The observer’s guide to bubbles….

Tuesday 21st November 2017

The observer’s guide to bubbles….

The panic is over for bitcoin holders – for now at least….

Last week’s plummet in price proved to be a temporary aberration – as we suspected….

Last week I highlighted a few features and factors that will serve to fuel continued momentum in the market….

Over the last week, bitcoin has not only recovered the lost ground but has kicked-on again – blasting through the $8000 ceiling and reaching new high points….

We figure this will be the scenario for some time to come – occasional corrections but a generally upward direction of travel….

The big question is this: is bitcoin in a bubble?

  • A four-point sociological checklist….

One interesting feature about bubbles is that they are frequently only recognized in hindsight – particularly by investors who get caught up in them….

The promise of ‘guaranteed’ big profits on a continued basis can blind a man to underlying realities….

To the point where he swiftly becomes fixated on ‘getting involved’ and ‘not missing out’ rather than trying to figure out whether he should be doing so….

Such investors might do well to heed William J Bernstein, the American financial theorist. He offers clear advice on how to spot a bubble – before you get sucked in….

Bernstein figures bubbles to be a product of sociological factors rather than econometric indicators. And he suggests you look out for four warning signs that act like a checklist.

I thought it might be an interesting exercise to apply Bernstein’s checklist to bitcoin – just to see what it reveals….

  • #1 – Everybody’s talking….

Bernstein’s first sign of a bubble is that everybody is talking about the asset or market in question. Not just the ‘experts’ and ‘pointy heads’ who might have something to do with the subject and are paid for their view – but everybody….

Cab drivers, pint-and-Castella man at the pub, the guy at the barbers, your next-door neighbor, the guys to your left and your right at the office – everybody….

People do call to talk to me about bitcoin. They want to talk. Most are not financial experts or even practiced investors. But maybe they call simply because I write on the subject.

You can’t open a newspaper or a website without tripping over some reference to bitcoin. Ads about cryptocurrency trading appear everywhere – on billboards, on social media, in newspapers and websites.

And celebrities are talking. Bjork, Harry Redknapp, Paris Hilton, Floyd Mayweather, Gwyneth Paltrow – to name but a few.

But I attended a dinner party at the weekend. And I was on an outing the week before. Nobody mentioned cryptocurrencies at either event. Bitcoin does not yet dominate the conversation at social gatherings here-there-and-everywhere. And maybe it never will….

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#2 – ‘Stick your job where the sun doesn’t shine.’

The second sign of a bubble on Bernstein’s checklist is people leaving high paid jobs to trade the asset in question….

We’ve seen this kind of thing in previous asset bubbles where people left jobs to become day traders or buy-to-let landlords, for example….

And there are examples of it happening with bitcoin and other cryptos….

‘Went in with 15 grand a month ago and a four days ago I finally quit my job and went into bitcoin trading and earned more than a few month’s salary. I should have done this earlier….’

That was a recent post on the bitcoin forum on Reddit. This next one comes from the Eth Trader Investment Community – also hosted on Reddit….

‘I did a lot of number crunching and believe that I have the means to sustain myself indefinitely if I continue to invest intelligently and start a home cryptocurrency mining operation. I ordered some mining gear and put in 3 months-notice to my manager. Worse-case scenario I just take a long vacation.’

I don’t know who made these posts. But, assuming they are authentic, some people are leaving work to trade cryptos.

But these are isolated instances. We are not reading stories like this day-on-day. Quitting work and trading cryptos has not become a widespread trend. Not yet at least.

  • #3 – ‘It’s totally obvious, stupid.’

Bernstein’s third sign is when opponents of the asset in question express their skepticism and are met not just with counter-arguments – but with abuse, aggression or some other kind of inappropriate vehemence that amounts to dogmatism in action….

The opponent says: ‘You know, I’m just not sure bitcoins have any intrinsic value and I reckon anybody paying $8000+ is paying way too much….’

The proponent rolls his eyes, smacks his lips and says: ‘Listen. You must be a dummy. This time next year bitcoin will be $30,000. That’s fact, my friend. If you can’t see it, you must be an idiot. Just concentrate on bagging my groceries and quit talking about things you don’t understand….’

When we see sustained instances of this kind of thing, bitcoin will tick the box. But we’re not seeing that at this point.

Jamie Dimon, CEO of JPMorgan Chase, has referred to buyers of bitcoin as ‘stupid’. But that’s just Dimon. He isn’t representative of a trend. Nobody is following his lead. And we’re not seeing bitcoin proponents using the same kind of tactic to any meaningful degree….

  • #4 – Crazy talk….

The fourth and final sign on Bernstein’s checklist is extreme predictions. And we have seen at least one example of this.

Our old friend John McAfee will go down as a footnote in financial history for the bet he made earlier this year when he said he would eat his own genitalia on national television if bitcoin failed to hit $500,000 in 3-years….

But McAfee is very much the outlier on the spectrum of bitcoin price predictions….

Tom Lee at Fundstrat Global Advisors has gone on record saying he believes bitcoin will climb to $25,000 by 2022….

John Spallanzani at GFI Group Inc has said it should reach $10,000 in 2018….

Ronnie Moas at Standpoint Research said in August that bitcoin could rise to $50,000 by 2027….

These are random predictions plucked from my notebooks. They are of no specific interest or importance. But they do serve to illustrate that predictions are generally conservative compared to McAfee’s large-scale expectations….

I suspect that if we dug deep enough, we would find additional examples of crazy talk on a par with McAfee’s….

But that’s the point. We would have to dig deep. We would have to search high and low. The bottom line observation is that instances of real ‘crazy talk’ are thin on the ground.

  • No bubble – but a ‘waste of time’….

Bernstein’s criterion for a bubble is, of course, just that – one criterion. He isn’t the last word on the subject….

But, measured by his criterion, bitcoin does not yet exhibit the characteristics of a common bubble (as dictated by Bernstein’s definition). And maybe it never will….

But Bernstein’s checklist does give us some interesting material to work with – and signs to look out for – on the road ahead.

We can use his checklist periodically to determine whether bitcoin remains a non-bubble or shows signs of growing into one (by Bernstein’s definition). And we will be sure to do that.

In the meantime, if you think the results of our summary test mean Bernstein is an advocate of bitcoin, think again. In an interview with CNBC at the end of October, he made his position clear:

He said the currency has ‘no intrinsic value’ and ‘the fact the price keeps rising, that’s a very bad sign…. bitcoin is not something I want to waste my time on….’

Bubble or not, Bernstein considers bitcoin a dud….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths