​Is Bitcoin a Bubble?

Have you subscribed to my podcast yet? If not, you can click the buttons below to subscribe:

​Main Topic: Is Bitcoin a Bubble?

Definition of a Bubble:

A bubble is a run-up in the price of an asset that is not justified by the fundamental supply and demand factors for the asset. Bubbles can occur in any traded commodity or financial instrument. A partial list of past bubbles includes:

Stocks: South Sea Company in 1711, British East India Company, Dutch East India Company, various banks, railroad shares, conglomerates, new issues, Internet Bubble that collapsed in 2000, the Housing Bubble that burst in 2008

Here’s how a bubble process typically looks:

  1. There is a change or “displacement” that occurs in some aspect of the asset.
  2. Second, there is a rational change in the price for the asset
  3. Third, there is stimulative monetary policy and supply of credit to buy the asset increases
  4. Rising asset prices attract the “get rich quick” crowd
  5. Swindles / fraud increases
  6. Wise investors see that the price has risen far above the fundementals and begin to sell
  7. Others see that wise investors are selling, and start to sell as well
  8. The market for the asset becomes illiquid and panic selling results in plummeting prices.
  • To illustrate these bubble milestones, I will discuss them as relates to the South Sea Bubble first, then we’ll compare to Bitcoin.
    1. There is a change or “displacement” that occurs in some aspect of the asset. In the 1700’s at the height of the British empire there was plenty of wealth sitting around as kindling to spark the bubble. The South Sea Company  was able to sell a ton of stock after they succeeded in purchasing all the rights to trade in the South Seas for $10mm pounds – then considered the most lucrative monopoly on earth. Stocks were still in their infancy, so there were few companies selling stock.
    2. Second, there is a rational change in the price for the asset. Once the public became aware of the stock available, the stock started to rise in price and demand increased exponentially.
    3. Third, there is stimulative monetary policy  and supply of credit to buy the asset increases. The British empire sold the rights to the trade route for debt, not cash.
    4. Rising asset prices attract the “get rich quick” crowd. The British were so caught up in the bubble, they didn’t question the fact that SSC kept issuing new chunks of stock. People were frantically buying up any shares they could get their hands on. The public opinion was that British companies could not fail and were the greatest on earth. This nationalism blinded the British investors to the truth.
    5. Swindles / fraud / IPOs increases – This is a clear sign of a bubble forming. Once the frenzy for stock was clear, a guy named John Law created the Mississippi company that was worth more than 80 times the value of all the gold and silver in France. IPOs of companies with no valid business models were common, including reclaim sunshine from vegetables and to build floating mansions to extend Britain's landmass. And all sold like crazy!
    6. Wise investors see that the price has risen far above the fundamentals and begin to sell. Eventually it became clear that SSC was a poorly run, unprofitable company and wasn’t worth much at all. In this case, it was insiders that started to sell first in 1720.
    7. Others see that wise investors are selling, and start to sell as well. As word came out that insiders were selling SSC stock, everyone else started to sell and the price of SSC stock certificates went to zero.
    8. The market for the asset becomes illiquid and panic selling results in plummeting prices.

    ​So now that you have an idea of how bubbles are formed and what causes them to pop, let’s see how Bitcoin stacks up.

