Ok maybe don't buy Bitcoin NOW...
Ok maybe don't buy Bitcoin NOW...
My discussion w/ Stephen Roach, former Morgan Stanley Chief Economist: speculative bubbles always burst by definition; fundamentals reassert when prices too detached; dollar will crash 35% by 2021...
I wrote on 2/9 a list of reasons that had convinced me Bitcoin’s price would keep going up. Had you listened to me then and bought Bitcoin, you would’ve made 20% by this point already (from $47k to $58k at one point this weekend), which is really crazy if you think about it. No college kid should be able to make a call on anything and yield you a 20% return within 10 days… When this happens, something’s wrong with that asset.
Another interesting fact is that if Bitcoin reaches $200k, more than half of the world’s billionaires will be from crypto, according to Coinbase CEO Brian Armstrong. This doesn’t seem very far away, but something feels wrong if this were to truly happen…
So today, to provide some counter-arguments to my own emails that convinced many of you to believe in Bitcoin, I want to express some of my doubts & reflections on Bitcoin over the past two weeks of frenzy purchase by investors, including my interview with Stephen Roach, former Morgan Stanley Chief Economist and Asia Chairman (with a Bitcoin painting as my Zoom background lol)…
The punchline is: I don’t think we should take it for granted that Bitcoin will definitely go to the moon – that is not a given – and it’s very likely that this speculative bubble will indeed burst very soon.
Bitcoin will probably pull back bigtime soon
Yesterday on 2/22 we saw Bitcoin tanking more than 10% to below $50k, presumably after Elon Musk tweeted that the prices “seem high.”
It seems that Bitcoin’s price movement has always followed such a pattern, as explained by a friend of mine:
It has some small price rise and nobody notices.
Once it hits some arbitrary value like $5k, $10k or $30k, then suddenly mainstream media picks up on it, and analysts & pundits start “freaking out” on CNBC and Bloomberg.
Then because the media widely report it, more people feel like they’re missing out and they all buy in.
This further fuels the rise in price, until at one point for some arbitrary reason people suddenly feel it’s too expensive and decide to sell. The price then pulls back to maybe half of its peak value before it gradually goes back up again.
And then this cycle just continues…
Sure, in the long run there is a high likelihood that Bitcoin will continue to go up, such that these short-term volatilities don’t matter. But I personally worry that Bitcoin has reached a temporary price ceiling and will pull back soon. If you’re interested in buying Bitcoin, instead of buying today at around $50k, perhaps it’s best to just wait a bit. Hence I emphasized in my title: maybe don’t buy Bitcoin now…
Stephen Roach on Bitcoin and the nature of speculative bubble
Prof. Roach is not really convinced by Bitcoin – neither the price outlook nor its political vision. I explained to him my logic why I think Bitcoin price will continue to go up in the long run, and he offered some pushbacks that you might find interesting.
Q: I am not entirely convinced were at all convinced that Bitcoin would be the new political vision that will solve our world's problems. But I’m convinced that the speculative bubble is strong enough to keep the party going. In other words, it seems the markets have been more detached from fundamentals, and the nice thing about Bitcoin is that it has no fundamentals, so you don't need to analyze fundamentals or have it become a currency; you just need people’s faith in it. And as long as the faith for this asset is strong enough, as long as people’s doubt on dollar and other forms of assets are strong enough, as long as the hunt for yield continues, Bitcoin will just keep shooting up.
A: Well Tiger, I don’t want to sound too professorial here, but speculative bubble is a phrase you just used, and you said it will go on forever. By definition, however, speculative bubbles do not go on forever; they always burst – always!
When an asset turns into a speculative bubble, that means people are buying the asset just under the expectation that the prices will keep going up. So by definition, it’s an investor play on price appreciation that is detached from the fundamental value of the asset. That detachment, we know, can go on for a lot longer than we think, but ultimately it reasserts itself when the price point involved, for reasons that are very different for each asset, gets so far detached that just the slightest, inconsequential shifts can lead to the bursting of the bubble.
And you can conjure up all sorts of wild things that could cause that burst – regulatory pressures, Elon musk changing his mind (which he has done on a weekly basis for most of his career), or somebody else can raise some questions about the underlying technology… I have no idea, but I'm suspicious of this very notion that a speculative bubble can go on forever – because to me, by definition, they never do.
