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It is often a wise thing to look around and see where people are doing that is nuts. ?Often it is obvious in advance. ?In the past, the two most obvious were the dot-com bubble and the housing bubble. ?Today, we have two unrelated pockets of nuttiness, neither of which is as big: cryptocurrencies and shorting volatility.
I have often said that that lure of free money brings out the worst economic behavior in people. ?That goes double when people see others who they deem less competent than themselves seemingly making lots of money when they are not.
I’ve written about Bitcoin before. ?It has three main weaknesses:
- No intrinsic value –?can?t be used of themselves to produce something else.
- Cannot be used to settle all debts, public and private
- Less secure than insured bank deposits
In an economic world where everything is relative in a sense — things only have value because people want them, some might argue that cryptocurrencies have value because some people want them. ?That’s fine, sort of. ?But how many people, and are there alternative uses that transcend exchange? ?Even in exchange, how legally broad is the economic net for required exchangability? ?Only legal tender satisfies that.
That there may be some scarcity value for some cryptocurrencies puts them in the same class as some Beanie Babies. ?At least the Beanie Babies have the alternative use for kids to play with, even though it ruins the collectibility. ?(We actually had a moderately rare one, but didn’t know it and our kids happily played with it. ?Isn’t that wonderful? ?How much is the happiness of a kid worth?)
I commented in my Bitcoin article that it was like Penny Stocks, and that’s even more true with all of the promoters touting their own little cryptocurrencies. ?The promoters get the benefit, and those who speculate early in the boom, and the losers are those fools who get there late.
There’s a decent public policy argument for delisting penny stocks with no real business behind them; things that are worth nothing are the easiest things to spin tales about. ?Remember that absurd is like infinity. ?If any positive value is absurd, so is the value at two, five, ten, and one hundred times that level.
The same idea applies to cryptocurrencies; a good argument could be made that they all should be made illegal. ?(Give China a little credit for starting to limit them.) ?It’s almost like we let any promoter set up his own Madoff-like scheme, and sell them to speculators. ?Remember, Madoff never raked off that much… but it was a negative-sum game. ?Those that exited early did well at the expense of those that bought in later.
Ultimately, most of the cryptocurrencies will go out at zero. ?Don’t say I didn’t warn you.
Shorting Volatility
This one is not as bad, at least if you don’t apply leverage. ?Many people don’t get volatility, both applied and actual. ?It spikes during panics, and reverts to a low level when things are calm. ?It seems to mean-revert, but the mean is unknown, and varies considerably across different time periods.
It is like the credit cycle in many ways. ?There are two ways to get killed playing credit. ?One is to speculate that defaults are going to happen and overdo going short credit during the bull phase. ?The other is to be a foolish yield-seeker going into the bear phase.
So it is for people waiting for volatility to spike — they die the death of one thousand cuts. ?Then there are those that are short volatility because it pays off when volatility is low. ?When the spike happens, many will skinned; most won’t recover what they put in.
It is tough to time the market, whether it is equity, equity volatility, or credit. ?Doesn’t matter much if you are a professional or amateur. ?That said, it is far better to play with simpler and cleaner investments, and adjust your risk posture between 0-100% equities, rather than cross-hedge with equity volatility products.
Again, this is one where people are very used to selling every spike in volatility. ?It has been a winning strategy so far. ?Remember that when enough people do that, the system changes, and it means in a real crisis, volatility will go higher than ever before, and stay higher longer. ?The markets abhor free riders, and disasters tend to occur in such a way that the most dumb money gets gored.
Again, when the big volatility spike hits, remember, I warned you. ?Also, for those playing long on volatility and buying protection on credit default — this has been a long credit cycle, and may go longer. ?Do you have enough wherewithal to survive a longer bull phase?
To all, I wish you well in investing. ?Just remember that new asset classes that have never been through a “failure cycle” tend to produce the greatest amounts of panic when they finally fail. ?And, all asset classes eventually go through failure.
While I agree with most of your thoughts on cryptocurrencies mostly as it competes as a form of “money” I do see some usefulness to cryptocurrencies.
I think they are valuable for money laundering. I think they can function as the technological ages “gold”. You have long backed owning gold. Crypto and gold share similar characteristics. One is math based and made rare one is a shiny metal with only use as jewelry.
But I do think cryptos have a real use as a means to launder money. Or hide assets from a wife in divorce. At current combined market values I do not think the current size of crypto currencies is too much for the needs of the black market. Or those needed to hide money from chinese regulators.
I am seeing 150 billion in market cap for the crypto currencies. That isn’t too big for the needs of global criminals. The world has mined 8.5 trillion in gold (quick google search but close enough).
You’re correct, the illicit uses of cryptocurrency are significant, and those could still prove be their undoing, if governments get serious. There will still be Florida, trusts, tax havens, life insurance, and many other ways to launder money, protect assets, and otherwise cheat people if used with ill intent.
You beat me to this comment. It used to be that criminals, money launderers, or capital control evaders had to move money into secret tax havens, like Switzerland, Caymans etc. either physically or wire transfers. Since those aren’t as secret anymore, crypto-currencies are now useful in their place. I think that is the fundamental demand out there that the speculators are then piggy-backing on.
China appears to be starting to crackdown on crypto-currencies. If more governments do that, then they could be ripe for a major fall as they would probably just revert to toy status then.
Until then, it is going to be the ultimate hacking target because many of the crypto-currency robberies won’t get reported to the police, unlike robbing a bank.
I read so many similar articles about the dot com bubble. Indeed, it did pop, once it reached a far greater size (that roughly equivalent to the NASDAQ, at the time). So many people sent warnings and so many people lost their life savings and more.
