Bitcoin – Millennials FAKE GOLD
by Vitaliy Katsenelson
Dec 25, 2017 6:00 AM
I’ve been asked about Bitcoin a lot lately. I’
haven’t written anything about it because I find
myself in an uncomfortable place in agreeing with
the mainstream media: It’s a bubble. Bitcoin started
out as what I’d call “millennial gold” – the young
(digital) generation looked at it as their gold
substitute.
Bitcoin is really two things: a blockchain
technology and a (perceived) currency. The
blockchain element of Bitcoin may have enormous
future applications: It may be used for electronic
contracts, voting, money transfers – and the list
goes on. But there is a very important misconception
about Bitcoin: Ownership of Bitcoin doesn’t give you
ownership of the technology. I, without owning a
single bitcoin, own as much Bitcoin technology as
someone who owns a million bitcoins; that is,
exactly none. It’s just like when you have $1,000 on
a Visa debit card: That $1,000 doesn’t give you part
ownership of the Visa network unless you actually
own some Visa’ stock.
Owning Bitcoin gives you a right to … what,
actually? Digital bits?
I can understand gold bugs and the original Bitcoin
aficionados. The global economy is living beyond its
means and financing its lifestyle by issuing a lot
of debt. Normally this behavior would cause higher
interest rates and inflation. But not when you have
central banks. Our local central bankers simply
bought this newly issued debt and brought global
interest rates down to near-zero levels (and in many
cases to what would have been previously unthinkable
negative levels). If you think investing today is
difficult, being a parent is even more difficult. I
tried to explain the above to my sixteen-year-old
son, Jonah. I saw the same puzzled look in his eyes
as when he found out where babies come from. I also
felt embarrassed, for my inability to explain how
governments can buy the debt they just issued. The
concept of negative interest rates goes against
every logical fiber in my body and is as confusing
to this forty-four-year-old parent as it is to my
sixteen-year-old.
The logical inconsistencies and internal sickness of
the global economy have manifested themselves into a
digital creature: Bitcoin. The core argument for
Bitcoin is not much different from the argument for
gold: Central banks cannot print it. However, the
shininess of gold has less appeal to millennials
than Bitcoin does. They are not into jewelry as much
as previous generations; they don’t wear watches
(unless they track your heartbeat and steps). Unlike
with gold, where transporting a million dollars
requires an armored track and a few body builders, a
nearly weightless thumb drive will store a dollar or
a billion dollars of Bitcoin. Gold bugs would of
course argue that gold has a tradition that goes
back centuries. To which digital millennials would
probably say, gold is analog and Bitcoin is digital.
And they’d add, in today’s world the past is not a
predictor of the future – Sears was around for 125
years and now it is almost dead.
A client jokingly told me that his biggest gripe
with me in 2016 and 2017 was that I didn’t buy him
any Bitcoin. I told him not so jokingly that if I
bought him Bitcoin, he’d be right to fire me. Maybe
I’m a dinosaur; but, like gold, Bitcoin is
impossible to value. What is it worth? It has no
cash flows. Is a coin worth $2, $200, or $20,000?
But Wall Street strategists have already figured out
how to model and value this creature. Their models
sound like this: “If only X percent of the global
population buys Y amount of Bitcoin, then due to its
scarcity it will be worth Z”. On the surface, these
types of models bring apparent rationality and an
almost businesslike valuation to an asset that has
no inherent value. You can let your imagination run
wild with X’s and Y’s, but the simple truth is this:
Bitcoin is un-valuable.
In 1997, when Coke’s valuation started to rival some
dotcoms, bulls used this math: “The average consumer
of Coke in developed markets drinks 296 ounces of
Coke a year. These markets represent only 20% of the
global population.” And then the punchline: “Can you
imagine what Coke’s sales would be if only X% of the
rest of the world consumed 296 ounces of Coke a
year?” Somehow, the rest of the world still doesn’t
consume 296 ounce of Coke. Twenty years later,
Coke’s stock price is not far from where it was then
– but on the way it declined 60% and stayed there
for a decade. Coke, however, was a real company with
a real product, real sales, a real brand and real
tangible, dividend-producing cash flows.
