A client jokingly told me that his biggest gripe with me in 2016 and 2017 was that I didn’t buy him any bitcoin. I told him not so jokingly that if I bought him bitcoin, he’d be right to fire me.
Maybe I’m a dinosaur; but, like gold, bitcoin BTCUSD, +19.54% is impossible to value. What is it worth? It has no cash flows. Is bitcoin worth $2, $200, or $20,000?
But Wall Street strategists have already figured out how to model and value this creature. Their models sound like this: “If only X percent of the global population buys Y amount of bitcoin, then due to its scarcity it will be worth Z.” On the surface, these types of models bring apparent rationality and an almost businesslike valuation to an asset that has no inherent value. You can let your imagination run wild with X’s and Y’s, but the simple truth is this: bitcoin is un-valuable. Moreover, in my view, bitcoin is in a bubble.
In 1997, when Coca-Cola’s KO, +0.02% stock valuation started to rival some dot-coms, bulls used this math: “The average consumer of Coke in developed markets drinks 296 ounces of Coke a year. These markets represent only 20% of the global population.” And then the punchline: “Can you imagine what Coke’s sales would be if only X% of the rest of the world consumed 296 ounces of Coke a year?” Somehow, the rest of the world still doesn’t consume 296 ounce of Coke. Twenty years later, Coke’s stock price is not far from where it was then — but on the way it declined 60% and stayed there for a decade. Coke, however, was a real company with a product, sales, a real brand, and tangible, dividend-producing cash flows.
If you cannot value an asset you cannot be rational. With bitcoin above $11,000, it is crystal clear to me, with the benefit of hindsight, that I should have bought bitcoin at 28 cents. But you only get hindsight in hindsight. Let’s mentally (only mentally) buy bitcoin today at $11,000. If it goes up 5% a day like a clock and gets to $110,000 — you don’t need rationality. Just buy and gloat.
But what do you do if bitcoin’s price falls to $8,000? You’ll probably say, “No big deal, I believe in cryptocurrencies.” What if it then goes to $5,000? More than half of your hard-earned money is gone. Do you buy more? Trust me, at that point in time the celebratory articles you are reading today will have vanished. The awesome stories of a plumber becoming an overnight millionaire with the help of bitcoin will not be gracing social media. The peer pressure to own bitcoin will be gone, too.
Then you’ll be reading stories about suckers who bought bitcoin at the all-time high. And then bitcoin will tumble to $2,000 and then to $100. Since you have no idea what this crypto-thing is worth, there is no center of gravity to guide you or anyone else to make rational decisions. With Coke or another real business that generates actual cash flows, we can at least have an intelligent conversation about what the company is worth. We can’t have that with bitcoin. The X times Y = Z math will be reapplied by Wall Street as it moves on to something else.
I can understand the original bitcoin aficionados. The global economy is living beyond its means and financing its lifestyle by issuing a lot of debt. Normally this behavior would cause higher interest rates and inflation. But not when you have central banks. Our local central bankers simply bought this newly issued debt and steered global interest rates down to near-zero levels (and in many cases to what would have been previously unthinkable negative levels).
The logical inconsistencies and internal sickness of the global economy have manifested themselves into a digital creature: bitcoin. The core argument for bitcoin is not much different from the argument for gold GCQ8, -1.03% : central banks cannot print it. However, the shininess of gold has less appeal to millennials than bitcoin does. They are not into jewelry as much as previous generations; they don’t wear watches (unless they track your heartbeat and steps). Unlike with gold , where transporting a million dollars requires an armored track and a few body builders, a nearly weightless thumb drive will store a dollar or a billion dollars of bitcoin. Gold bugs would of course argue that gold has a tradition that goes back centuries. To which digital millennials would probably say, gold is analog and bitcoin is digital. And they’d add: in today’s world the past is not a predictor of the future.
Bitcoin started out as “millennial gold” — the young (digital) generation looked at it as their gold substitute.
In fact, bitcoin is really two things: a blockchain technology and a (perceived) currency. The blockchain element of bitcoin may have enormous future applications: electronic contracts, voting, money transfers — the list goes on. But there is an important misconception about bitcoin: ownership of bitcoin doesn’t give you ownership of the blockchain technology. Someone without a single bitcoin owns as much bitcoin technology as someone with a million bitcoins; that is, exactly none. It’s like when you have $1,000 on a Visa debit card: That $1,000 doesn’t give you part ownership of the Visa network unless you actually own Visa
V, -0.01% stock.
So owning bitcoin gives you a right to — what, actually? Digital bits?
People are buying bitcoin now for one simple reason: FOMO — fear of missing out. This behavior is so predominant in our society that we even have an acronym for it. Bitcoin is priced above $11,000 because the fool who bought it for $11,000 is hoping that there is another, greater fool who will pay $12,000 for it tomorrow. This game of greater fools is not new. The Dutch played it with tulips in the 1600s — that did not end well. Dot-coms took the game to a new level in the late 1990s — that also ended in tears. And now millennials and millennial-wannabes are playing it with bitcoin and other competing cryptocurrencies.
The counterargument to everything I have said so far: those dollar bills in your wallet or digitally residing in your bank account are as fictional as bitcoin. True. Currencies are stories that we all have (mostly) unconsciously bought into. (I highly encourage you to read my favorite book of 2015: “Sapiens,” by Yuval Harari.) Of course, society and, even more importantly, governments have agreed that these fiat currencies are the means of exchange. Also, taxation by the government turns the dollar bill “story” into a physical reality: Governments will not accept bitcoin to pay your taxes.
Governments also tend to look at bitcoin and other cryptocurrencies as a threat to their existence. First, governments are particular about their monopolistic right to control and print currencies — this is how they can overpromise and underdeliver. No less important, the anonymity of cryptocurrencies makes them a heaven for tax avoiders — governments don’t like that. The Chinese government, for example, outlawed cryptocurrencies in September 2017. Western governments most likely are not far behind. If you think outlawing a competitor can happen only in a dictatorial regime like China’s, think again. This can and did happen in the U.S. With an executive order in 1933, President Franklin D. Roosevelt made it illegal for the U.S. population to “hoard gold coin, gold bullion, or gold certificates.”
Of course, nothing about bitcoin’s bubble will matter until it does. Bitcoin may soar to $111,000 from $11,000 before it comes down to earth. That is how bubbles work.