Crypto-currencies are all the rage and that’s a problem.
The Fad Problem
In August, The Industry Spread warned, “If it’s a fad, it’s a problem,” when analyzing whether or not crypto-currency was in a bubble.
There is no longer any doubt that crypto-currency has become a fad.
A recent interview on Fox Business included this question to Chris Hogan, a financial expert and author of “Retire Inspired”, “What do you say to people looking at an investment craze like bitcoin?”
“I’m glad you used the word craze,” Hogan said, agreeing with The Industry Spread, “because your financial future is not something you want to gamble on something that could be a hit or miss. Focus on the things that you know.”
Advertisements for crypto-currency are everywhere, including popular sports websites like espn.com and the powerhouse conservative political aggregator the Drudge Report.
The two new crypto-currency futures CME and CFE introduced, immediately popped for more than 25% in their first day, a story covered breathlessly by all financial related media.
The Drudge Report, which has had approximately ten billion site hits in the last year, not only puts up bitcoin advertisements but links to stories about crypto-currency including one from the USA Today entitled “’Bitcoin crash’ among 2018 worries for financial markets, Deutsche Bank warns.”
The story noted: “A ‘Bitcoin crash,’ rising inflation, danger from North Korea and results from special counsel Robert Mueller’s investigation of Russian meddling with the 2016 presidential election are among 30 risks for financial markets next year, Deutsche Bank says in a report on Friday.”
Indeed, such dire predictions of the crypto-currency bubble are not unique.
Many financial players believe that crypto-currency is not only in a bubble but a significant one.
“Is Bitcoin the Most Obvious Bubble Ever?” warned Derek Thompson writing in The Atlantic, in another story linked to by Drudge Report.
“Bitcoin is turning into a gaggle of greater fools. Retail investors are jumping into the market to buy bitcoin, in the expectation that they will be able to sell their investments for cash to some other sucker later on. In November, Bloomberg reported that ‘buy bitcoin’ had overtaken ‘buy gold’ as an online search phrase. In December, bitcoin platforms soared up the app charts. Coinbase, an online broker where people can buy cryptocurrencies, is now the top trending app in the Apple App Store. Two similar platforms to oversee cryptocurrency accounts, Gdax and Bitcoin Wallet, are now fifth and eighth on the trending charts.” Thompson stated.
We’re in a crypto-currency bubble and we know it.
This leads to a second warning from the same August article from The Industry Spread, “When you’re in a bubble, you know it.”
Bitcoin was at approximately $1,000 per unit at the start of the year and now stands at over $17,000 per unit.
While trading in the crypto-currency has increased exponentially, does anyone believe that its use in transactions on Amazon, Walmart, and others has increased nearly that much.
Its exact use in society is still not entirely clear, so most of the run-up is hype. That’s the very essence of a bubble.
There is one more idea from the first The Industry Spread analysis which is relevant today.
Even if crypto-currency ultimately thrives, we can still be in a bubble.
“Just because it changes the world doesn’t mean it’s not a bubble,” that piece stated, noting further, “In the late 1990s, the answer to most concerns about internet stocks was that the internet was so powerful it would change the paradigm. Companies could justify exorbitant P/Es because the internet was going to allow them to grow at multiples we’d never seen before; at least that’s what the bubble participants kept repeating.
“At one time, approximately one hundred automobile makers manufactured cars, most setting up shop in Detroit.
“Today, three – Chrysler, General Motors and Ford – have survived. A few of the others were swallowed up by one of these three, but most faded into the dustbin of history as failed enterprises.”
Even if crypto-currency thrives in the end, that not only doesn’t mean it isn’t going through a bubble now, a point made by Thompson: “Fifteen years from now, the blockchain too, might be an integral infrastructure for the digital world. In this hypothetical world of 2033, bitcoin at $16,000 might be an absolute steal. But we don’t live in ‘hypothetical-world 2033.’ This is still real-world 2017. And bitcoin’s last few weeks are the real-world definition of a speculative bubble.”
Even if the industry thrives, most of it are likely to go by the wayside in the initial wave.
Bitcoin seems like it will survive any bubble, however even that cryptocurrency poses potential risks. Transactions are irreversible, insecure, and not anonymous, among other potential issues.
There are dozens of crypto-currencies now, and most of them are fly by night; most won’t survive even if the industry does.