Cryptocurrencies are in a tailspin. Bitcoin bears are out in force.
Bitcoin pulled back more than 50% from last month’s peak of close to $64,000 before rebounding over the past few days.
Still, it has now fallen below its 200-day moving average for the third time in its history.
After the end of the other two such streaks, it tumbled an average of 50%.
Observers are of two minds on the current pullback.
For the bears, the recent drop confirms that Bitcoin is – as Charlie Munger eloquently put it – “rat poison.”
For the bulls, it’s another opportunity to get a bite of the Bitcoin apple.
The media is doing its part to keep the party going.
It fetes cryptocurrency pioneers like Michael Novogratz as “visionaries.”
It indulges in schadenfreude over the fate of a California-based software developer, Stefan Thomas. He forgot the password to his Bitcoin account.
He stands to lose 7,002 Bitcoin, worth more than $273 million.
Then there is the Bitcoin developer Laszlo Hanyecz. In May 2010, he traded 10,000 Bitcoin for two pizzas. Today, those 10,000 Bitcoin are worth $390 million.
The media’s anointing of both heroes and zeroes reinforces my biblically inspired view that there is nothing new under the sun.
I am convinced now more than ever that Bitcoin and its army of imitators will soon be added to the ash heap of financial history.
The Outlook for Bitcoin
Bitcoin offers many attractions for naïve investors.
Bitcoin has the patina of a whizbang new technology called the blockchain. Bitcoin is more than a medium of exchange. As a Bitcoin investor, you are part of a revolution.
Strip away the feel-good factor, however, and you are left with… well, not much.
Bitcoin is a “currency” because its supporters say it is.
Enthusiasts argue that Bitcoin’s scarcity – and expensive mining costs – gives it its value.
That argument never made sense to me.
“Scarcity” doesn’t make anything intrinsically valuable. You can’t trade a four-leaf clover for a BMW.
But you can trade a Bitcoin for a BMW for one reason: psychology.
At the peak of Holland’s tulip mania in 1637, a single tulip bulb – the Semper Augustus – was worth more than a house on the Amsterdam canal. (Today, that house is worth about $2.5 million.)
Nor is Bitcoin’s status as a “currency” unique.
Remember the Japanese financial bubble in the late 1980s?
Back then, Renoir paintings were routinely used as currency. Like Bitcoin, they offered the benefit of tax-free transactions.
Bitcoin as a “Store of Value”
Let’s stick with the analogy of Bitcoin as a piece of fine art.
Like art, Bitcoin produces no cash flows, no dividend yields. It has no price-to-earnings ratio.
Whether you see art as a “store of value” or a “pie-in-the-sky speculation” is a matter of taste. And tastes can change.
As art critic Robert Hughes put it, “Art prices are determined by the meeting of real or induced scarcity with pure, irrational desire, and nothing is more manipulable than desire.”
The same applies to Bitcoin.
Yes, art, like Bitcoin, can make you money.
As Henry Clay Frick, the hard-nosed partner of Andrew Carnegie and an art collector, observed with wide-eyed wonder, “Even during possession, some paintings were seen to increase sometimes 100- or 1,000-fold more rapidly than the certificates of the best-managed joint-stock companies.”
But that does not make it an investment… any more than buying Beanie Babies was when they accounted for 10% of eBay’s transactions.
Or buying a lottery ticket that happens to hit.
Arguing With “Success”
Alexander Green’s recent (negative) column on Bitcoin drew the following comment: “How can you argue with an average annual return of 200% per year for the past 11 years?”
The answer is simple.
Just because the price goes up doesn’t mean that it is worth anything (unlike, say, a share in Coca-Cola or Google).
I can put a value on company shares. No one can do that for Bitcoin.
Bitcoin started as a medium of exchange designed for a libertarian utopia, free of government control. A digital currency had been the dream of entrepreneurs since Peter Thiel founded PayPal in the late 1990s.
The elephant in the room is this…
Today’s Bitcoin investors aren’t revolutionaries engaged in a holy war against fiat currencies.
If you bought Bitcoin, you bought it for a single reason: You expected it to go up.
No Japanese businessperson cared about the impressionist art they were buying at the peak of the art mania in the 1980s.
When asked why he had paid more than $300 million for late 19th-century French paintings, Yasumichi Morishita replied, “Impressionist paintings go better with modern decor.”
The real reason was far more straightforward.
In the 15 years leading up to 1990, the price of French impressionist paintings rose more than twentyfold.
Morishita was betting this trend would continue.
The Ultimate Fate of Bitcoin
That’s because governments have the power to take the punch bowl away from the Bitcoin party any time they want to.
China will be the first of many to do so.
If you’ve made money in Bitcoin, pat yourself on the back.
But remember, “Never confuse brains with a bull market.”
Get out of the cryptocurrency game of musical chairs before the music stops.
And live to invest another day.