It was bound to happen, the cries of “pyramid scheme” applied to Bitcoin. In this case, it’s billionaire investor Howard Marks, who, in an investor letter circulating earlier this week (and reported on by CNBC here), suggests that there’s a bubble afoot.
And this is from a guy who, according to CNBC, “is famous for his prescient investment memos, which predicted the financial crisis and the dotcom bubble implosion.”
Cue the comments about Tulip Mania!
Much consternation ensued – people were peeved – over on the Bitcoin and cryptocurrency chatrooms. And rightly so: one rich billionaire dude does have the power to sway other billionaires and, in turn, cause more than just a ripple-effect.
The response from this site, though, is a heck of a lot more calm. If Mr Marks is correct, then why are hedge fund investors quietly getting involved in the space?
The Store of Value
Is it possible, though, that Mr Marks is simply misguided?
Bitcoin’s value is somewhere in the neighborhood of $46 Billion. The cryptocurrency economy – factoring Bitcoin, Ethereum, Ripple and the hundreds of other coins and tokens that make up the digital currency universe – is worth around $90 Billion. (Figures from Coinmarketcap.com.)
Gold? Estimates are that all the gold in the world would be worth somewhere in the neighborhood of $10 Trillion.
The US Debt? Twice that.
Marks is misguided, in our opinion because he doesn’t understand how the value is created and stored with Bitcoin and its ilk. Similar to gold, it has to be mined, created, manufactured. (Some ICOs are “pre-mining” their coins or tokens, and that’s a different subject.) Something exists that’s of value – but the value is stored and unlocked through lines of code and cryptographic puzzles to ensure that the code is what it says it is.
Yes, They’re Speculative, Too
Note that Marks says these are highly speculative assets – and we agree with that assessment, to a point. ICOs appear to be everywhere, and that might be part of the tulip comparison in his mind. You could, conceivably, launch a token sale today and unlock some value from the crypto economy.
Speculative investments, though, abounded after the bubbles that Marks predicted popped. Dot-com value was created after 1999; Facebook spawned a whole host of competitors (not just social media sites) after its IPO, which happened after the toxic mortgage/asset bubble popped in 2008.
What to Make of All This?
Back to those old saws:
- Don’t put all your eggs in one basket
- Don’t invest more than you can afford to lose
- Watch the space closely
- Seek advice from a few places
- Do your own research
- Talk to a tax advisor, a lawyer, an accountant
Certainly, value the opinion of someone who has made billions. But seek out other opinions, too.
Maybe these Bitcoin things aren’t tulips after all?