Monday, January 22, 2018

The Difference Between Gambling On Crypto And Investing In, Say, Exxon.

Investing in stocks does incur some risks. However you can quantify these risks in a number of ways. Gambling on cryptocurrency, on the other hand is just gambling.  And actually gambling on cryptocurrency is even dumber than gambling in a casino or at the horse track.  When all you have to go on is pricing trends, you really are shooting in the dark.

I get flak from the crypto true believers who claim that "investing", as they call it, in cryptocurrency is a good deal because you can put in a little bit of money and it's possible you might make millions of or even billions of dollars.  Of course, this is the siren song of the pyramid scheme and the Ponzi scheme - that a little bit of investment can yield a fantastic amount of money.  However you don't have to be a rocket scientist to see that in order for you to make a lot of money, a lot of people are going to have to lose a little bit of money, and eventually those other people refuse to cooperate with the scheme.  The great Fool shortage of 2007 proved that.  So long as a greater fool kept buying these investments, it all worked out OK.  But then we ran out of fools, motley and otherwise.

The crypto faithful also say silly things like "Well, you can never count on the Dow is it can go down in value as well!"  And yes investing in stocks involves a lot of risk.  For example in February of 2009, the stock market dropped by nearly 50%.  Of course, it recovered by the same amount within a year.  So when you invest in stocks there could be risk.  Particularly with individual stocks, companies can go bankrupt and leave you with nothing - which is why stock-picking is so risky.  Buying a number of stocks in small amounts is less risky - which you can do, or buy a mutual fund.

But with stocks, you can at least investigate and research the particular stock you were buying, and what's more monitor its performance and make a decision over time whether to buy or sell. Take for example, stock in Exxon, which I've just chosen at random.  Before you buy the stock, you could do something stupid like looking at the stock price and its trend over time - which is what crypto-currency buyers do.  But stock price really doesn't tell you much about the company and whether or not to invest, as I have noted before.  You might also look at the P/E ratio, which tells you the ratio of price-to-earnings gives you an idea of the profitability of the company.

You might also look at the annual dividend and the dividend yield to get an idea of how much money you'll make in dividends from a company.  And you can look at the profit-and-loss statements and the annual reports and figure out how the company is doing financially from its balance sheet.  Moreover, you can research the industry in general and understand how it is doing overall, where the price of oil is going, what the demand for petroleum products are, geopolitical factors that affect the oil business, and so forth.

And you can use this data to come up with an opinion about whether the stock is of any value and whether it's going to go up or down in value.  And you can use this data to decide when to sell the stock if you think it's going to decrease in value - although the timing the market is awfully difficult and I don't recommend it.  But at least you have a treasure trove of data to draw from and to draw conclusions from, other than merely the share price of the stock and its history.

Now take gambling on cryptocurrency.  All you have to look at is... the price of the cryptocurrency and the pricing trends.  Oh, and the opinion of "experts" (who are quickly minted in this new field) which often are very vague on details.   And this is where the difference between gambling and investing is. With cryptocurrency, our buyer looks at a chart showing the price of the cryptocurrency going ever upward, much as Disco Stu's disco record sales chart shows.  They then assume that since the price is going up, it will always go upward, and they buy the cryptocurrency.

There really is nothing else to look at.  Or at least, people seem to be willfully blinding themselves to any ancillary data. There's very little data out there on who is using cryptocurrency and for what purpose and what the volume of actual trading the cryptocurrency for use in actual purchases.  Since the entire thing is decentralized, we have no idea if people are actually using this as a currency or in fact using it is just some sort of virtual investment.  There are no annual reports, no balance sheets and no other dated to look at.  There are no P/E ratios or dividend ratios as the currency, of course, does not pay any dividends or make any profits.

Like I said, what little concrete data there is, most crypto buyers ignore.  Bitcoin for example is supposed to be a currency that people can use to buy and sell things.  But since the cost of each transaction and the amount of time it takes to process each transaction has expanded greatly, nobody can use Bitcoin for anything other than transactions involving thousands or tens of thousands or millions of dollars - such as in money laundering.   Crypto is hot in China right now, because the Chinese want to take money out of the country without the government knowing.   Also, Chinese are famous gamblers - ask Sheldon Adelson.   But China is cracking down on crypto for obvious reasons.  The party will end there soon, and soon after in South Korea - with America and Europe next falling in line.  Only rogue states will let the currency be used unfettered, and it may not be useful for them, if they can't use it to move money from other countries.

