The get rich quick crew is at it again. The get rich quick folks are those that are looking for rapid riches with little knowledge, experience or capital, and there will never be a shortage of opportunities for these people. These opportunities swoop in, take their money via the greater fool theory and then swoop out. Right now this is being seen in bitcoin. Nobody really knows what the value in bitcoin is, or how it works, or its function in society , yet there is a massive wave of money being poured into it. The money is pouring in because the price is going up. That’s it. There is no data to support any of the values, no sales, no projections, no assets, and for that reason I see a crash in the near future.
Warren Buffet is arguably the best investor of all time. For those that aren’t aware of Warren’s investment strategy, Warren invests in what is called value investing. Value investing is a strategy we discuss on this blog a lot but what is important about value investing as it pertains to bitcoin is that you want to find something undervalued and hold it, what is important is determining the value in the first place.
How do you determine value?
Value is determined by multiple things. Value can be found on the balance sheet, by looking at the assets and liquidity of the company. This shows how financially strong a company is. Financial strength indicates viability, and viability indicates value. Another way is to look at sales and sales growth. This indicates that the company is strong and growing and has a good track record of generating profits.
As this pertains to commodities we have to look at a lot of different things. We look mostly at supply and demand. An example is gold. Gold tends to do well during times of high inflation because it is supposed to be a hedge against it. Gold is scarce and thus it will appreciate faster than inflation especially when dollars start getting printed like crazy. Another example is oil. Oil prices have been artificially lowered, whether people agree or not, to stem off the demand for electric vehicles which would ultimately render oil useless. This is essentially what happens with bitcoin. With bitcoin the coins are “mined” by solving an algorithm which is ridiculous. That in itself creates artificial demand and supply. It might create scarcity but it is false scarcity. Even if it allows for the price to increase as rapidly as it has that isn’t anything I can rely on as an investor. As an investor I need things that are predictable not arbitrary. So bitcoin not only lacks things that typically drive value but its price movement is also not tied to fundamental changes in the market which make it a scheme and not an investment.
The crash is coming
When there is nothing to support sky high valuations the bottom tends to fall out. This is especially seen via the greater fool theory of speculation. With that theory you ultimately run out of fools to sell to and then the stock falls and falls and falls. That is the problem with investing in something that has zero intrinsic value. That is what keeps Warren on the sidelines and what has made me leery of the entire thing this whole time. I just don’t see the value in the entire thing. It is all pie in the sky to me.
When I look at a stock I look at what the company does and then I look at what it is going to do. When you look at what it does you determine the risk of loss by looking at if this company will ever go out of business, can it go bankrupt, does it have a strong brand and base of assets. Then you look at what it is going to do. Does it plan to grow, can it grow, is it content with where it is? That combination of old and new gives you foundation and then potential growth. Protection and prosperity.
That is only part of the story though. In addition to analyzing where the company or holding is going you have to determine what is supporting the stock at its current level. When you look at blue chips you know that those stocks, while they might not grow much, they have consistent numbers and a large base of assets to support the value. It might not grow much but it won’t fall much either.
When I look at bitcoin I have a hard time giving it an actual value because they only thing propping it up are the hopes and dreams of the get rich crew. When you bring this argument out they are quick to talk about the block chain but there is no actual need for the block chain or anonymity. If anything, all of the features of the block chain serve to perpetuate crime which could bring down the entire operation. The block chain for some reason gives them this idea of stability but there is nothing that makes the block chain that revolutionary, that it is a disruptive force. Banks do a lot more than just transfer money from one person to the next that cant be what bit-coiners are banking on.
The crash is coming because that is what happens when investments run up the way bitcoin has run up. That is what happens when the holders of the investment are led with blind enthusiasm. That is what happens when people who weren’t ever investors are now gurus. You can track this all back to the real estate bubble when random joes were buying Bentleys or the dotcom era when 22 year olds were blowing their millions in Vegas. We might not see the crash for another five years but it is coming. People will be made rich and wealthy and they will be laughing all the way to the bank, but the crash is still coming.
It might be wise to get some money in bitcoin while it’s there but make sure you are stashing your gains and putting that money into real assets like real estate. Just because its going to crash doesn’t mean that people wont be made rich in the process.