The “B” Word
Since the dot-com boom crash and 2008 recession, calling a successful market a bubble has become high fashion.
The bitcoin craze is no different. People have been calling it a bubble since the beginning.
- Bitcoin @$4: “Bitcoin is overpriced, this is a bubble”
- Bitcoin @$40: “Total insanity, everyone will lose their shirts”
- Bitcoin @$400: “I can’t believe anyone is stupid enough to buy this”
- Bitcoin @$4,000: “This is a fad, it’s just like tulips.”
Now sitting at just over $6,000 per coin, there isn’t a week that goes by that someone doesn’t weigh in on why bitcoin must be a bubble.
In March 2014, Warren Buffett went on CNBC and told viewers to stay away from bitcoin; viewers persuaded by the Oracle of Omaha missed out on a 620% run-up in the past 3½ years.
Wall Street Is Getting It All Wrong
Recently, both Jamie Dimon (CEO of JPMorgan Chase) and Ray Dalio (chairman of Bridgewater Associates) went on record saying they believe bitcoin is in a bubble.
These guys are incredibly sharp. So how is it that they can be so incredibly wrong about digital currency?
For one thing, cryptocurrency stands to disrupt their business (more on this later).
Additionally, valuation of currency is difficult. Unlike real estate, stocks or bonds, currency doesn’t intrinsically produce an income stream — dollars stuffed under a mattress won’t increase in value over time by themselves, although ownership of a stock might.
This difference is important because existing financial models depend on income streams in order to determine a fair price. Currencies do not produce income. The price is driven by supply and demand, making long-term price projections almost impossible.
This is what makes cryptocurrency fundamentally different from other investments. When you buy stock in a company, it doesn’t impact the cash flow of the company, so the value of the company is the same whether you buy it or not.
However, as we discussed with currency, as more people accept it, the more value it has.
For many people (including Dimon and Dalio), the idea of a currency that is not backed by a government is hard to absorb. However, it wasn’t too long ago that trust in the government wasn’t enough and all currencies were backed by gold.
The movement to digital currency represents a natural progression toward reliance on data to solve our problems.
Market Bubbles? Depends on Your Perspective
It doesn’t take a stretch of the imagination to understand why financiers like Dimon, Dalio and Buffett are pessimistic about the future of digital currency. JPMorgan’s ability to profit is dependent on customers depositing funds in a bank.
However, cryptocurrencies negate the need for a bank to safely store funds. In fact, Dimon has expressed his concerns regarding cryptocurrency in the past.
In a letter to shareholders in 2015, Dimon stated that “Payments are a critical business for us… But there is much for us to learn in terms of real-time systems, better encryption techniques and reduction of costs and ‘pain points’ for customers.”
Basically the ones screaming “Bubble!” are the ones whose bottom lines are going to be most affected by crypto. It’s self-preservation feigned as financial analysis.
Still not convinced? Consider this…
For years, executives at Blockbuster Video dismissed the very real changes happening to their business model while Netflix ate their lunch. In fact, Blockbuster had the opportunity to buy Netflix for $50 million in the early 2000s but refused because the price was too high. Netflix has recently been trading at a market cap of $80 billion.
When people ask whether I think cryptocurrency is in a bubble, the best response I can give is which side of history do you want to be on… the Blockbusters of the world or the Netflixes?
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