Is This the Bitcoin Bubble Bursting?


Before I begin telling you what I think, I want to establish that I’m a “dumb shit” who doesn’t know much relative to what I need to know.’

So starts Ray Dalio’s book, Principles. Dalio founded Bridgewater Associates in the late 1970s, a company that has gone on to become the largest hedge fund in the world today.

I knew I would like the book as soon as I read the first sentence. One of my mantras is that I don’t know anything. The world is just too complex to try and understand. Anyone who thinks they do understand it is fooling themselves.

But to try and make sense of such a complex world, you must have ‘principles’, or rules that you operate by. When it comes to investments, these should be rules that you have worked out by trial and error over time.

By following these rules, you give yourself the greatest probability of making money, without being knocked around by random events and people’s opinions of those events.

I bring this up because I want to talk about bitcoin. Now, when it comes to bitcoin, I confess I am a ‘dumb shit’. I’m not saying that to give myself an ‘out’ if my view is wrong. I’m saying it because I genuinely don’t know what bitcoin means for the future of money, or how our monetary system will work in 10 or 20 years’ time. I’m OK with that. I don’t think anyone else knows, either.

But I do know there are some principles that are worth following when it comes to new technologies that capture people’s imagination, like cryptocurrencies have over the past year. One of those is that when hubris is widely prevalent, you should be very wary.

If you’ve read my stuff regularly, you’ll know that I’ve been sceptical of bitcoin’s rise. And I’ve been dead wrong. I thought it was a bubble at US$5,000…

So clearly, I have no idea.

Despite knowing that I don’t know, I still look for signs that are proven red flags that warn of bubble-like conditions.

This is not confirmation bias, where I am cherry picking information to suit my argument. It’s simply assessing facts…or in this case human behaviour. And after reading a recent New York Times article on some of the bigger players in the crypto space, I’m more convinced that we’re witnessing a bubble of massive proportions. 

I encourage you to read the whole thing, here. But for now, let me give you a few telling excerpts…

There’s an actual house called the Crypto Castle, and the king is Jeremy Gardner, 25, a rakish young investor with a hedge fund who has become the de facto tour guide for crypto newcomers.

He wears a bracelet from his Burning Man camp (Mayan Warrior) and a necklace that is a key on a chain. “I was given this necklace and was told my net worth would go up, and it’s gone up six x since then,” he said.

He drew a chart to explain the crypto community: 20 percent for ideology, 60 percent for the tech and 100 percent for the money, he said, drawing a circle around it all.

Nearby is a building residents call the Crypto Crackhouse.

Grant Hummer, who runs the San Francisco Ethereum Meetup, lives there. Long hallways called Bitcoin Boulevard and Ethereum Alley lead to communal bathrooms. Mr. Hummer and his co-founder committed $40 million of their own crypto-made money to their new $100 million hedge fund, Chromatic Capital.

“My neurons are fried from all the volatility,” Mr. Hummer said. “I don’t even care at this point. I’m numb to it. I’ll lose a million dollars in a day and I’m like, O.K.”

Mr. Hummer went out to meet Joe Buttram, 27, for drinks. As a mixed martial arts fighter, Mr. Buttram said he would fight for a couple hundred bucks, sometimes a few thousand, and worked security at a start-up… 

He said his holdings are into double-digit millions but wouldn’t give specifics other than to say he’d quit his job and is starting a hedge fund. 

They talk about buying Lamborghinis, the single acceptable way to spend money in the Ethereum cryptocurrency community. The currency’s founder frequently appears in fan art as Jesus with a Lamborghini. Mr. Buttram says he’s renting an orange Lambo for the weekend. And he wears a solid gold Bitcoin “B” necklace encrusted with diamonds that he had made. Otherwise, HODL.

This is one of the core beliefs in this community: HODL, “hold” typed very fast, as if in a panic. HODL even if you feel FUD — fear, uncertainty and doubt. If you show wealth, it means you don’t really believe in the cryptocurrency revolution, a full remake of the financial system, governments and our world order that will send the price of ether up astronomically.

“HODL when everyone has FUD,” Mr. Hummer said quietly, to explain why he still lives in a dorm room. “This will change civilization. This can 100 x or more from here.”

He knows this is strange.

“When I meet people in the normal world now, I get bored,” Mr. Hummer said. “It’s just a different level of consciousness.”

“All I know is the price of ether is going to go up,” Mr. Hummer said.

So, one of the wealthiest men in the world knows he is a ‘dumb shit’, and a newly minted millionaire only knows that the price of ether (a crypto) is going to go up?

There are so many signs of hubris in that article that it’s a real worry. Then there is this opening paragraph from a recent article in the UK’s Telegraph:

The North American Bitcoin Conference opens in Miami shortly and guest speaker Jeremy Gardner has a lot of yacht parties to attend. So many, he jokes, that he may have to buy his own vessel to sail between them.

Is this the bitcoin bubble waiting to burst?

Let me be clear. I’m not moralising here. I don’t care that people can become millionaires quickly. They had a punt, and are reaping the rewards. I’m just pointing out that in nearly all historical instances of ‘new paradigm’ technologies like cryptocurrencies, you tend to get these types of scenarios.

And in nearly all historical instances (at least that I’m aware of) the price bubble deflates over time.

I think that’s what happening now with bitcoin. As hubris kicks in, the bubble deflates.

And I wrote the above before I saw the latest price action. Bitcoin plunged 11% in the latest trading session. Here’s the latest chart:

Bitcoin / US Dollar FX Chart Daily | 17-01-2018

Source: Optuma
[Click to enlarge]

The price at time of writing is US$11,098. In my view, the price is breaking down.

The trend is still favourable, and you could argue that bitcoin is just correcting and consolidating its big recent move.

In fact, if you’re financially and emotionally invested in it, I’m guessing that’s the story you’re telling yourself.

But given the discussion above, I would argue this is what a bursting bubble looks like.

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia