Bitcoin – Trapped inside of a Bubble

I wonder if Warren Buffett would trade $1B in Berkshire Hathaway stock for $1B in Bitcoin? He wouldn’t even trade $100 for $1B in Bitcoin. Bitcoin is blowing up into one the largest bubbles ever. Bitcoin is not regulated, there is no recourse, no protection from fraud, and trading is subject to severe market manipulation. There are even limits for making deposits and withdraws, and fees for the transaction costs are excessive. If the SEC had been regulating Bitcoin, many of the traders would be in jail.

As a registered investment advisor, there are strict rules that I follow to know my client. By law, I need to know if they are on a terrorist watch list, and if they are who they say they are. In the world of Bitcoin, you have no idea who is on the other side of the trade. These rules have made it impossible for Wall Street firms to get involved. That is up until now.

The Chicago Board of Exchange is going to be offering future contracts on Bitcoin.  These same brilliant financial wizards were the ones who about 15 years ago, decided it was a great idea to package subprime mortgages and sell them off to investors who were seeking higher returns. In the end, Wall Street almost financially bankrupted the country. These same mathematic genius types are about to get involved in a bubble that is even worse than subprime. At least subprime had an underlying collateral. Bitcoin has no value, can’t be valued, and is worth less than a subprime loan taken out by someone going through bankruptcy! Bubbles are a means to transfer wealth from a person who bought early to the next speculator who wants to sell it even higher.  This is not financial advice to either buy or sell Bitcoin. I’ve written often that Bitcoin could go to $100,000 or $100. Bitcoin was up another 80% in a matter of days. Coinbase, which serves as the digital wallet for Bitcoin, has become the most downloaded app on Apple’s iTunes. If you want to buy Bitcoin, I would not talk you out of it. I’ve never advised a client to buy or sell it.

Most of the speculators buying Bitcoin have no idea what they are actually buying. The financial press reporting on the topic of Bitcoin has been terrible. What the press fails to realize, is that all the new Bitcoin millionaires and billionaires are trapped inside of this giant bubble. They can’t get their money out fast enough. They now need the public’s help to cash out. This by the very definition is a Ponzi scheme.  Coinbase, which is the most popular digital wallet, allows you to only deposit or withdraw up to $15,000 a week. Imagine having $100 million dollars and you can only take out $15,000 a week. Warren Buffett would be older than Yoda at around 1,400 years before he could withdraw his $1 billion.

There are over 1,300 crypto currencies. The press only reports on Bitcoin but there are over 1,300 coins and they are also in bubble land. The market caps of these coins are in the hundreds of millions and billions. There is actually a huge bubble and inside the bubble there are 1,300 other micro bubbles. If you need a good laugh, check out for the new coins that are about to be launched. I’m laughing out loud, but they are laughing all the way to the bank. The founders of these make believe coins are making upwards of $5 million each launch. There isn’t even a product. This is very similar to the dot-com bubble when companies would make millions if they changed their name to have .com at the end of it. Many companies changed their name to .com just to go public, so that they could raise even more money. In Bitcoin land, there is no SEC regulations and none of the facts are verified.

There was one new coin that was cutting out the grocery store and you could use digital coins to buy directly from a distribution center. This coin was close to raising $20 million. Once the coin is launched, it goes onto an exchange. On this exchange, everyone can speculate on the next price of this coin.  Many of these coins with ideas even worse than the grocery store have risen from $20 million and are now into the billions. It’s an incredible wealth transfer that has been created. The trouble is that the owner of the $1B in worthless coins is cashing out. For those coins to be sold inside of the Bitcoin bubble, the founder has to sell his made-up currency and buy Bitcoin. The worthless coins inside of this giant bubble are sold when Bitcoin is bought. This is helping to increase the price of Bitcoin.

This week as Bitcoin rose from $10,000 to almost $19,000 all the other crypto-coins were crashing. It was a massive flight to safety as speculators inside of the bubble were trying to protect their profits. Most of the 1,300 coins dropped over 50% in two days, but the financial press missed this part of the story. All of the sellers of the coins were buying Bitcoins this week. The following day, all of the Bitcoin holders started to rotate their coins back into the other currencies. The second most popular crypto coin is called Litecoin. This coin is now up 70% in the last 24 hours! The market cap of this coin moved from $4B to $7B in 24 hours. Two years ago the price of this coin was around $1.5 (a cup of coffee) and on December 8th, it rose to $170 (a fun night out). It could go to $1,000 or back to $1.5. The scary part is this bubble is not even close to ending unless the public realizes that this is a giant Ponzi scheme or the Federal Reserve wakes up to the fact that millions of people now prefer holding crypto-coins instead of dollars. This bubble dwarfs the size of the Madoff ponzi scheme. It is truly out of control and there is nothing to stop it.

I am closely monitoring this bubble because it is starting to impact other real financial assets.  It might have already negatively impacted the price of gold, which is down over 5% in the last few months. The Bloomberg Commodity index (DJP) was down 3.30% last week. This has been no impact on the investments that I hold for my clients but it is a risk worth watching. Another concern is, if millions of Americans are loading their credit cards up on Bitcoin, then this robs the economy of real purchases. The appreciation of Bitcoin is also very inflationary and is creating immediate wealth. On the other hand, it also has the potential to destroy wealth and slow consumer spending. If you are interested in learning more about Bitcoin, please feel free to give me a call. I can help explain all of the other technical information behind Bitcoin such as mining, blockchains, and ICO’s.

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