    1. There is a change or “displacement” that occurs in some aspect of the asset. In this case, Bitcoin was a creation of a still unknown entity who goes by the name Satoshi Nakamoto, to allow black market transactions that were untraceable. Bitcoin was one of the first “crypto currencies” and the first to use a new technology called “blockchain”.
    2. Second, there is a rational change in the price for the asset. When Bitcoin first started being used, it’s price was quite volatile, but priced in the dollars, tens of dollars and so on. The price did rise and fall quite often but did not seem to have an exponential rise for the first few years.
    3. Third, there is stimulative monetary policy and supply of credit to buy the asset increases. We currently have had stimulative monetary policy for a decade and this is a very common underpinning for bubbles to form. Today, there seem to be bubbles forming in high end art, high end real estate, and crypto currency.
    4. Rising asset prices attract the “get rich quick” crowd. You may have noticed a tremendous amount of advertisements for Bitcoin trading programs and cryptocurrency in general. Several prominent internet marketers are putting together classes for how to invest in Bitcoin claiming its ability to create instant wealth. There are now Bitcoin ETFs being created, the Chicago Board of Options Exchanges recently announced Bitcoin options that will be available for trading soon. Asset managers are starting to refer to crypto currencies as an”asset class”. Even the Winklevi have been in the game for years, buying 1% of all Bitcoin and working towards creating a Bitcoin ETF as well.
    5. Swindles / fraud increases. There have been numerous instances of Bitcoin being stolen from electronic wallets. Some of the coins were stolen from the actual black market operators themselves!
    6. Wise investors see that the price has risen far above the fundementals and begin to sell. The Bitcoin price is approaching $12,000 per coin and if you look at a chart of bitcoin, it clearly went parabolic and that is a clear sign of an unsustainable price rise. Whether the price is above the fundamental value is really impossible to say because no-one really knows how much a Bitcoin is worth.
    7. Others see that wise investors are selling, and start to sell as well
    8. The market for the asset becomes illiquid and panic selling results in plummeting prices.
  • Here is one truly speculative conspiracy of my own creation.
  • What if Bitcoin was a way for a government to transfer some of its debt load to an unsuspecting world? Let’s think about how this works.
    1. First we create a cryptocurrency called JBCoin
    2. We keep its origin secret, and use a name that makes people think it started with, say, the Japanese.
    3. We mine as much of it for ourselves as we can. https://qz.com/1055126/photos-china-has-one-of-worlds-largest-bitcoin-mines/
    4. 8 buildings
    5. 25,000 machines
    6. Fifty employees
    7. We create an artificial scarcity by limiting the issue to 21,000,000
    8. We use social media and the internet to convince everyone that it is a new asset class
    9. We hope for the price to go exponential, and then convert our Bitcoin in to actual real, spendable currency and pay off all our bad mortgage loans.

    Who owns the most bitcoin? Here are some statistics for you:

    • 4.11% of addresses own 96.5% of BTC
    • One percent of addresses own 50%
    • Bitcoin as a total market is now worth about $60 billion, which is bigger than Fed Ex and General Motors in terms of market cap, and they pay dividends, Bitcoin does not. You shares in Fed Ex and GM won’t get stolen by a hacker.

    https://howmuch.net/articles/bitcoin-wealth-distribution

    http://grist.org/article/bitcoin-could-cost-us-our-clean-energy-future/

    Conclusion:

    Bitcoin appears to fit the classic definition of a bubble. Whether the bubble pops in the near or long term is the question. But if it follows the pattern of a bubble, eventually, that 1% of holders will try to sell all at once and look out below.

    ​Ask JB: Tax Planning, and what investment strategy is the best?

    Ask JB: Lost $5,000 this year but dont want to use it as deduction. Can I use it for next year? (self.investing)

    submitted 14 hours ago by samanthabus

    My parents will f*** me up if I let them know. Can I use the $5,000 loss for next year income tax?

    JB Says: You can only offset $3,000 of taxable income each year. You can use $3k this year and $2k next year

    Ask JBWhich Investing Stategy Is Best? (self.investing)

    submitted 2 hours ago * by SillySausage87

    Buy n hold

    Try to time the peaks and dips (selling total position)

    Try to time the peaks and dips (selling a portion of position)

    I kinda feel that the 3rd one is best cos it locks in some gains, but doesn't withdraw entirely from the position (so if you didn't time the peak perfectly you can still ride it up further with some of your money)

    From your experience, which works best?

    ​JB Says: Buying quality business and never selling has created the most wealth for people. Any other strategy pales in comparison.

    Thoughts on this podcast? Disagree with me on some point? Something I missed? Leave a comment!

    About the Author

    Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

    Leave a Reply 0 comments

    Leave a Reply: