Is a bitcoin boom or bust ahead?
It’s a question being pondered by many “late-to-the-game” Wall Street types. JPMorgan CEO Jamie Dimon calls bitcoin a “fraud” that “won’t end well.” Nobel-prize winning economist Joseph Stiglitz says “it’s a bubble” that “ought to be outlawed.”
The key takeaway: You know you’re on to something when an idea is so vigorously dismissed by so many on Wall Street.
Still, with the launch of bitcoin futures on the CME and CBOE exchanges, Wall Street and the U.S. government are getting involved in the conversation. Many are backtracking to figure out traditional applications for the transformative technology blockchain – a peer-to-peer distributed ledger for efficiently recording transactions that is secured using cryptography.
We hosted a special discussion on bitcoin recently. In this edition of Real Conversations, currency guru and Goldmoney co-founder Josh Crumb cut through the noise during an in-depth discussion with Hedgeye CEO Keith McCullough.
In case you missed it, below are three key takeaways from the webcast. Also, below is a brief video excerpt from the conversation. Click here to watch the entire video replay.
1. Are investors getting ahead of themselves?
The cumulative proceeds from Initial Coin Offerings (ICO) – the cryptocurrency equivalent of a stock’s Initial Public Offering – have reached $3.8 billion, according to Coindesk. Are investors getting ahead of themselves in all these new ICOs?
“Probably,” Crumb says. “Just like the dot-com bubble, most of them will return to their intrinsic value, which is 0.”
But that’s the point. Bitcoin is “one of the most perfect medium of exchanges we’ve ever had,” Crumb says.
“Just like we had no idea what the Internet was going to do, but we knew it was important, this wave of cryptocurrency capital is pushing all of these things to crazy multiples.” In other words, some will win. Some will lose. But cryptocurrencies are here to stay.
Another thing to note about the nearly $4 billion in ICO proceeds: There’s no transparency.
“I think that number is totally fraudulent,” Crumb says. “There are so many wash trades of financing these things. So we see this big number, but it may just be shifting back and forth between different ICOs.”
That says nothing about the “revolutionary” nature of cryptocurrencies more broadly, Crumb says. “I think that we have another period of rounding up and taking a lot of these ICO people to jail,” Crumb says. That’s what has happened in transformative markets throughout history.
2. Isn’t bitcoin a bubble?
“The annual production of bitcoin is now larger than the silver market, larger than the lead market, and we’re approaching zinc,” Crumb says. “It’s still probably only 10% of the gold market. But it’s getting into the levels of value where people are going to have to start to trade this asset class.”
This is important.
The total market cap of all cryptocurrencies recently hit $632 billion (but finished last week around $510 billion). At last week's highs, the total cryptocurrency universe was larger than the market cap of massive companies like Amazon (AMZN), Berkshire Hathaway (BRK.A) and Exxon Mobil (XOM). Mr. Market is advising investors to take cryptocurrencies seriously.
Still, a lot of investors believe bitcoin is a bubble. Crumb turns this argument on its head. He says to consider the “bubbly” nature of more traditional asset classes. “Look at the size of the fiat government bond bubble,” he says. Crumb asks whether you are more confident you’ll be able to send your son or daughter to college in 10 years with money invested in bitcoin or European government bonds?
“If I was going to buy a European bond with a negative interest rate, nominally we already know it won’t get to par. In real terms, I absolutely think there’s no way 10 years from now. So as a store of value I think that’s a massive bubble,” he says. As for bitcoin, “It could pay for your son’s college in the next 2 months. That’s what people are buying it for right now.”
Short-term, say in the next three months, Crumb says he’s unsure of the price of bitcoin. But, in three years, he thinks the price of bitcoin is higher. After the fallout from the wave of questionable ICOs that sends some to jail, Crumb thinks there will be these “adaptive peaks, where more and more people are coming in and getting comfortable with bitcoin.”
3. Can the establishment control cryptocurrencies?
Many are speculating about the launch of fedcoin, a national cryptocurrency controlled by the Federal Reserve. These people think, as cryptocurrencies are more broadly adopted, the government won’t let them usurp the U.S. dollar and overtake the Fed’s control of the money supply.
Might the establishment (governments or Wall Street types) attempt to undermine bitcoin?
“I don’t think they can,” says Crumb.
“You have to remember, central banks created this. It was their control of the market that caused people to say, ‘I don’t like you controlling it. I’m going to figure out a way to create a currency no one could control.’” In other words, Pandora’s Box has been opened. And there’s no turning back now.
A final note (and a list of interesting reads)…
Here is a list of Josh's required reading on cryptocurrencies:
- Nick Szabo's "The Dawn of Trustworthy Computing" & "Social Scalability"
- Union Square Ventures' "Fat Protocols"
- Roy Sebag's "The Natural Order of Money & Why Abstract Currencies Fail"
Click here to watch the entire video replay of our Real Conversation with Josh Crumb.