechanism was removed from the
equation.

Is it “Bitcoin” or “Bitcon?” The cost to produce, or “mine,” a
Bitcoin does not imbue it with inherent value, as some have argued. It
cost money to produce Pet Rocks in the 1970’s and they took off like a
Roman Candle in popularity purchase price. Now if you own a Pet Rock,
it’s nearly worthless. It costs money to produce and defend dollars. We
know the dollar is headed for the dust-bin of history.

I’m not saying you can’t make money on cryptos. A lot of people made a
small fortune on internet company stocks in 1999. But I’d bet that 98%
of the internet stocks IPO’d during the tech bubble no longer exist.
Currently cryptos are fueled by the “greater fool” model of making
money. Most buyers of the cryptos are buying them on the assumption
they’ll be able to sell them at a later time to another buyer at a
higher price.

Cryptos are de facto fiat currencies. Perhaps there’s a limit to the
supply of each one individually. But that proposition has not been
vetted by the test of time. I do not believe that anything in cyberspace
is 100% immune from hacking. Just because there have not been reports
of the Bitcoin block-chain being hacked yet does not mean it can’t be
hacked. It’s also possible that, for now, any breach has been covered
up. Again, the test of time will resolve that. However, as we’ve seen
already, the quantity of cryptocurrencies can multiply quickly in a
short period of time. Thus, in that regard cryptos are no different than
any fiat currency.

Finally, all it takes is the flip of a switch and your Bitcoin is
unusable. But all these flaws are, for now, covered up by the euphoria
of the mania. This is no different from every flawed “investment” mania
in history. The current wave of crypto buyers are buying them with the
hope of selling them at higher price later. “Hope” is not a valid
investment strategy. “Hope” is the heart-beat of a speculative market
bubble.

Perhaps one of the most definitive signals that the top in Bitcoin is
imminent is this snapshot taken by the publisher of the Shenandoah blog
at
johngaltfla.com:

This picture was snapped in Florida. The sign says “got bitcoin?
Passive income and no recruiting. Earn up to 1% on your money Monday –
Friday.”

I recall reading about the process by which Bitcoins are “mined.”
Anyone can get started but it involves an upfront investment plus the
ongoing expense of the considerable amount of energy used to power the
computer system required to engage in the mining process.

Let me guess, the creators of Bitcoin will be happy to assist you
with buying the equipment and software necessary to get started? How is
this any different from a high-tech-equivalent of a multi-level
marketing scheme? As johngaltfla asserts: “When someone implies that it
is ‘easy money’ it isn’t, it is a bubble.”

I’m not here to criticize anyone attempting to profit from trading
Bitcoin. I am suggesting that it is not a good idea to get married to
the trade. I regret not loading up on Bitcoins in 2012.

Without a doubt I believe there is legitimacy to the cryptocurrency
concept. However, I can envision a Central Banking-led attempt to
implement the crptocurrency model as means of centralizing the process
of removing cash currency from the system. But that also means the
eventuality that Governments collude to remove competing cryptos from
the internet. This is just surmisal on my part. Again, the test of time
will determine the ultimate fate of cryptos.

Speaking of time-tested money, it’s worth noting that China is going
to roll out a gold-backed yuan oil futures contract – not a
cryptocurrency-backed yuan contract. Perhaps one of the major Central
Banks will eventually roll out a gold-backed cryptocurrency. That’s
where I believe this could be headed.


Dave Kranzler

Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals. Contact Dave at dkranzler62@gmail.com.


The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

Source: Sprott Money