The idea that Bitcoin would become a new currency that you could use to buy a latte at Starbucks is not only overstated, but laughable.  Nobody accepts this currency for anything other than investment purposes and thus it's no longer a currency.  UPDATE:  Starbucks now says it may accept cryptocurrency in the future, but not Bitcoin.  Of course when "in the future" is not specified, and I suspect this is just a ploy by Starbucks to appear to be trendy and hip to their customer base.  It may also be some principals in Starbucks may be buying crypto and using this announcement to prop up or depress prices as it actually did.  This illustrates how easy it is to affect prices in crypto through press releases - which creates an emotional reaction in the market.

I said that buying cryptocurrency is gambling, but it is even worse than that - it is the most stupid form of gambling.  If I go down to the racetrack, I can at least look at the horses and read their histories and look at their past racing history, figure out track conditions, and make an educated guess as to which horse is the fastest.

If I bet on professional football, I can research the teams and understand the players and coaches and their histories and home team advantage and come to a conclusion as to who is likely to win the football game.  In poker I can understand the odds of obtaining the various hands that win and also play my opponent as well as the cards in my hand.  Even in idiotic wheel games I can understand the odds of winning.  But with cryptocurrency we don't even have this limited data.

People are buying these things because other people are saying they're going to go up in value. Nobody is saying why or giving any rational arguments why they go up in value, they just are.  In over the last two or three decades I've heard the same siren song again and again and again - and each time people get burned.  Houses were going to go up in value in 1989 because they were.  And once again, in 2007, houses were going to go up in value just because they were.   Gold was going to go up in value just because it was.   An IPO stock in a money-losing company was going to go up in value, just because they said so.   You see a pattern here.

And the pattern is called irrational exuberance.  And we've seen this time and time again.   It usually follows a period of irrational pessimism.    In the 1920's not only did the stock market take off, but society did as well.   It was an era of optimism, jazz music, flappers, bootleg gin, and 23-skidoo. They called it the "roaring 20's" because of that, and eventually, that era of irrational exuberance gave way to the depression and irrational pessimism ' "we have nothing to fear, but fear itself."  You get the idea.

The optimism of the post-war 1950's America lead to the recession of 1958.   Suddenly, over-priced and under-built gaudy cars slathered with chrome and giant tail-fins seemed, well, excessive, and sales of smaller and more practical Ramblers, Studebaker Larks, Chevy II's, and Ford Falcons took off.   The era of peace and love of the 1960's was a fun time, and the economy was doing great, until the Arab oil embargo and stagflation recession of the 1970's.   Then it was Reagan's "Morning in America" in the 1980's, and "It's the Economy, Stupid"  by the end of the decade.   The boom years of Bill Clinton, followed by 9/11.  Then the irrational market of the Bush era, capped by the collapse of the economy in 2007.  Up and down, up and down, up and down.   If you can't see this pattern, you are fucking blind.

So, what's next?  A steady and slow progression throughout the Obama years that resulted in the longest bull market since the war.   Throw some tax-cut gasoline on the fire and watch it burn - brilliantly, of course, but not for very long.  We see irrational exuberance all over the market, from the IPOs, to gold, to housing, to crypto-currency - all going up in value, we are told, just because they will.   Never mind that the IPO company never makes money, the expensive houses cost more to own than rent, or that gold has already peaked and fallen.   Crypto is different!   This time, for sure!

This is not some made-up construct.  It is not fitting a pattern to data.   The Bulls and the Bears of the market are well-known and have been, for over a century.   And the Bulls usually win, over time, which is why investing in rational things, over time, pays off.  Where people lose money is in the wild swings - where a small number of people make money at the expense of others.

So it comes down to this - do you want to be the person that someone else makes a lot of money off of, at your expense?   Because you aren't going to be the brilliant Bitcoin Billionaire who cleans up on this mess, unless your name is Winklevoss or something.

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