PLAYING WITH THE BITCOIN FIRE

Bitcoin BTC - virtual money

I recently came across an interesting article on Reuters.com that relayed a recent interview on CNBC of Saudi Billionaire Prince Alwaleed bin Talal, who owns investment firm Kingdom Holding where he shared his thoughts on cryptocurrencies like bitcoin. In the interview, Prince Alwaleed expressed his skepticism of cryptocurrencies, warning that bitcoin was like “Enron in the making.”

His major criticism of cryptocurrencies was that they were unregulated and because they were unregulated, this made them risky.  “I just don’t believe in this bitcoin thing. I think it’s going to implode one day. It’s Enron in the making,” he said, referring to the U.S. energy company that filed for bankruptcy in 2001 after revelations of a widespread accounting fraud.

I agree with Prince Alaweed’s opinion of bitcoin and other cryptocurrencies.  Unlike traditional currencies, it’s completely unregulated and is not backed by any government.  In reading this article, I was reminded by the book Blink by Malcolm Gladwell that is about how we think without thinking, about choices that seem to be made in an instant-in the blink of an eye-that actually aren’t as simple as they seem. Before we analyze a choice with our minds, our subconscious (i.e., “guts”) has usually already made the correct choice for us.  Successful decision makers tend to go with their gut feelings while those who ignore their instincts usually stumble into making wrong choices.  My gut instinct is that bitcoin is a fad with real world consequences for those who choose to play with this latest form of fire.  I choose not to play with the bitcoin fire for many reasons.

The biggest red flag for me when it comes to bitcoin is that it was created out of thin air (and anonymously at that) in 2008.  The price of bitcoin is determined entirely by what somebody else is willing to pay for it.

The biggest red flag for me when it comes to bitcoin is that it was created out of thin air (and anonymously at that) in 2008.  The price of bitcoin is determined entirely by what somebody else is willing to pay for it.  And in 2017, that price has climbed dramatically, increasing by 410% year to date.  Unregulated, unbacked by any government and with the price untied to any underlying economic factors or indicators, bitcoin is purely speculative.

It’s my view that bitcoin is a bubble fueled by a general delusion of its projected value.  It’s no different than past financial bubbles that were fueled by irrational speculation.  Having lived through the dotcom bubble, the similarities are eerily similar.  During the dotcom boom, investors were purely speculating on the future value of dotcom stocks, irrationally ignoring underlying economic fundamentals.

Many of these companies that were attracting insane amounts of venture capital were nothing more than a website and an idea with no underlying business or operational history to show.  As a result, the value of these dotcoms were purely speculative.  Their value rose and rose because some fools down the road were willing to pay more and more for them.  Finally, when some cooler heads prevailed and questioned the underlying value of these companies and their future profitability, they went bust because most had no viable business.

Bitcoin is a bubble

Bitcoin is a bubble and will burst because there is even less underlying its value than even a dotcom in the early 00’s.  It is purely speculative.  The price is being driven up entirely based on the irrational speculation by investors believing that some other fool down the road will pay even more for it later.  Like fads that come and go, bitcoin too will come and go.  Sure, there may always be a use for it because of its semi-anonymous nature, maybe by drug dealers or operators of other illegal enterprises, but as a legitimate long-term currency, I don’t buy into the hype.

One final thought.  There is one glaring difference between the bitcoin and past bubbles.  Many public figures and prominent academics have been warning about bitcoin for quite some time, even going back to its inception.  Unlike the dotcom and housing boom that seemed to creep up and take everyone by surprise, the inevitable crash of bitcoin should come as a surprise to no one.  Prince Alaweed is not the first prominent figure to sound the alarm about bitcoins and he will not be the last.  That is why we choose not to play with the bitcoin fire.

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