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Market Bubbles

Bitcoin is a Bubble: I Suggest Getting Out Now

After doing my research on cryptocurrencies I have concluded the following facts based on historical market data, general consensus of prominent investors, and common sense.

Bitcoin is not a currency

As Ray Dalio constantly says, two criteria are needed for something to be a currency: (1) it must be a medium of exchange, and (2) it must be a store of value. Bitcoin is not a medium of exchange because most merchants won’t accept it; neither can you pay federal taxes in Bitcoin because the government only takes dollars. Thus Bitcoin is extremely volatile, making it a far cry from a store of value compared to gold, which is a longstanding safe haven. Gold and silver preserve the quantity of wealth (i.e. purchasing power of U.S. dollars). Unlike gold and silver, which go up in value when fiat currencies weaken—Bitcoin does what it wants based on random market speculation.

Cryptocurrencies are a fleeting craze similar to tulips

The tulip bubble crashed based on the same principles that causes Bitcoin to behave the way it does. Jordan Belfort mentioned in a CNN interview that once futures were trading in the tulip mania, the bubble came to an abrupt holt. Thus he feels the same will happen to Bitcoin; derivatives introduced into the market will allow sophisticated investors to short it, causing traditional “squeezes” with accelerated prices due to scarcity (there are only 21 million Bitcoin). Consequently, Bitcoin will rise to such high levels in price, only to come crashing down in a horrific, dramatic fashion.

Don’t be fooled. In the coming months crypto prices might soar. People will buy in like they did in early 2017 when Bitcoin almost hit $20,000. During that period when prices bounced between fifteen and nineteen thousand, the “suckers” took equity off their homes and went into debt to buy Bitcoin—then it crashed down to almost $3,000! As the old saying in trading goes, “Bulls make money, bears make money; pigs get slaughtered.”

Unfortunately many young millennials will buy in to this rise in cryptocurrencies which will be broadcasted over the news as a hot trend. Average people will go all in as they did before. Then, it will come crashing down to an abrupt halt, leaving them dumbfounded to have lost so much. The cryptocurrency movement will be deemed as a bubble after all.

The entire cryptocurrency craze, which includes the thousands of copycat “alt coins” that have emerged, conveys all the characteristics of a market bubble: people buy in solely for the purpose of selling later at a higher price, absent from any interest in the asset as an inherent store of value. Those who own Bitcoin and other cryptocurrencies have organized themselves in a tight-knit community almost resembling a cult, with “us verses them” mentality as they often scold traditional stores of value such as gold.

No inherent store of value

Digital currencies are nothing more than a charge in a transistor. They have no inherent, tangible value beyond the fleeting hype that people impose. Though value is subjective, objective factors are also necessary for supply and demand. People need to collectively identify assets beyond their utility as a medium of exchange.

The merely trading mentality of cryptocurrencies make them no different than that of Las Vagus gambling casinos. There are no dividends in these “coins.” The assets are issued through companies that may be making a profit, but have no real need for the “cryptocurrency.” Many such business are built on venture capital money with no real offering to the market other than facilitating another alt coin for deceptive pump and dump schemes. I don’t want to sound negative but I am a realist, and this is what’s happening.

If an asset trades without objective measures of value to the marketplace (evidence of consumer needs, P/E ratio, dividends, etc.), then it is nothing but a gambling token. Bitcoin has attracted multitudes of young millennials who have no interest in investing otherwise, but got drawn to the crypto movement based on a pure speculation to make cheap, easy money.

My short-lived relationship with crypto

Over the past week of looking into Bitcoin and its nearly 3,000 alternative digital coins, I joined Coinbase.com and their professional trader platform, Coinbase Pro. I put some money in these accounts via the wallet system which isn’t hard to use. I funded the accounts with ACH and debit cards both directly and through the wallet transfer system of Bitcoin.com and Blockchain.com. Blockchain.com seems to be a better deal because Bitcoin.com uses the Simplex entity to purchase funds from your debit or credit card, only with a $20 dollar fee.

