Stocks started to stabilize late last week after several weeks of weakness led by technology stocks. While the Dow and S&P 500 were still within 3% of all-time highs, the tech-heavy NASDAQ was down close to 8% at its low. Newer hyped stocks, including many SPAC names that came public in January and February, fell below original offering prices. Many were down 30-50% from very recent all-time highs.
But all of the air coming out of SPACs and other newbie high flyers paled against the attention given over the last week or so to Bitcoin. While Bitcoin may seem rather new to most of us, it was actually created in 2009. A person, or group of people named Satoshi Nakamoto, created it using open-source programming. Transactions would be recorded on a public ledger using something called blockchain technology. Because every created or mined Bitcoin had its own unique identification number, no intermediaries would be required to verify the transaction, thus cutting out the middlemen, like Visa and MasterCard, saving both time and cost.
But what sounded cool in theory simply didn’t work in the real world. The value of Bitcoin was unstable from the beginning, rising or falling as much as 10% in a matter of hours or even minutes. While the Bitcoin itself had a unique ID that left a trail, the buyer and seller could both be anonymous. In today’s world, there are no currencies that are unregulated at any level. Any serious attempt at replacing the dollar as the world’s reserve currency would require some form of regulation, safety, and transparency. Bitcoin never has met any of those standards. Once in a while, a company, trying to grab a headline or make a statement, will state a willingness to accept Bitcoin. But the reality has been that most Bitcoin transactions have little to do with the sale of goods or services. Most are simply buys and sells between Bitcoin holders. At the peak of frenzy last week, 50% of the number of Bitcoins outstanding traded in just one 24-hour period. To the extent that Bitcoin is used for transactions, its most important characteristic has been the abilities of buyers and sellers to remain anonymous. Thus, the ransom Colonial Pipeline recently paid to Dark Side hackers, allegedly from Russia, was paid using Bitcoin. Drug smugglers, money launderers, and sellers of arms on the black market also use Bitcoin regularly. Not all inventions find functional purposes that benefit society.
So why did Bitcoin ever get to a value of $60,000? Good question. The glib answer is that there have persistently been more buyers than sellers. Why? Because the owners of Bitcoin (who obviously wanted the value to increase) have done a masterful job hyping the story. Before too long, the neophyte Robin Hood crowd got interested. Once you could buy a tiny fraction of a Bitcoin, or even set up a high-speed computer to try and mine some, more and more people got hooked. At least up until now, Bitcoin is the modern-day equivalent to the Dutch tulip bubble of the middle ages, wrapped in techno-jargon that makes enough sense to suck in new buyers but not enough sense to sustain a value.
I have no idea whether Bitcoin a month from now will sell for $10,000 or $1,000,000. As noted earlier, it depends on the balance between buyers and sellers. Clearly, Bitcoin owners will do whatever they can to continue to advocate their cause. But as time passes, and 12 years between invention and today is a millennium in the world of high technology, Bitcoin is going to have to find a purpose in order to retain any semblance of today’s value.
Advocates still support the notion that Bitcoin will be the inevitable digital currency of tomorrow. The other major story line is that it will replace gold as a store of value. That latter premise certainly suffered a bit of a jolt over the past week. While one can argue whether gold is a good store of value or not, it has been accepted that way since Egyptians ruled the world. Bitcoin, in contrast, has been around for a dozen years and price stability certainly hasn’t been one of its hallmarks.
In time, there will almost certainly be a digital currency. The process of digitization of money has been going on as long as Bitcoin has been in existence. The recent pandemic has accelerated the use of credit cards, digital wallets, and platforms like Venmo to move money around digitally. But that money is flowing in dollars, or euros, or any other currency. The digitization of money does not require the creation of a digital currency, at least not yet.
