Our risk-free forever-surging stocks are too tame? Chase “blockchain” and cryptocurrencies, even if it’s just a name.
The thinly traded shares of On-line Plc [LON:ONL] spiked 528% Friday morning in London, after it announced on Thursday that it plans to change its name to On-line Blockchain Plc, explaining that “blockchain technology and cryptocurrencies are a new and exciting area we have been working on for some time.”
As its shares were exploding higher on Friday, the company came out with a statement cautioning that its blockchain product is just at an early stage, upon which shares collapsed two-thirds of the spike, then re-spiked before tapering off and closing up 165% for the day.
This is how hot the money is around “blockchain” and cryptocurrencies. The temptation to make huge amounts of money in hours on nothing – even if it ends in tears – is just too big.
Why bother making 10-30% per year in our risk-free stock market these days, when you can make that much or more in a day or a week with the blockchain hype and cryptocurrencies?
That’s what Bill Miller, who runs the $2.3-billion investment firm, Miller Value Partners LLC, must have been thinking. Among the funds at his firm is MVP1, a hedge fund with $154 million in assets. According to Miller’s latest letter to the hedge fund’s investors, cited by the Wall Street Journal, the fund has a stunning 30% of its assets in bitcoin.
He paid an average price of about $350 for the bitcoin, he said in the letter. Currently, bitcoin is at around $5,800. The fund is up 72.5% so far this year, he told the Wall Street Journal in an interview. But he isn’t buying more bitcoin at these prices, he said.
In the letter, Mr. Miller pointed out that a “Murderers’ Row” of revered investors have been declaring that bitcoin is overpriced or a “bubble,” including Berkshire Hathaway Inc.’s Warren Buffett, James Dimon of J.P. Morgan Chase & Co. and Laurence Fink of BlackRock Inc., Bridgewater Associates’ Ray Dalio and Howard Marks of Oaktree Capital Management.
But his hedge fund just rode the momentum. It’s about making a quick buck, not about some philosophical or technical theme on changing the world or destroying fiat currencies or whatever. He doesn’t appear to fall for all the hype surrounding bitcoin. In fact, he’s brutally realistic about it in his letter:
“My view on bitcoin is that it is a technological experiment that may or may not prove to have any long lasting value.”
“Bitcoin has a market capitalization greater than 90% of the companies in the S&P 500, but it still might fail. I don’t know and neither does anyone else, no matter how certain they are of their opinion.”
“I believe there is still a nontrivial chance bitcoin goes to zero, but each day it does not, that chance declines as more venture capital flows into the bitcoin ecosystem and more people become familiar with bitcoin and buy it.”
The last statement is particularly fascinating, not only for explaining the risks – that bitcoin might still go “to zero” – but also the notion of what might keep it from going there: The principle of artificial demand by “venture capital” and other big-money elements chasing after a digital entity whose very design includes the notion of artificially limited supply.
But this artificial demand can disappear without notice – when interest wanes for whatever reason. And there is now an ever growing pile of cryptocurrencies out there, showing that even if the supply of bitcoin is artificially limited, the supply of cryptocurrencies is endless.
So far this year, there have been over 200 Initial Coin Offerings (ICOs), where various outfits sell new crypto-coins to the public. There are no regulations. Anything goes. It’s easy to do. Over $3.25 billion have been extracted from the public so far this year. And there are now about 1,000 cryptocurrencies out there, many of them already worthless.
The promotional efforts are visible in the media, including the mainstream media where reporters fawn over the big moves.
Those that promote these ICOs and cryptocurrencies send me their promo articles all the time, to publish on my site to get me to drum up support for their thingy. They have “Buy Now” websites that, among other things, usually offer a “white paper” that explains in carefully written gobbledygook how their thingy is the greatest thingy since sliced bread.
This has been going on in my inbox for years. At first it was just bitcoin promoters with all their promo-theories. Now it’s everyone else. This is how this works. The last article by an ICO promoter that has been dogging me for weeks to publish their stuff explained just how easy it is to “build a blockchain cryptocurrency.” Anyone can do it, they said. And clearly, anyone is doing it.
So there will be endless supply of cryptocurrencies and limited or waning demand. And it’s just a matter of collecting as much money as possible before speculators – such as Mr. Miller’s hedge fund – start taking profits and bailing out.
It shows how daring speculators have become in chasing profits, in a world where all risks appear to have been removed by years of central-bank liquidity that is trying to find a place to go.
Why trying to bet against this madness is a widow-maker trade. Logic has nothing to do with it. Read… Einhorn Vents his Frustrations about the Crazy Markets