Wednesday, April 14, 2021

High Tech Tulips

For those contemplating diving into Bitcoin consider its current valuation...

  • 35 x the value of gold
  • 2,400 x the value of silver
  • 63,000 x the value of the US Dollar
If you are thinking of buying Bitcoin you need to be comfortable with these valuations and expect them to go higher. And IMHO that is not rational. Bitcoin is not a bubble in the traditional sense of the term. The bond market and Tesla might be bubbles. But Bitcoin has moved way beyond that. It has become a speculative mania being fueled by frantic buying on the part of people who are afraid they will miss out on the greatest get rich quick opportunity in the history of investment markets. 

Or to borrow an old line from Wall Street professionals "dumb money chases hot money." And I suspect the hot money has mostly cashed in their profits and left the building. 

But with trillions now parked in Bitcoin, what is likely to happen when this all blows up? The honest answer is, I'm not sure. There isn't really any modern event to compare it to. You'd have to go back almost 400 years to find anything comparable. The Great South Seas bubble of the 1720s was comparatively tame in terms of its overpricing. As was the railroad bond bubble that precipitated the Panic of 1873 and the stock mania that blew up in October of 1929. 

If it deflates slowly (probably the best case scenario) it could limit the systemic risks. But a sudden crash could cause chaos. It could also inflict staggering losses on people who can ill afford to lose a lot of money. If Elon Musk, a big BTC enthusiast, loses a few billion, honestly who cares? But there are a lot of working and middle class people who have been putting a great deal of their hard earned money into this. These people could take a hit they aren't ready for. 

Update: On the subject of smart money cashing in their Bitcoin, CNBC reports that Jim Cramer recently sold half of his BTC and paid off the mortgage on his house. Cramer's description... "Phony money paying for real money."

4 comments:

unreconstructed rebel said...

I can't help but wonder, during the next global conflict, what will happen when a combatant succeeds in taking out the Internet. Not all that difficult to do in the age of guided cruise missiles.

Pseudo Bessarion said...

Rebel, what would a blue print for that look exactly? I've thought about that scenario before but I'm not sure what would have to happen.

unreconstructed rebel said...

Getting into specifics just now is not a good idea. But, way too many people know where all the pieces-parts are. Maybe not all, but enough to put the cabash on commercial use. Think about how dependent on on-line commerce we have all become. Hell, you can't visit you doctor anymore without checking in on-line first.

The Anti-Gnostic said...

I can't help but wonder, during the next global conflict, what will happen when a combatant succeeds in taking out the Internet.

Not necessarily a bad thing.

I've yet to have anybody tell me why I should buy one cryptocoin over another cryptocoin.

Anyway, as John points out all indications are crypto is just the current place where the inflation is going.