Key Post Bitcoin is a clearly identifiable economic bubble

I remember well the conversations I had with people at the time of the dot.com bubble.

It was simply impossible to have a rational discussion with people who "believed". These were often very clever people. They might have taken a punt on lastminute.com or whatever other worthless company was fashionable that week. I told them that they were mad. But a month later they had doubled their money and they felt justified ignoring my warnings.

I remember one particularly smart guy telling me about his investment - unfortunately, I can't remember the company - "one more stock split and I will be able to buy a house for cash.". I tried to explain to him that if a company is worth €100m today and has 1m shares - splitting those shares in two does not change the value of the company. But of course, in practice, the mere rumour of a share split, was enough to increase the value of a share.

I remember another guy, a fellow Chartered Accountant, who dismissed my diversified portfolio in bricks and mortar companies as old fashioned. I was probably making 6% a year. He was doubling his money every few months.

Those of us who bothered challenging the dot.com believers faced real obstacles. During the bubble,they were far more successful than we were. And a few months later, they appeared to be justified by hanging in.

We are now in the exact same position with Bitcoin. It's a bubble. It has to burst. It may continue inflating for a while longer. We will continue to read of people who bought it at $10 and who are now millionaires. Those who are holding Bitcoin when the music stops will lose their entire investment in it.

It has no intrinsic value. Eventually, the market will appreciate that. But in the meantime those of us who challenge it will be told that we just don't understand it.

Good warnings on Bitcoin

Warren Buffett on Bitcoin

As reported by the Motley Fool


2014
Elaborating on his remarks, Buffett said bitcoin is "a very effective way of transmitting money, and you can do it anonymously and all that." He added: "A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money?"

He capped his criticism by saying that "[t]he idea that [bitcoin] has some huge intrinsic value is just a joke, in my view."

2017
"You can't value bitcoin, because it's not a value-producing asset." Glancing at it through investor glasses, he added that it wasn't possible to determine how high it will trade for. According to him, there's "a real bubble in that sort of thing."

Rory Gillen [broken link removed][broken link removed]

Extract:
So, have bitcoins any value? When you own them can you earn a return on them? Our current understanding is no. Do you have counterparty risk? Yes. Can the amount of bitcoins be increased at will? Not at present, but new cryptocurrencies are cropping up regularly so does it really matter if each separate one is limited if there's no control of the supply in general? It would not appear so. Unless you know the answers to these 'Sound Money' questions, you should avoid bitcoin as an investment proposition. Fans of bitcoin seem to be placing all their faith in the fact that bitcoins are strictly limited in supply. So what? A limited supply means very little if an item has no intrinsic value. The Dutch learnt the lesson of intrinsic value in the late 1600s when Tulip-mania took over. The only intrinsic value tulips had then (and now) was the cost of production, but the Dutch forgot that for a few years, and lives were ruined in the too often human pursuit of riches without effort.

Everyone wants to get rich quick though , I'm happy to get rich slowly.

Seen this on Twitter kinda sums it up for me the current bitcoin talk.

History of Bitcoin
$500: It's a bubble!
$1000: It's a bubble!
$2000: It's a bubble!
$3000: It's a bubble!
$4000: It's a bubble!
$5000: It's a bubble!
$6000: It's a bubble!
$7000: It's a bubble!
$8000: I think it's time to buy...to the moon!

Of course bitcoin is a bubble. That does not mean that there isn't money to be made in it.

Back in the days of the dotcom boom, I invested a weeks wages in Fran Rooneys "Baltimore Technologies". I didn't know what online shopping was or understand the concept of payment security. I was well aware of these limitations.

I followed the share price daily, in the newspaper imagine, the second day the price fell I telephoned my broker and told him to sell. The shares were sold the following day having slipped again. I made more than 2 months wages for my shares.

Just because bitcoin has no intrinsic value, does not mean there is no money to be made from it.

You cant compare bitcoin to anything else in the history, not tulips, not the stock market, not dot.com or whatever... It is brand new territory, maybe its a bubble now, maybe it goes up 100 times then bursts to lose 90%.

cremeegg said:

Just because bitcoin has no intrinsic value, does not mean there is no money to be made from it.