If you cannot value an asset you cannot be rational.
With Bitcoin at $11,000 today, it is crystal clear
to me, with the benefit of hindsight, that I should
have bought Bitcoin at 28 cents. But you only get
hindsight in hindsight. Let’s mentally (only
mentally) buy Bitcoin today at $11,000. If it goes
up 5% a day like a clock and gets to $110,000 – you
don’t need rationality. Just buy and gloat. But what
do you do if the price goes down to $8,000? You’ll
probably say, “No big deal, I believe in
cryptocurrencies.” What if it then goes to $5,500?
Half of your hard-earned money is gone. Do you buy
more? Trust me, at that point in time the
celebratory articles you are reading today will have
vanished. The awesome stories of a plumber becoming
an overnight millionaire with the help of Bitcoin
will not be gracing the social media. The moral
support – which is really peer pressure – that
drives you to own Bitcoin will be gone, too.
Then you’ll be reading stories about other suckers
like you who bought it at what – in hindsight –
turned out to be the all-time high and who got
sucked into the potential for future riches. And
then Bitcoin will tumble to $2,000 and then to $100.
Since you have no idea what this crypto thing is
worth, there is no center of gravity to guide you or
anyone else to make rational decisions. With Coke or
another real business that generates actual cash
flows, we can at least have an intelligent
conversation about what the company is worth. We
can’t have one with Bitcoin. The X times Y = Z math
will be reapplied by Wall Street as it moves on to
something else.
People who are buying Bitcoin today are doing it for
one simple reason: FOMO – fear of missing out. Yes,
this behavior is so predominant in our society that
we even have an acronym for it. Bitcoin is priced
today at $11,000 because the fool who bought it for
$11,000 is hoping that there is another, greater
fool who will pay $12,000 for it tomorrow. This game
of greater fools is not new. The Dutch played it
with tulips in the 1600s– it did not end well.
Americans took the game to a new level with dotcoms
in the late 1990s – that round ended in tears, too.
And now millennials and millennial-wannabes are
playing it with Bitcoin and few hundred other
competing cryptocurrencies.
The counterargument to everything I have said so far
is that those dollar bills you have in your wallet
or that digitally reside in your bank account are as
fictional as Bitcoin. True. Currencies, like most
things in our lives, are stories that we all have
(mostly) unconsciously bought into. (I highly
encourage you to read my favorite book of 2015:
Sapiens, by Yuval Harari.) Of course, society and,
even more importantly, governments have agreed that
these fiat currencies are going to be the means of
exchange. Also, taxation by the government turns the
dollar bill “story” into a very physical reality: If
you don’t pay taxes in dollars, you go to jail. (The
US government will not accept Bitcoins, gold, chunks
of granite, or even British pounds).
And finally, governments tend to look at Bitcoin and
other cryptocurrencies as a threat to their
existence. First, governments are very particular
about their monopolistic right to control and print
currencies – this is how they can overpromise and
underdeliver. No less important, the anonymity of
cryptocurrencies makes them a heaven for tax
avoiders – governments don’t like that. The Chinese
government outlawed cryptocurrencies in September
2017. Western governments are most likely not far
behind. If you think outlawing a competitor can
happen only in a dictatorial regime like China’s,
think again. This can and did happen in a democracy
like the US. With Executive Order 6102 in 1933, US
President Franklin D. Roosevelt made it illegal for
the US population to “hoard gold coin, gold bullion,
or gold certificates.”
However, nothing I have written above will matter
until it does. Bitcoin may go up to $110,000 by the
end of the 2018 before it comes down to … earth.
That is how bubbles work. Just because I called it a
bubble doesn’t mean it will automatically pop.
|
|