Usually I have a fairly strong opinion about the stocks, bonds and funds I write about. I know I can be wrong — my less-than-flawless track record demonstrates that. And I can’t recall a time when I had such a strong opinion on an investment that I couldn’t see the other side of the trade.
But that was before Bitcoin and the more-than-1,500 other cryptocurrencies.
These are a bubble — in fact, one of the largest bubbles in human history. I am as sure as I can be of anything that they will get clobbered, and that all but the earliest buyers will lose a ton of money. Those who hold their cryptocurrencies likely will lose every penny they invested.
In fact, my main worry about Bitcoin and its ilk isn’t that they’ll go to zero – which they almost certainly will – but how badly a total cryptocurrency crash might affect other markets. Which bankers and brokers put up big money so that foolish “investors” could speculate on Bitcoin? We won’t know until the collapse comes, and I have no clue when that will be.
Here are seven reasons I think cryptocurrencies will go to zero:
It’s a bad idea. A cryptocurrency makes a lot of sense to some libertarians. Here’s a universal currency, not controlled by any government, that allows individuals to conduct financial transactions privately, anonymously without any intermediary — banker or government — taking a cut. (At least in theory. The IRS has been public about getting its cut of Bitcoin trades.)
But back up a minute. Who needs such a currency? Criminals, yes. Terrorists, yes. Anyone else who wants to keep their affairs invisible to prying outside eyes — whether law enforcement, intelligence agencies, or a spouse in a contested divorce. That’s a very limited universe, and it’s not inhabited by the most honest of us. Big investors seeking to build a big position in a security have plenty of other tools.
What’s more, cryptocurrencies’ secrecy has made them vulnerable to crooks and conmen of all stripes. Practically a day doesn’t pass that we read about another victim of crypto-crime. Apple (AAPL) co-founder Steve Wozniak, hardly a tech neophyte, recently lost $70,000 worth of Bitcoin to a crook with a stolen credit card number. Start-up brokers have lost countless millions to hackers.
It’s much too volatile. A currency is supposed to be a medium of exchange, not, primarily, an investment. Yes, currencies change in value, but nothing like Bitcoin, which rose from virtually nothing several years ago to above $19,000, then plunged to just under $7,600 before recently rebounding a bit. Why would anyone use an instrument that volatile to buy or sell anything? If you’re buying a house or a new car, you spend hours researching the best price. Why would you then want to use a currency so volatile to buy it? Ditto for the seller.
They have no real value. The truth is that cryptocurrency advocates are misleading when they call these digital items a currency. Yes, technically they are currencies in that they can be used to buy some goods and services. But cryptocurrencies are fundamentally a speculation — people are buying hoping to sell later at a much higher price.
But this is very close to a ponzi scheme: The early investors walk away with handsome profits, especially those who initially sell cryptocurrencies in initial coin offerings (ICOs). But the currencies themselves have no fundamental value, no economic worth, no intrinsic value. They pay no dividends, they earn no profits — there’s no there there. Cryptocurrencies are only worth what the next fool will pay.
The tulip bubble in Holland in the 1600s saw crazed investors selling their houses to buy a fraction of a tulip bulb. This was insane, of course — no tulip was worth that much. But tulips, quite new to Holland, did have value. They grew into beautiful flowers that people still are willing to pay real money for.
With Bitcoin and the others, when the reckoning comes, hapless investors will find they don’t even end up with a coin. Bitcoin is nothing but lines of computer code — worth nothing. “The fundamental value of Bitcoin is zero,” says Nouriel Roubini, an economist who predicted the 2007-2009 financial crash.
They’re a commodity. Anyone with the right computer skills — and enough cheap electrical power to produce the code and complex puzzles needed to launch a cryptocurrency — can do it.
The fact that there are more than 1,500 cryptocurrencies is more than sufficient proof that these are not a scarce item. A commodity that’s easy to re-invent is worth little, if anything.
It’s a bubble. Let’s suspend disbelief for minute and imagine cryptocurrencies are going to be a huge technological game changer like the Internet or airplanes or automobiles. Luddites, like me, can never see the next big thing until it’s too late to cash in on.
It’s still a bubble. Remember some of the earliest computers: Kaypro, Commodore 64, Eagle? There were hundreds of brands. Almost none survived. Nor did first mover advantage prove invaluable. The same thing happened with automobiles, airlines — almost any breakthrough technology you can name.
Investors tend to glom onto anything that remotely smells like a breathtakingly new technology — even though most of the innovators go bust. For every Apple, there are hundreds of Acorn computers, which vanish without a trace.
Remember the tech bubble of the late 1990s? For every Amazon, there were hundreds of companies like, Pets.com, Broadband Sports, eToys.com, Excite and theGlobe.com. There was even, get this, a digital currency, Flooz.com, which boasted Whoopi Goldberg as its spokesperson. Never heard of these? They all popped.
Don’t take my word for it. “Remember, cryptocurrencies are still a new and hyper volatile asset class, and could drop to near zero at any time,” said Vitalik Buterin, founder of the Ethereum blockchain network. “Don’t put in more money than you can afford to lose.”
They are unregulated, and regulators are clamping down. Governments haven’t known what to do about cryptocurrencies. The currencies span the globe, making it difficult for any country to stop them. The lack of regulation has led to increased fraud in the crypto-markets.
But governments are beginning to crack down. After all, they don’t want competitors to their real currencies. And they don’t want messy crashes in cryptocurrencies that could bruise their financial markets. To stay in business, cryptocurrencies will have to go further underground—making them even more risky.
What about blockchain? Think of blockchain as a financial version of Twitter (TWTR) that records every transaction indelibly on thousands and thousands of computers — with all users employing secret coded names. Everyone can see all the transactions; viewers can only guess who the buyers and sellers were.
Blockchain is a potentially important technology that’s in its infancy. What isn’t clear is who might end up profiting from it. It could well be the big Wall Street banks, who have tons of money to throw at it. There’s little indication that any of the startups, using cryptocurrencies or not, will ultimately prosper from blockchain. More likely, they’ll disappear like all those fledgling computer companies in the 1980s.
Steve Goldberg is an investment adviser in the Washington, D.C., area. He has bought puts that will profit if Eastman Kodak (KODK), which has embraced crypto and blockchain technology, goes down in price in the next month or two.
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