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Well there's money to be made in everything , you can go and back a horse to win a race at 33/1 and be lucky , it doesn't mean it was the correct decision financially. As an investment you can't value Bitcoin so its just speculation or gambling its not an investment with a positive expected return long term its a zero sum game , there will be big winners and big losers , its a coin flip to decide which one you will be.
There's nothing wrong with speculation or gambling I just wouldn't include Bitcoin in an investment section of a forum.

ant dee said:

You cant compare bitcoin to anything else in the history, not tulips, not the stock market, not dot.com or whatever

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The dot.com believers had the same argument. This time it's different.

Some of the dot.com shares had an intrinsic value. Bitcoin has no intrinsic value. It is just set by the greater fool principle. If you believe it's worth $8,000 and you are prepared to pay $8,000, then it's worth that today. But, in time, it will be worth zero.

Brendan

ant dee said:

You cant compare bitcoin to anything else in the history, not tulips, not the stock market, not dot.com or whatever... It is brand new territory, maybe its a bubble now, maybe it goes up 100 times then bursts to lose 90%.

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forgive my ignorance but how is bitcoin unique ?, seriously , i know nothing about it apart from its digital

If Brendan thinks that Bitcoin is in a bubble, I would like to understand on what valuation basis he is basing this opinion and by extension when the price of bitcoin reached "bubble" territory.

Hi elacsaplau

It has no intrinsic value whatsoever. So it's different from say the Irish housing bubble.

One could have argued that Irish house prices were worth €x but as the price was €2x, they were 100% over valued.

But with Bitcoin, there is no value in it whatsoever.

There is a value in the blockchain technology, but that is different.

Brendan

Brendan,

If I asked you to buy 100 bitcoins right now on the condition that you must hold on to them for 1 year - what is the maximum that would you would be prepared to offer. As it's the weekend, I'll make it easy for you!!

a) Not interested at any price
b) €100
c) €1,000
d) €10,000
e) €100,000
f) somewhere north of €100,000

I think Brendan has some fair points and some that are off the mark.

There is a similarity between the current cryptocurrency growth and mania and something like the dot.com boom - that is there's been a huge innovation, it's difficult to understand the technology and the consequences, but it excites people and they want to jump on the train. I think like the dot.com bust, many or most cryptocurrencies and ICOs are going to fail rather quickly when this hype cycle dies dow, BUT also like the dot.com era, I think there will be winners like Amazon, Google and Facebook, they'll take a short term hit but recover and continue to grow with the market. I can't see Bitcoin or Ethereum easily failing at this point, beyond that I wouldn't be surprised at any other crypto dying off.

Is bitcoin going to have a correction and/or bear market where things cool off and weak hand speculators who never understood it anyway jump ship? - probably, and it wouldn't surprise me if it was in early 2018 after a blow off top around 10k.

This all already happened in 2013 by the way when Bitcoin went from 100 to 1000 after having never been above 300 previously (1000% rise in 6 weeks). There was Tenebrix, digicoin, worldcoin and a bunch of other cryptocurrencies that rode the hype wave too, they mostly died off (Litecoin hung around better than most) and have been largely replaced by a different set of over-hyped garbage and scams this time.

The current bitcoin 'bubble' differs from the housing market in a few ways. Houses were generally bought with a lifetimes worth of debt per person, they're illiquid, and like most bubbles supply eventually catches up to demand. Bitcoin is probably less often bought with debt, and supply is inelastic (though supply of different crypto currencies is not!).

The 'intrinsic value' argument is an old one, and pretty much irrelevant. Bitcoin is a system that functions as a decentralised digital money. It's portable, durable, divisible, absolutely limited in supply, fungible and transparent. It can be stored in ways that nothing else of value can be stored, and this is a bit circular, but that gives it value. I'm not sure in the point of making distinctions about intrinsic and extrinsic value, other than to say that if bitcoin does at some point fail to be a decentralised digital money than yes it's probably worth nothing, whereas if gold failed at some point to be money you could still make a spoon out of it.

Usually this argument comes from people hung up on the fact that it's digital . Bitcoin is digital therefore it 'doesn't exist' or it's 'not real'. Hey it's 2017! I think we're past the point of thinking that because something is digital it is 'pretend' or has no 'real value'. An email account is more valuable in most cases than a PO box. A digital camera is more valuable than a film one. A folder of digital mp3s has more value than a CD of the same music, a netflix account has more value than a box of DVDs.