Blockchain, the platform on which Bitcoin and other digital currencies are built, is a valuable technological breakthrough. The incorporation of blockchain into the monetary world can speed transactions and reduce costs. But any currency built on top of a blockchain base still must be subject to some regulation, must maintain a stable value, be accepted broadly, and be safe. If your bank fails, the FDIC will swoop in and transfer your assets to another bank overnight giving you complete protection (up to $250,000 per account). If someone hacks your Bitcoin wallet, there is no protection. There isn’t even a robust oversight today for Bitcoin exchanges, although that is changing rapidly.
Simply said, if a new digital currency is inevitable, it is just as inevitable that the currency will not be Bitcoin, but rather a creation of one or more central banks. China is already experimenting with the limited use of digital currency and the Federal Reserve is watching attentively.
OK, so Bitcoin is a problematic investment without any real intrinsic value. What’s the point of my spending a morning to discuss this? The answer can be summed up in one word.
When markets get hot, investors grab at half-truths and try to make a silk purse out of a sow’s ear. The surge of Bitcoin and the surge of interest in SPACs coincided. No explanation by me is necessary at this point. SPACs are blind pools looking for tomorrow’s Amazon. There are hundreds of such blind pools created in just the past few months and there is only one Amazon. Does anyone really believe that all these SPAC creators will successfully find the wonder company of tomorrow? Do investors understand that SPAC creators grab a big chunk of the ownership for themselves and then form another vehicle called a PIPE to grab an even bigger chunk?
If you stopped to think a couple of months ago, you would have never considered a SPAC, at least until you saw what the SPAC was buying and could make an intelligent decision on the value of the new company.
If people had taken the time to think, GameStop wouldn’t have gone past $400 per share.
But those admonitions are fairly obvious. What about the futures of Peloton and Zoom? Both may have very bright futures. I would be the last one to argue that Zoom won’t have a place in this world post-pandemic. But will the future earnings of Zoom justify the prices we saw in January? I doubt it. Will Peloton bikes still be the rage when gyms reopen? Do we go to gyms just to work out or to socialize while we work out? Will Pelotons ultimately collect dust alongside our Total Gyms? I don’t have the answers, pro or con. But its stock price a few months ago assumed we would all own bikes at home in a few years. And I won’t even discuss the treadmills it just had to recall. Oops!
When the Fed is pouring money into markets, when money supply grows 20% plus along with our savings rates, too much money sloshing around looking for a home is a breeding ground for hucksters of half-baked truths. It isn’t confined to the stock market. NFTs have captured a corner of the art world, sending prices at auction into the tens of millions of dollars. Homes are sold within a week of listing. Prices in some hot markets are up 30-50% or more in a year. Spikes, by their nature, don’t last that long. I am not suggesting housing won’t remain strong. But I am suggesting that today’s spike in prices and the fear of being left out won’t go on forever.
Car dealer lots are empty because of a semiconductor chip shortage that probably will be resolved before the end of the year. The price of lumber spiked obviously in association with the hot housing market. But over the past two weeks, those prices have started coming back to earth. Rural landowners are chopping down their own stands of pine to benefit. Supply will catch up with demand quicker than you might imagine.
When the Fed says today’s inflation spike is likely transient, it is right, at least to a point. The commodity spikes correct. When they do, prices will fall as fast as they went up.
You actually see the same thing happening with Covid-19. A spike in case counts brings a reaction you would expect. People isolate themselves. Forget what governments say, no one wants to get the disease. In some instances, herd immunity might kick in. Just look at a chart of the disease in any locality, even India where case counts are starting to fall rapidly. Actions bring reactions. In the case of Bitcoin, will there be as many buyers tomorrow? Will any rally bring out more sellers who want to escape? Or will the decline simply create new buyers? I don’t know, but unless Bitcoin finds a real purpose beyond the world of criminals and rogue nations, its long-term value is questionable.
Today, Priscilla Presley is 76. Bob Dylan turns 80. Tommy Chong is 83.
James M. Meyer, CFA 610-260-2220