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December 22, 2017 | Pop

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

On December 17th (that was Sunday) one Bitcoin was worth a hair less than $20,000 US. Five days later (Friday), it was $13,000 – a swing of 35%. In the meantime the founder of Litecoin announced he was cashing in all his chips. Two major Wall Street trading platforms got into the cryptocurrency futures business. And Goldman Sachs, of all people, said it was setting up a Bitcoin desk.

By Friday this was an inefficient market in disarray. The digital currency peaked at $15,800 and plunged a few hours later to $10,800 – a swing of 31%. What will happen next is utterly unknown. It could go to $100,000. It might return to zero. But it looks like the margin calls have started, plus the realization this is an asset that borders on illiquidity. Easy to buy in – “in 60 seconds with Visa/MC!” – as the unregulated exchanges brag. But not so easy to sell. You can liquidate an ETF with one click and get your money in two days, guaranteed. Converting a Bitcoin to C$ can be tortuous, time-consuming and involve a wait of weeks.

Well, days ago this blog told you not to buy Bitcoin. Good advice. Heed it. It’s not money, but a speculative commodity. There is nothing backing it – no company, no earnings, no hard assets, no government, tax system or central bank. Most of the units are closely held by a small group. The trading of it is unstable and sporadic. And the retail investors pouring in are, largely, naïve sheep.

Meanwhile ‘digital currencies’ which are not currencies at all, are being invented, marketed and speculated upon in forums which are unlicensed, unregulated, unsupervised and often unstable. The backers of non-fiat money and proponents of the blockchain technology behind most say none of that matters. This is the future. It’s the final step into electronic money from the age of the printing press – a revolution of the payment system and at the same time a stick in the eye of central bankers and the financial establishment responsible for the consolidation of wealth into the hands of the elite. Especially those who publish free blogs.

So I get digital money. Who doesn’t? How many people still carry folding money, ever write a cheque or go to a physical bank? A dwindling number. In time, none. I also understand how moisters who have grown up taught to be afraid of stocks and realize they can’t afford real estate would be drawn to cryptos. In large part, they own this market. They constitute the millions of retail investors who have been pouring billions into Bitcoin and its clones on the faith that it’s the future. And in that, a huge parallel with the dot-com bubble of 18 years ago. We know how that ended, even though the underlying principle – that the whole world would go online – was totally valid.

So while cryptocurrencies have legs – the Bank of Canada is investigating creating one of its own and Bitcoin ETFs will soon appear – the current trading platforms and valuations could turn to dust before long. The sheep are doing predictable things – flocking to anything that promises rapid gains with renegade genes. The current story illustrating this is of the Long Island Tea Corp, whose stock jumped 289% when it renamed itself the Long Blockchain Corp. Hey kids, maybe you should Google pets.com.

Like dot-coms with cool ideas, CEOs on skateboards and no profits, cryptos are not valued based on traditional metrics. Most investors wouldn’t know a blockchain if they fell over one. The market is completely driven by speculation. It’s gambling, not investing. The surprise which awaits the buyers when they decide to become sellers will be epic. As the financial professionals move in – and it’s happening – the kids will end up being someone’s lunch. The coolness and technological elegance of the underlying asset will not matter one whit. Early speculators are often rewarded. Later ones are always spanked.

Bitcoin, Litecoin, bitcoin cash, ethereum, ripple and whatever’s next may be new. Human nature is not. And the young must learn the same stuff over and again. It’s not different this time.

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December 22nd, 2017

Posted In: The Greater Fool

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