(In early 2015, I wrote some posts here about what Bitcoin is, what it achieves and why it's valuable, e.g. this post: https://www.askaboutmoney.com/threads/bitcoin.192243/#post-1420067 and other others on that 1st page of that thread that some of you may be interested in.)

elacsaplau said:

what is the maximum that would you would be prepared to offer.

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Hi elacsaplau

I am an investor and not a gambler, so I am not used to assessing such gambles.

The market price today is $8,600. It was $100 4 years ago.

It could easily be $100 or nil in one year. And, of course, it could be $80,000.

I would probably take a punt that there would be some "greater fools" still in the market in a year's time and that even the bubble might not burst within the year. So, yeah, I would pay $100 per coin but I would be quite prepared to lose it all.

Brendan

@fpalb very interesting post above. You raise a very interesting point about those 'investing' in crypto that don't really understand it.

The fact is that the underlying technology is a game changer, and we'll see blockchain technology underpinning major projects across the globe. And a hype around that is justified.

However, I'm sure a lot of people don't understand that the 2 aren't intrinsically linked. A success of blockchain does not yield a dividend return for the holders of Bitcoin, nor do I need to own Bitcoin to launch a blockchain solution. I'm not 'investing' in Blockchain.

The comments around other ICO's is also interesting. We've seen some large scale ones, where they insisted the investment be made in Bitcoin, in turn increasing the demand and the price of Bitcoin. Suddenly the ICO is worth more, simply because they've held the Bitcoin, but haven't done anything else.

The investor has made a paper profit instantly, and suddenly nobody wants to miss out on an ICO in future, so every ICO is fully subscribed.

The question is not if we are in a bubble, but when will that bubble burst? When it does it will be one of the fastest and most dramatic crashes ever. It will be a thing of beauty that will be used to teach economics in the future.

fpalb said:

BUT also like the dot.com era, I think there will be winners like Amazon, Google and Facebook, they'll take a short term hit but recover and continue to grow with the market.

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Interesting post.

But these are real companies. The sell stuff. They have huge revenues and profits. Sure they may have been overvalued during the dot.com boom, but they were still profitable or potentially profitable.

Brendan

RedOnion said:

A success of blockchain does not yield a dividend return for the holders of Bitcoin, nor do I need to own Bitcoin to launch a blockchain solution.

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This is Warren Buffett's point: "A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money?"

By the way, how would one invest in blockchain technology?

Brendan Burgess said:

By the way, how would one invest in blockchain technology?

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This is the interesting bit. You can't really.

What you can invest in is projects / companies that utilise blockchain to deliver their solution. Which is what a lot if the ICO claim to be. But in reality a lot of them are just scams with no underlying business idea other than riding the wave of the crypto hype.

What you're really investing in is an idea and a team. Blockchain is just an enabler.

Brendan Burgess said:

.....I am not used to assessing such gambles.

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Agreed - that was my impression - sorry for being so blunt!

I am well aware of the market movements of bitcoin!! Also, investing can involve a core satellite approach (there are more things in heaven and on earth, Horatio.....) - in which typically aggressive return seeking positions are taken with small elements of one's overall capital.

Part of my satellite portfolio, for the last number of years, included an allocation to bitcoin and subsequently to other cryptos. Two of these plays have done crazy well (bitcoin and ethereum) and two were disasters. In these ultra high risk plays, up to this year I considered the risk asymmetrical in my favour. During 2017, I have been selling regularly - when you've won the game, there's no need to continue playing.

All that said, personally, I am unsure where this is all going to end up.

elacsaplau said:

Also, investing can involve a core satellite approach (there are more things in heaven and on earth, Horatio.....) - in which typically aggressive return seeking positions are taken with small elements of one's overall capital.

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Hi

What you mean is "I am happy to invest the bulk of my money and gamble with a small part of it"

In other words, you are prepared to place some money on bets which have a negative expectation. That is not investing.

The fact that you got in early in this bubble and have got out early is good luck. And fair play to you.

But it's the people who get in late and don't get out before the bubble bursts who will lose their entire wager.

Brendan

Brendan Burgess said:

In other words, you are prepared to place some money on bets which have a negative expectation. That is not investing.

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Investing can take many forms!!