What comes to mind when you look at the chart above? What could the chart possibly be tracking? The EKG of a defective heart? Altitude measurements of the various Tour de France stages? The stress level of an air traffic controller during peak hours? None of the above. The above chart represents the Bitcoin price over the past three months. Other popular cryptocurrencies like Ethereum have followed similar patterns. No one would want to date someone with this type of emotional profile but why would so many investors want to be involved with an investment with this type of volatility? Is it more secure than other forms of currency? Is it backed by any government? Does it offer any advantages over traditional forms of currency like convenience? The answers to all of these questions is a resounding NO, so why the crypto craze?
The Bitcoin craze and the cryptocurrency craze in general can be explained more by human nature than any intrinsic economic factors. Just like the dotcom and the mortgage-backed securities booms of the 2000’s, the Bitcoin craze is fueled and inflated by the same irrational psychology behind previous bubbles.
The Bitcoin craze and the cryptocurrency craze in general can be explained more by human nature than any intrinsic economic factors. Just like the dotcom and the mortgage-backed securities booms of the 2000’s, the Bitcoin craze is fueled and inflated by the same irrational psychology behind previous bubbles. There can be no other explanation because as a form of currency, Bitcoin is inferior to traditional currency in more ways than one. Is it more secure than traditional currency? No. In fact, at times, it can be a liability. The deposits at your banks are insured. The Bitcoin you hold at one of the various central exchanges is not only not insured but not very secure either. In December of last year, hackers made off with nearly $70 million of Bitcoin from major cryptocurrency-mining service NiceHash. The largest cryptocurrency hack occurred back in 2014 when hackers stole approximately $450 million from Mt. Gox, a Bitcoin exchange based in Tokyo that handled 70% of all Bitcoin transactions at the time of the hack.
One of the biggest weakness of Bitcoin and other cryptocurrencies compared to traditional currency like the U.S. dollar is Bitcoin is not backed by any government and is unregulated. The U.S. dollar is backed by the full faith and credit of the United States. In simple terms, the dollar is a liability of the U.S. government and is the form of accepted tender in the United States and will continue to be so in the future. So, while the U.S. dollar is the liability of the U.S. government, with a central bank controlling its value, Bitcoin is nobody’s liability. Bitcoin is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and is not the liability of any institution at all.
Does Bitcoin offer any advantages over traditional currency? In terms of convenience, Bitcoin is anything but. No major online retailer accepts Bitcoin and the list of online merchants that do accept Bitcoin is actually shrinking. The only place where Bitcoin and other cryptocurrencies are widely embraced is the Dark Web, where illicit activities like drug dealing and prostitution can be funded by cryptocurrencies due to their anonymous nature. While cryptocurrencies may offer convenience to criminals, for the average law abiding citizen, it offers no advantages over traditional currency.
With little reason to explain its popularity, why has Bitcoin become the investment du jour? That’s because investors, by nature, have always been chasing the next shiny object or unicorn. History is rife with examples of investment crazes and burst bubbles. There are two basic facts about human investing behavior that can explain the Bitcoin craze. 1) Investors will always chase the next big thing and 2) Nobody wants to miss out. The Bitcoin joy ride checks both boxes. It’s the current “next big thing” and it’s because nobody’s learned from past mistakes. Everybody’s thinking, “this time it’ll be different.” They’ll point to some big name billionaires invested in Bitcoin or cryptocurrencies like the Winklevoss twins or Michael Novogratz. The fear of missing out is a powerful motivator and a very real thing. It’s hard to resist when your coworkers, your family and your neighbors are all in. The same thing happened with dotcoms and mortgage-backed securities. The allure was too great. What if the market keeps going up? You don’t want to be the one left at the station. But here’s a warning. Bitcoin, more than any past bubble, is destined to fail.
Why will the Bitcoin craze come crashing down? It’s because Bitcoin and other cryptocurrencies have no intrinsic value. Bitcoin’s value is fueled entirely by speculation. What else would explain the wild price swings of just the past three months? It’s not because of the economy. If the economy had such violent swings in just three months, we would all flee to deserted islands to escape the madness. The price of Bitcoin is determined entirely by what somebody else is willing to pay for it. Unregulated, unbacked by any government and with the price untied to any underlying economic factors or indicators, Bitcoin is purely speculative and will eventually rear its ugly head and the signs have been there for a while for anyone willing to look past the blinding sparkle of everybody’s new favorite toy.
For the reasons stated above we at Four Peaks prefer to invest in something tangible with intrinsic value. With real estate, even if prices crash, there’s still the structure and the land on which it sits, which still hold value. We love mobile home communities (“MHC’s”) for our real estate investments because rents have remained historically stable and are projected to only rise in the foreseeable future due to limited supply. To us, acquiring MHC’s is not speculation, it’s principle-based investing. Even if prices fall, with real estate investments like MHC’s, the prices will always bounce back. The dot-coms and mortgage backed securities that failed in the 2000’s will never come back. Bitcoin is destined for the same fate. The asset that has survived every crash and bubble is real estate. It always comes back and will never go away.