The past couple of weeks were spend reading and listening to cryptocurrency podcasts as well as trading in the crypto market on both Coinbase and Coinbase Pro. Their premium version gives a much better deal as commissions are roughly between .05% and .25% depending on the amount of capital you move a month, and whether you’re buying or selling. Coinbase on the other hand, charged me about $10 dollars just to sell a few hundred dollars of crypto. They obviously prey on the novice ones who are new to the platform and may have not discovered their pro version yet (not very ethical in my opinion).

Overall, I made some gains, and lost a little. Being the cautious trader that I am I pretty much broke even at the end upon pulling my money out. This short lived experience in the cryptocurrency market of trading penny stock-like coins, and learning how to convert the assets from Bitcoin to stable coin, or from USD to Bitcoin through the blockchain wallet system, was educational to say the least. It is a great technology, don’t get me wrong, but I don’t see much value in the whole market whether used as a transport vehicle between parties or investment pursuit.

Perhaps if I want to transfer money to my relative in Europe by converting my dollars into euros, I could use one of the “stable coins” for the process to avoid risk in price fluctuations. For example, let’s say I send $1,000 dollars to my nephew in Boston by converting my U.S. dollars to Bitcoin, and sending him a deposit into his wallet that he could transfer back to USD upon receipt—Bitcoin’s price might go up or down by $500 in a minute! Therefore, the transfer options via stable coins have some utility because I don’t have to spend $20 or $40 dollars on a wire fee through a bank.

There is no third-party handling my money or taking commissions in the process. However, the aspect of “trading” and (God forbid) “investing” in cryptocurrencies with an alleged diversified portfolio of coin assets is utterly foolish and ill-advised. Take this not as financial advise but as my personal opinion of what I have chosen to do with my money in 2019: I am buying gold and silver, and their respective mining stocks.

A highly speculative asset

Bitcoin and cryptocurrencies in general are highly speculative assets—nothing more, nothing less. This means for the disciplined trader you can make money for a time, assuming it will all come to an end some day. Unless I’m wrong and cryptocurrencies endure as a medium of exchange and store of value, if you want to trade cryptos during these times, have at it. In other words, there is nothing morally or ethically wrong with buying a lottery ticket once in a while or going to the casino with a small portion of your money set aside for fun; I personally don’t do it, and neither do most self-made wealthy people.

The majority of high net worth individuals scoff at the idea of playing the lottery or gambling, even within conservative bounds for fun. It’s the principle of it that matters. Making money through bringing products and services to others is the truly rewarding exchange. Making it through “luck” (which does not exist) has no character or spiritual promoting value.

Buying and selling crypto is like gambling: trading the U.S. stock market is not

If you want to trade crypto during these times when it’s performing well, then go ahead. Realize what you are doing is unlike the value that traders provide to the traditional equity markets. Unlike cryptocurrencies, which are not tied to companies in the same ways that stocks, ETFs and mutual funds are, buying and selling securities on the NASDAQ and NYSE benefit the whole economy. Let me explain.

NASDAQ and NYSE would not function effective without short-term traders

Day traders provide liquidity to the market because large buy-and-hold investors (e.g. institutional managers) would be unable to get-in or get-out of target positions but for day traders and swing traders. For example, a professional day trader might have $100,000 dollars in his account plus margin. He has roughly $200,000 dollars worth of buying power. He likely moves a million dollars worth of shares in securities among the market per day!

This is greatly beneficial to large scale investors because more liquidity is available for entry and exit positions. Without each type of investor and trader in the marketplace, its ecosystem would not operate effectively. The diversity among investors both individually and corporately bring the system as a whole to run smoother.

Nevertheless, the cryptocurrency market brings little value to our societies. It’s a gambling game, and like all bubbles, it will come to an end.