The Bitcoin bubble is bursting
The Bitcoin price is heading south again.
I last wrote about Bitcoin in the Daily Reckoning exactly four months ago. Since then the price has almost halved.
Sure, there’s been – and continues to be – plenty of volatility as the news flow varies.
But is it really all over for the so-called king crypto?
Let’s start with a short story…
The Emperor’s new clothes
You may well know the tale about the Emperor’s new clothes.
If you don’t, though, here’s a potted version…
The Emperor loved clothes. One day, two strangers arrived at his palace.
“We can make you the most beautiful clothes in the world”, they said.
“Then do it,” ordered the Emperor. But weeks later, nothing had appeared.
“Where are my new clothes?” demanded the Emperor!
“They’re here, Your Majesty,” said the first stranger. “Aren’t they wonderful?”
The Emperor was confused – he couldn’t see anything!
“These clothes are so special and magic that only the smartest people can see them”, said stranger No.2. “They’re too fine to be seen by stupid and ignorant people”.
“Of course”, said the Emperor quickly (not wanting to seem stupid or ignorant). “They’re great and I’m sure everyone’ll love them. Can I try them on?”
“Please do. As you can see, they’re not quite finished”, said the strangers.
“But if pay us more money, we’ll have them ready for the big parade.”
So the Emperor promised to pay the strangers anything they wanted to get the garments ready. Meanwhile, all the Emperor’s friends told him that “your new clothes are magnificent, Your Majesty!”
“My friends can see my new clothes but I can’t”, thought the Emperor. “I’ll have to pretend I can see them so that nobody thinks I’m stupid. No-one can know the truth!” When it was time for the big parade, the Emperor put on his new garments and joined in. The crowds, also wanting to look smart (and not seem stupid or ignorant), all said: “What a great outfit!” and “Isn’t he wonderfully dressed!”
The Emperor was very pleased that everyone was admiring his new clothes.
But then a small voice in the crowd yelled: “The Emperor’s got nothing on!”
A hushed silence fell over the parade. Then everyone started laughing. “The little boy’s right“, they said. “The Emperor isn’t wearing any clothes!”
“I must return to the palace and put something on to cover my embarrassment!” said the Emperor to himself. “I should never have trusted those strangers who only wanted to flatter me and take my money!”
Over to Bitcoin.
I’ll leave you to substitute it for the Emperor’s new clothes in the above story.
My point is very simple.
I believe that Bitcoin is an illusion. It’s not worth anything. It’s a bubble, full stop.
Intrinsic value is zero
Allianz Global Investors is the investment arm of Europe’s biggest insurer. It manages almost €500bn. And it has just published its analysis of Bitcoin.
“In our view, its intrinsic value must be zero,” says Stefan Hofrichter, the firm’s head of global economics and strategy. “Bitcoin is a claim on nobody – in contrast to, for instance, sovereign bonds, equities or paper money – and it does not generate any income stream.”
Sure, gold doesn’t produce any income either. But it’s a genuinely rare and weighty metal that’s been widely accepted as a store of value for more than two-and-a-half thousand years – compared to less than a decade for the Bitcoin experience.
Further, says Hofrichter, the world’s largest cryptocurrency “ticks all of the boxes” of the essential criteria for any asset bubble, including overtrading, “new-era” thinking and rising leverage. Bitcoin mania is a textbook-like bubble, he continues, “one that is probably just about to burst.”
Allianz Global isn’t the only commentator to cast doubt on the underlying value of Bitcoin, reports Bloomberg. University of Pittsburgh researchers have called it “an asset which has no value by traditional measures” and economist Nouriel Roubini – who predicted the 2008-09 great financial crisis two year before it happened – has even described the cryptocurrency as the “biggest bubble in human history”.
Indeed, I believe that describing Bitcoin as a currency of any description is a misnomer. Along with all the other ‘cryptos’, they’re little more than a speculative bet.
What will burst the bubble? As Jim Rickards puts it, the “free reign by cryptos is over”.
Governments, central banks and multilateral institutions such as the IMF have been monitoring the crypto market. And they see it threatening their monopoly on so-called ‘fiat’ money creation (i.e. the ability to print as much as they like). The authorities also view cryptos as an easy way of facilitating illegal purchases, money laundering, tax evasion and terrorist finance.
So it’s little surprise that fresh government moves against the crypto world are happening all the time. Assaults are coming from America’s SEC (the Securities & Exchange Commission, a pivotal US financial sector regulator), the US IRS (Inland Revenue Service), criminal prosecutors and other global regulators. These attacks are aimed at cryptocurrency exchanges, initial coin offerings and dark web transactions.
Yes, I know that the ‘blockchain’ payments system, otherwise known as distributed ledger technology or DLT, is touted as having a bright future.
Perhaps. Not being a ‘teccie’, I freely admit that I don’t understand all the jargon. Though I did see Kai Stinchcombe, CEO of True Link Financial, note that “after years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain – besides currency speculation and illegal transactions”.
In any case, you can bet your bottom dollar/pound/euro that the world’s financial regulators will ensure they can control and regulate the blockchain too. In fact IMF boss Christine Lagarde recently said that G20 governments should “fight fire with fire” by using government blockchains to monitor and control private operations.
I’ve previously compared Bitcoin to the 17th Century Dutch tulip bubble. From then via the 18th South Sea Bubble to canal building (1830s), gold (1869), railways (1890s), Florida property (mid-1920s), stocks (late-1920s), dot.com (2000) and US mortgages (2007), the world has seen many a bubble burst. The result has been big winnings for a lucky few but huge losses for many other – later – investors.
The last investors in Dutch tulips at least kept the flower. I believe that Bitcoin players will end up with nothing.
Editor’s note: Do you agree with David? if you have doubts whether Bitcoin will be worth anything in the long run, our experts think you might be right.