12 Jan Vitaliy Katsenelson’s Contrarian Edge: Bitcoin and cryptocurrencies are just the Beanie Babies of the moment
If you invested in the stocks back in 1999, it is hard to observe the bitcoin mania and not experience the feeling that you’ve seen this movie before and know how it will end — in losses and tears.
The internet convinced great minds to invest capital and energy into businesses that have transformed the world — such as Amazon.com AMZN, +2.23% , eBay EBAY, +0.56% , Cisco Systems CSCO, +1.92% and PayPal.
Rising stock prices of internet companies also brought unscrupulous people out of the woodwork. In 1999, if a company added dot-com to its name it was an instant guarantee that its stock price would pop on this non-news. In a slightly later stage of the bubble, when internet incubators were in vogue, thinly traded companies would announce that they were changing their business model to become “internet incubators” and their stocks would surge. Management cashed out on suckers who bought the pop in the stock price.
Business models are changing again amid the cryptocurrency fever. In December, Long Island Iced Tea Corp. rebranded itself as Long Blockchain LBCC, -8.73% , and shares of this tea company turned blockchain-technology investor soared 183% in a single trading day.
The coin/blockchain mania echoes the Beanie Babies mania of the 1990s. Beanie Babies were released in a limited quantity (the key word), and thus the price kept going up. New, limited editions of Beanie Babies sold for hundreds if not thousands of dollars (some were “collector’s items,” as though Vincent Van Gogh had graced them with his brush).
Predictably, this fad ended just every other — it went from hot to cold. Someone realizes that a $100 stuffed animal is not much different from a $10 one. Pretty soon the people who want to cash in their gains exceeds the new suckers who want to buy. Supply exceeds demand, and just as price increases spawned more price increases on the way up, price declines snowball into further price declines — this is how a bubble bursts.
I am not picking only on bitcoin BTCUSD, +2.98% — people are shelling out for other coins, too. At least with Beanie Babies they got a garage sale item — what do you get when you buy cryptocurrencies like bitcoin? I have no idea. As I discussed in an earlier article on the subject, by owning a coin (bitcoin or any other), you don’t own the blockchain technology.
About bitcoin: hedge-fund manager Paul Isaac was a guest on financial-market commentator Jim Grant’s podcast (which I recommend wholeheartedly). Isaac made an excellent point: bitcoin as a technology is version 1.0; it’s inefficient and slow. Future blockchain innovations will be much faster and much more efficient. So if you are attracted to bitcoin because it’s a “currency,” know that it’s not even a good one. Future ones will be better. And maybe that is why more than 1,300 other cryptocurrencies are competing to dethrone bitcoin.
A bubble is usually a good thing taken too far (though I still cannot grasp what was so great about tulips or Beanie Babies). I don’t know when this mania will end. In the dot-com bust, billions of dollars were lost.
This coin bubble will follow a similar script. People will be hurt by this mania, and many of them will not be able to afford their losses. A friend of mine told me about a bitcoin buyer, who ordinarily would not quality for a mortgage, borrowing $150,000 to speculate in bitcoin. This likely is not an isolated story — many people saw their dot-com wealth destroyed when the bubble burst (though at first their wealth tripled or quadrupled).
If the fear of missing out is too strong, treat “investing” in bitcoin like gambling. The odds are clearly against you, and if you play long enough, you’re destined to lose. Yet millions of people gamble every day, finding nonfinancial, entertainment value in the possibility that luck may be on their side.
That said, rational people don’t pour their life savings into slot machines. They gamble with as much as they can afford to lose. If you treat bitcoin as a gamble and win, you’ll have something to brag about. If you lose, at least you won’t be broke.
So, how does one invest in this overvalued stock market? Our strategy is spelled out in this fairly lengthy article.
Vitaliy Katsenelson is chief investment officer at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing” (Wiley) and “The Little Book of Sideways Markets” (Wiley). Read more on Katsenelson’s Contrarian Edge blog.