Cryptos are in ‘fin de bubble’ mode
From Bill Bonner, Chairman, Bonner & Partners:
BALTIMORE – The big news today is that the Dow has hit a new record of over 25,000.
We’ll get to that in a minute… we’re still looking over our shoulders at last year’s performance.
Let’s see, the top-performing U.S. stock market sector last year was technology.
An investment in the top 100 Nasdaq stocks went up 34%.
Then came a list of also-rans – from the Dow (up 28%)… to the S&P 500 (up 22%)… to the energy sector (down 4%)… all the way down to the worst-performing sector, natural gas (down 44%).
Our Reversion to the Mean (R2tM) portfolio gained 33% last year – not bad for such a simple strategy.
Buy Low, Sell High
Our R2tM strategy is so basic anyone could do it.
You look for the worst-performing stock markets in the world and buy them. Then you count on the fact that what goes down is likely to go back up.
At the start of last year, for instance, Russia, Poland, and Italy were among the cheapest major stock markets in the world.
As it turned out, in 2017, Polish stocks (up 55% in U.S. dollar terms) and Italian stocks (up 29% in U.S. dollar terms) were among the most profitable investments.
The Russian market was up just 2%. But heck, two out of three ain’t bad.
Isn’t that the way it’s supposed to work? Buy low, sell high; not the other way around.
Which is a way of backing into the third of our three most remarkable surprises of 2017 – the dizzying rise of bitcoin and other cryptos.
If any “asset class” has a claim to being top dog for the year, it is cryptos.
Bitcoin rose 1,300% last year – or about 42 times more than the Nasdaq 100.
But in the racy crypto field, bitcoin ran as though it had a broken leg. The third most valuable crypto by market value, Ethereum, was up 8,900%.
And get this: The No. 2 crypto by market value, Ripple, rose 36,000%.
And when we picked up the newspaper on Tuesday, we discovered that Ripple had gone up 50% in a single day!
If you had put $1,000 into Ripple at the start of the year, you would have about $361,000 now.
Fin de Bubble
What, you didn’t invest in Ripple?
Did we forget to recommend it? Must have slipped our mind…
We seem to have forgotten to buy Ripple ourselves. But one of our sons – who has taken a keen interest in cryptos and invested some of the family money in them – didn’t.
“I’m way up. I got back my initial investment almost immediately. Now, I’m thinking about taking a trip around the world.”
“I’d do it sooner rather than later,” we advised. “Cash out and buy your tickets while you still can.”
Cryptos are clearly in Full Bubble mode.
Last month, shares in LongFin Corp. went crazy after the small financial technology company announced it had hitched itself to the blockchain – the decentralized ledger technology that underpins cryptos – by buying a company called Ziddu.com.
LongFin jumped 1,000% immediately before settling down with a 400% gain.
Then there were some even stranger cases. A beverage company somehow got into the blockchain business. So did a bra maker.
And there was the maker of a urinary control patch called “UrinStopper” whose owners practically wet themselves when they added the word “blockchain” to their business model.
“You get what you pay for,” said economist Milton Friedman. Investors want cryptos… and they’re willing to pay for them.
Young hustlers are filling the need. And then some.
Gone With the Wind
The original premise of bitcoin was that the quantity of the new currency was limited by the unbreakable bonds of its governing algorithm.
Alas, new cryptos seem to be coming online faster than 100,000 bolívar notes from Venezuela’s central bank.
And the promise that the transaction costs for cryptos would be so much lower than in the fiat money world has also been undermined by sudden success.
The transaction fee for buying a bottle of beer with bitcoin was recently more than the cost of the beer itself. And investors report delays and snafus in trying to exchange their cryptos for fiat dollars on the big online exchanges such as Coinbase. (Wait ’til they crash!)
Gone with the wind, too, is the claim that owning bitcoin is inherently safer or easier than owning gold. Investors are losing their “private keys” – the secret number that serves as proof of ownership – and their bitcoins…
Unlike a Facebook account password, apparently you can’t reset your private key.
Your editor reports that he, too, misplaced a physical bitcoin (which can be spent like the virtual variety). At the time it was given to him, he had no idea that it might someday be valuable…
But getting back to Ripple; what is it?
It is a “centralized, real time, gross settlement system.”
Okay… we don’t have any idea what this is about, either. But as of this morning, it’s cofounder, Chris Larsen, is now the 15th richest person in America.
What can we learn from this remarkable story?
First, there is a plausible argument that the financial (money) system is ready to be disrupted by an innovation such as bitcoin.
In a fake-money world, people pine for the real thing. And when the dust finally settles, a few of these new cryptos will probably still be in business.
Second, never underestimate the power of animal spirits in the investment world. When people think they can get rich without hard work or long hours of study, there will be a rush to get in.
Third, we called bitcoin an entertainment class, not an asset class. Watch out. It could quickly turn from an amusing comedy into a scary thriller… or a tragedy.
But here, we will venture a recommendation (and remind readers that it is worth at least every penny they pay for their Diary subscription): Buy low. Sell high.
Sell Ripple. Buy natural gas.