The people who invested in a physical product, with a user base, that solved problems, think Amazon, Google and Ebay, made away with huge amounts of money. People wanting to invest in whims and fancies and delusions of grandeur, obviously lost the farm.
Baron Rothschild said it best when he stated that in every new economy or movement there is money to be made. Some are good, some are bad, but they all have money making opportunities.
Not sure Beanie Babies are a good investment, but some of the mainstream cryptocurrencies with user bases and who collect revenue and solve problems are still a good bet.
Contrary to popular belief in the media, I did not say that Beanie Babies were a good investment. I said they had more legitimate value than cryptocurrencies.
But really, I don’t care what the promoters who wrote the articles said. They have to spit at anyone that exposes their scam.
Cryptocurrencies may not all go zero — there is a need for money-laundering. It will be interesting how many countries bar them as a result, and how many promoters go to jail for being facilitators of felonies. Remember, it is very easy to get charged with conspiracy — almost any felony involves it if there are multiple people involved.
It’s clear to me that you don’t understand the Blockchain use case. Yes, I’m sure there’s still a lot of illicit money flow, but it’s no worse than you’ve seen in the financial markets rife with corruption, The diamond industry, mining rights of commodities, etc. Just because the stock market exists or a commodities market exists, it doesn’t make a clean money. You need to be very clear on that.
Secondly, you give no credit to immutability. I beg of you to find an immutable asset that exists in the flesh.
But I will give you credit. If you can stave off other investors for a little while longer, it will all be to obtain more block chain assets before inevitably you have to switch over to own some.
I don’t think there are any more manipulated, irrationally valued and scammed markets than are on stock market.
Since you are a fixed asset and a little risk equities investor of other peoples money, I can see how they would be an incentive for you to detract people away from alternative investments, so as to keep the money in your fund. Do what you need to do, but I would recommend you do a deep dive into the technology, as your blog post clearly indicates you don’t have a good understanding of the market and it’s use cases.
Blockchain and cryptocurrency are separable issues. That said, blockchain is a resource hog. Not everyone who uses it is enamored with it, and like many people, you don’t get that computer systems are a subset of people systems. The blockchain didn’t stop a variety of frauds and losses in Bitcoin, as I pointed out in my first article. Where there are locks, people will make keys.
You also missed my point about “things only have value because people want them, some might argue that cryptocurrencies have value because some people want them. That?s fine, sort of. But how many people, and are there alternative uses that transcend exchange? Even in exchange, how legally broad is the economic net for required exchangability? Only legal tender satisfies that.”
Profitable corporations provide widely needed products that are a large portion of the economic net. Lose them, the world falls apart. Lose cryptocurrencies, only a bunch of criminals and speculators get hurt.
I’m not detracting from cryptocurrencies as an investment. They are collectibles, commodities, as the IRS has ruled.
Criticize me as much as you want. I got a lot of abuse from people during the housing bubble. In the end, my arguments will win. They usually do. 😀
I think its very close minded to think that cryptocurrency has a use case for money laundering alone. I think that shows you don’t understand the space or have researched it poorly.
I may not be a huge fan of it, but I am very much open to the fact that there are some legitimate people doing legitimate things. Trying to solve real world problems, as they did in the dot com era.
I could easily dismiss the idea of investing in the housing market in certain neighbourhoods of Detroit, but the fact that there is a ‘need for crack dens’. Now that may be a legitimate comment as ludicrous as it is, but to define the entire global property market on one small area doing one small thing, would indicate my lack of understanding of the property market.
Re banning of cryptocurrency, the Chinese have ‘suspended’ ICOs, not banned. I think some people have very loose interpretations of Mandarin. There is a huge difference between ‘suspension’ and ‘banning’.
Until such time as this all fizzles out, and I’m sure it mostly will, I will learn from it, not be dismissive and as is the case with all emerging markets, I will make some money from it too. After all, every bubble and boom has followed the exact same economic cycle. What are we if we haven’t learned from our past?
The phrase is “closed-minded.” Also, I said about China “Give China a little credit for starting to limit them.” That’s all I said.
Cryptocurrencies are a gamblers market — don’t stay too long. 😉 The Devil will take the hindmost.
I have no doubt that I will be right about a crash in cryptocurrencies in the end, and that some failures will be spectacular. Yes, I am closed-minded on this, because it resembles a wide number of bubbles that have happened in the past.
People get dazzled in the midst of speculation. You’ll find that out soon enough.
What are you talking about?
I know the risks involved with the market and I understand the likelihood of it capitulating at some stage. As I clearly stated above, all booms and bubbles follow the same cycle and have since we have recorded proof. I will follow that cycle, as I have the ones before and do as I always do. Exercise caution and make money. I am fully versed with buying the rumours and selling the news and also fully comprehend that every market crash comes before mainstream adoption and not after.
I give China credit and think its great they are trying to put a bit of governance and structure behind the collection of funds. You mentioned countries banning cryptocurrencies. I mentioned China hasn’t banned them, they have suspended them. Since my last response they have come out to clarify this and said it is temporary. They want to ensure rules and regulations are established before they list the suspension.
I am also sure you are familiar with the quote “if you are losing the argument, correct their grammar”
Never heard of that quote, but I did was pedantic. Sorry.
http://alephblog.com/2008/04/24/book-reviews-manias-panics-and-crashes-and-devil-take-the-hindmost/
Some things don’t get a mainstream adoption. Tulips, South Sea Bubble, Ponzi Schemes, penny stocks, etc. There has to be something there for mainstream adoption to take place, like railroads, which were a bubble at one point. There is nothing behind cryptocurrencies. To the extent that they don’t disappear, they will have an existence like penny stocks.
Hi David, I’d be interested to hear your opinion on the activation of Segregated Witness and the potential for 2nd layer solutions like Lightning Network, MAST, and Atomic Swaps.