Earlier on, I commented that I don’t see bubbles anywhere within the investible universe. That is accurate because I do not put cryptocurrencies in my bucket of things that I believe are investible. I feel that cryptocurrencies are rapidly heading into bubble territory because the narrative has run so far ahead of the definable economic worth, that you will continue to see crashes like you saw this week. Be it ICO’s (initial coin offerings), be it bitcoin itself, the account is the same: if the sole utility of an asset is the prospect of selling that asset to another person at a higher price, eventually the value of that asset will collapse. Bitcoin has legitimacy but dozens of other cryptocurrencies do not and as such, they are nothing more than digital tulips.
I am not a luddite. I am a realist who has seen too much excess in his career not to spot a bubble when I see it. The Chinese regulators have this right when they ban ICO’s this week citing illegal activity. Don’t get me wrong, the blockchain is amazing and I do believe that there is a place for a seamless way to transact. The problem is that bitcoin started its life as the conduit of choice for terrorists and drug dealers and has now morphed into a money laundering tool for Chinese investors. Of course, there are legitimate investors in bitcoin who are using it as a store of value but the chances of you being able to use bitcoin on Amazon anytime soon is remote because governments around the globe are going to require regulation to ensure that the sources of these digital currencies are legitimate. Let us not lose sight of the fact that global drug cartels, ISIS, Al Qaeda, human traffickers and the North Koreans have all used digital currencies as a means of avoiding the law.
Now before my libertarian friends throw a fit (on your way back from Burning Man), please remember that for digital currencies to become mainstream, you do need official support. Sad but true. You won’t be able to walk into Wholefoods anytime soon and buy stuff because Wholefoods won’t be able to pay suppliers or their taxes with cryptocurrencies. Unfortunately, that isn’t coming anytime soon without governments around the world becoming convinced that they can stop the bad guys from using it. There is no way of stopping corruption but the anonymity of cryptocurrencies makes it so much easier. Law enforcement will resist the broad use of digital currencies until they can mitigate the risk that bitcoin won’t be used to fund the next 9/11. This is just the way it is.
So, as we stand today, cryptocurrencies are a bubble and you will see more actions from global regulators similar to what you have just seen in China. If ICO’s want to be legitimized, they have to accept regulation and unfortunately, this regulation will expose many of the sponsors as empty vessels.
Just because you make something digital, doesn’t necessarily mean its legitimate.
I will be on the bid in bitcoin at $1000 if anyone is interested.