Saturday, December 9, 2017

The Bitcoin Debacle

When Bitcoin crashes, it will crash hard.  Wait for it.

Some interesting news about Bitcoin.   One article notes that about 40% of all "coins" are owned by less than 1,000 people.   Yes, you read that right - a small cadre of people own a huge chunk of this, and if they decide to sell all at once... well, the price could plummet.

Second, the trading of Bitcoin futures is about to begin.  So you could go long or short on Bitcoins and cash in if the price goes up or down.  Say, for example, you were one of those 1,000 people who has a lot of Bitcoins.  You could "short" Bitcoin and then dump your coins on the market to depress the prices and then clean up on your short.   You then buy back your bitcoins at the new lower price (likely lower than what you sold them for) and wait for the price to ratchet back up.

Third, Joe Paycheck is getting into Bitcoins.  They now have Bitcoin ATMs where any idiot can walk right up and buy them - and they are.  The search term "Buy Bitcoin with Credit Card" is rising on the search engines - a sure sign the suckers are getting in, and that everyone else should get out.

I had a friend do that back during the "dot com" craze - he bought tech stock futures and put them on a credit card.  Not only was he out the $10,000 he put on his credit card, since these were leveraged derivative trades, he was out $100,000.  He ended up bankrupt.   When ordinary Joes and Joesphines get into a hyped trading environment, the end is nigh.

And of course, the underlying problem with Bitcoin is that you are buying nothing.   The value of the "coins" is not determined by the meaningless puzzles solved to generate them, but by the perception of the buyer.   Now some smart-aleck readers have replied to this argument by saying that any stock or investment could be similarly construed.

And yes, that is true to some extent, particularly when it comes to speculation and not investment.  When you speculate that a stock price will go higher, you are basically gambling in most cases - and this is true particularly for so-called "tech stocks" which are trading at P/E rations in the hundreds.   You are buying the perception of the value of the stock, not its actual value.  And not surprisingly, these tech stocks - historically - have been particularly volatile, often going way up and then way down in value.

On the other hand, if you are investing based on rates of return, the track record of the company (or government) it is a different beast.  You are trading based on the return on investment - the profits the company makes, the dividends it pays, the interest on bonds that a company (or government) pays.  When you buy a stock that cranks out a regular dividend and has a solid product line and a rational P/E ratio, you are not buying the perception of others, but rather a mathematical valuation which can be calculated.

When gold hit $1000 an ounce a few years back, prognosticators said it would hit $5000 an ounce.  That has yet to happen.  Oh, it will, some day.  Maybe tomorrow, maybe after I am long dead.  Inflation will eventually make it worth that much.  But the idea that gold would go to $5000 an ounce "just because I said so" is idiotic.   Gold, like anything else, is subject to the laws of supply and demand.

Oh, but the supply of Bitcoin is limited, right?  Maybe.  The worldwide supply of pocket lint is arguably limited too - that doesn't make it worth much.   The problem with supply and demand, as I have discussed numerous times here, is prices will swing wildly in response to small changes in supply and demand.

In the housing market example I like to use, if there are 100 houses for sale in Century City and 101 buyers, one buyer will end up with no home.  He will offer 5-10% more in price to buy a house and a bidding war will start.  A 1% difference between supply and demand can result in a 10% difference in price - maybe more.  And on the selling side, the same is true.  If there are only 99 buyers, one seller will lower his price 5-10% to snag one of those buyers and a race to the bottom ensues.

Whether it is stocks, bonds, houses, gold, or Bitcoin, the price paid for the last share, condo, or coin is what the last sucker paid in, not what all shares are actually worth.   And that is why "Market Cap" is a bullshit term.  Just because some sucker today paid $100 a share for ACME company doesn't mean ACME has a "Market Cap" of $100 Million of there are a million shares outstanding.  It only means the last guy in paid a hundred bucks.

Thus, the run-up in the price of Bitcoin doesn't represent the actual value of Bitcoin - something that could be readily demonstrated tomorrow if those 1,000 folks who own 40% dump their coins on the market.   The same is true for Microsoft stock - if Bill Gates sold all his shares tomorrow, the value of the stock would plummet, simply because there would be more stock than buyers.

But what about all those Bitcoin Billionaires?  Everyone is making money at this, why not you?  Well, because you didn't buy it five years ago when no one heard of it.  It is like gold.  If you bought it ten years ago and sold it five years ago, you might have doubled your money.  Today?  You're just parking money.

Today?  Well, Bitcoin has shot up in value - and that is the worst time to buy anything, whether it is a stock, bond, or gold.   But whether this "crypto-concurrency" whose value is backed by nothing, has a long history of volatility, and has a long history of corruption and theft, will go up in value further is anyone's guess - and guessing isn't something you should do with your money.

Oh, and it isn't really limited, either.  Bitcoin recently spun off a sister currency, shattering the myth that the number of "coins" was finite.  Not only that, there are a plethora of "me too" currencies which have since come out, calling into question whether Bitcoin will really increase in value over time, or merely be one of a number of such "coins" that can be used to buy drugs, weapons, and children on the Internet.   Oh, and most of these "me too" currencies are rife with fraud, and the collapse of those currencies will likely take down the price of Bitcoin as well, when they ultimately fail.

You don't have to invest in everything, and falling victim to "Don't Want To Miss Out!" syndrome is how people ended up in trouble with tech stocks, gold, and houses, over the last three decades.

But, it seems people never learn, and the snake-oil salesmen come along every few years with a "can't miss" investment (or so they call it) that they can't really explain, but promise will make you tons of money.   And yes, a few people make out big - but the vast majority of the unwashed masses (you and me) lost it all.

In a way, it is like the Casinos.  Yes, a few people win big, the rest of us lose big, and the Casino always profits in the end.   Just don't go to Casinos.  You aren't missing much.

P.S. - our monetization experiment will be ending soon.  The income is paltry and the ads they put on my blog are appalling.  I am sure, for example, that this posting will be bookended by ads for a "free master class" in Bitcoin.   Don't click on them.   "Free" should be your tipoff that it is going to cost you in the end.   Don't be a chump!