Bitcoin is an innovative, rapidly expanding network for storing and exchanging value among investors.If it’s an asset, does it have an inherent value, like gold? Arguments about “inherent value” are, and always will be, meaningless. Is there really some kind of “inherent value” in gold? We just decided it was valuable to us. The same is happening with Bitcoin.
It’s a cryptoasset that has the safe haven characteristics of gold and will potentially compete with it for a place in portfolios. Bitcoin is not a currency and will not be adopted as a new medium of exchange. It is not a stable store of value, nor can it be easily transmitted and exchanged for any good or service at a consistently predictable value. But, that’s not important from an investor’s perspective. Bitcoin remains incredibly volatile, and its correlation with other major assets has been inconsistent, but allocations are seen as suitable among an increasing number of investment professionals, and, increasingly, it is seen as an alternative investment equivalent to a derivative or other call options, given the potential for spectacular returns. The downside is well-defined while the upside can be asymmetric and significant.
Cryptocurrencies Hit New Highs. Should we be terrified?
Probably.
Bitcoin, Ether and, the most recent joke, frenzy, and punch line, Dogecoin, have increased 10x to 20x over the last 12 months. A spectacular return, but can it last?
Probably not.
The forces driving the eye-watering returns are the same as those that drove the insanity behind GameStop: the equivalent of a trading floor in every pocket funded with excess cash looking for disruptive investment opportunities and charging forward like an out of control herd – or lemmings – however you want to envision it. Cryptocurrency became the overwhelming target of Reddit day traders and mobs. Social media influencers, led by various forms of PT Barnum imitators like Elon Musk and many less sophisticated contributors, combined with the public listing of Coinbase to create a massive rally.
Initiative, savvy, luck, circumstance, and convolution have taken over currencies – or at least digital creations purported to be currencies (but in reality don’t, and never will, quite fit the bill). Those entities that create and support real currencies are taking notice. In other words, welcome to government in action. Here come central bank digital coins. Now imagine these “developed” governments (of whom France is probably not the worst offender) trying to deal with a global currency, currency exchanges, and the transfer of funds internationally. We don’t have to look too far to find the convoluted rules behind Bretton Woods, the WTO, and other international absurdities to recognize that this problem is not easily solved, or even understood. Bureaucrats are generally better at devising rules, charging fees, and collecting taxes and information than making anything that is useful or even comprehensible.
Luck rather than leadership, circumstance rather than foresight or political skill, seem to have been more helpful in triggering these developments. Digital coins (while loosely described as “currency” are more like a digital asset easily transferred and accounted for in a digital ledger) represent a handful of rather clever people taking on central government’s mighty bureaucrats. Armed with simplicity, clarity, and algorithms, they are defeating all administrations’ fondness for complexity, confusion, and rules.
In general, bureaucrats are masters of the art of convolution. Essentially, governments work overtime to create farce in the spirit of precision. An example of bureaucratic absurdity can be found in France (admittedly, a country that has taken bureaucracy to an art form – perhaps more so than art itself). When the government started a new lockdown because of the pandemic, they devised a two-page permission form to leave home, with 15 different justifications, before, thankfully, shelving it in the face of ridicule. The French can buy alcohol, for instance, but not underwear. These rules were simply to be able to walk out the front door, and the government imagined that this kind of detailed process was somehow useful, and not the bewildering reality it represented.
Fundamental drivers for pricing valuations in public markets have changed. Now, there is a new interaction among factors unseen just recently. Advanced technologies such as artificial intelligence have had a profound impact on the tools available and analysis presented to even the most amateurish investor. Social media, such as Reddit, Twitter, and other platforms, have allowed access to information and influence from media “stars” driving demand in an almost herd-like mentality driving up prices, and causing extreme volatility. Finally, technology has enabled a trading floor to be in everyone’s pocket. That same trading floor allows access to any information on anything from anywhere, and communication with anyone or, via social media, receive communication and information (regardless of how dubious) from anyone about any security or investment strategy.
These factors will cause unprecedented market volatility, along with extreme price movements for well-known (or perhaps more accurately, well-publicized) companies and their securities. While the supply of securities remains somewhat constant, demand for those securities is increasing (sometimes exponentially) because many more investors are now chasing those same securities.
The price of anything cannot escape supply and demand dynamics. Recent IPO activity is an attempt to meet growing demand (and raise capital at attractive prices). The new supply from IPO’s, secondary stock issuances, and most recently and monumentally, SPAC offerings, still do not provide enough supply to quench a growing and overwhelming demand. The valuations, especially those given to the SPAC’s, are entering stratospheric levels that could hardly be justified under normal market conditions. Successful investors are the ones who understand adding return without corresponding risk is the most critical component of successful investing, especially given the new equation for valuation:
Economics + Advanced Technologies + Social Media = Price
These three components are now inexorably linked and constitute an influential role in determining valuation from now on.
The More Things Change…
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