Q: What do you mean by fundamentals? For companies, there are cash flows that we can discount; for the stock markets, we can look at P/E ratios or some other metrics; but for a currency, what are the fundamentals?
A: Currency is something you know you can hold. It can be a store of value, and it's widely accepted as a medium of transactions. It’s hard to label whether Bitcoin qualifies as a currency on any of those accounts. It could certainly be labeled as a financial asset, or, if it grows big enough, as an asset class. But I think it's a real misnomer to call it a currency.
Q: What is the relationship between Bitcoin, gold, dollar, and inflation?
A: I think it's interesting that Bitcoin’s attraction has taken off during a period when some, myself obviously included, are beginning to question the stability and role of the dollar. The world's currency is under some surprising downward pressure, and a case being made is that there could be more to come.
Financial markets are possibly in search for a new anchor – maybe a blockchain technology. It’s possible, but it's probably pretty early to reach that conclusion. And, especially, Bitcoins at this price point has been extraordinarily volatile.
Gold historically has been the anchor of the financial system. It's definitely a store of value; it has been used as a means of exchange in the past, though no longer. It still plays a linchpin role in anchoring a lot of financial assets around the world, and it's something tangible that you can hold and look at, as opposed to a bunch of zeros and ones in a supercomputer like for Bitcoin.
Q: Should investors hold a bit of Bitcoin as a hedge against further erosion of dollar value?
A: Precious metals have been a hedge historically against inflation, but you could also make a point that they would be a hedge against deflation. So again, I go back to the discussion we had earlier: If you're looking for big shifts and inflation, one way or another, then the alternative of a precious metal that has a more predictable and stable store of value becomes more attractive.
It is interesting that Prof. Roach expects the dollar value to slide by as much as 35% in 2021 for a number of reasons, and Bitcoin news sites actually cite him as a “friendly voice” providing evidence why Bitcoin price will continue to go up…
Even Prof. Roach acknowledges that the financial markets are possibly in search for some new anchor, and that precious metal (or other alternative asset) could be good hedges when dollar value declines and inflation is present. This brings me to my next point:
Is Bitcoin actually a good hedge? Maybe not really…
A common argument made in favor of Bitcoin is that big corporations and institutional investors would start buying more Bitcoin to hedge risks against their normal portfolio with stocks and bonds. This sounds right at first sight, but there are some details missing:
A fund would have to buy a lot of Bitcoin to really hedge against their overall portfolio. Using 1% of your entire asset allocation on Bitcoin doesn’t really change your overall performance much if you have a bad year – it defeats the point of hedging. You can devote 5-10% of your entire asset under management (AUM) to Bitcoin, but then you’d be actively investing in Bitcoin now and no longer hedging.
If a hedge fund has a bad day/month or need cash urgently, one of the first things that they’ll get rid of from their balance sheet is Bitcoin! If stock market goes down, the funds would need free cash flow, and they’d first look to liquidating their Bitcoin holdings because that’s “their hedge.” This means if global markets go down, Bitcoin price will likely fall as well if more institutional investors are getting involved.
The counter-argument is: Bitcoin is still a hedge if you believe that having 1% of your portfolio in Bitcoin will end up being 99% by the time the dollar collapses or some other catastrophe happens… I think this is a very idealistic vision that will not happen anytime soon. Dollar value may be declining, but I don’t why a total collapse of dollar would happen anytime soon.
Will Bitcoin really go up to the moon? Maybe not really…
I previously said that you should wait a bit and buy in after Bitcoin pulls back in price. However, many would argue back that in the long run it’s gonna hit some extremely high valuation like $1 million per coin anyways, so there’s no point in really worrying about the short-term downfalls.
Well, you don’t know that for sure, right? It could hit $1 million by the end of this decade, or it could be worthless! Bitcoin is now almost 100% dependent on narrative and speculation. This doesn’t mean it won’t continue to go up if the speculative forces are still strong and young, but this is nevertheless a very risky proposition. Prof. Roach explained the nature of “speculative bubble” incredibly well, and I think it’s worth pondering over.
I personally think there is a higher likelihood that Bitcoin will continue to go up, but the alternative scenario of being worthless has pretty good odds as well. Refusing the conceive the latter notion is just as bad as not being willing to keep an open mind about Bitcoin’s likely rise in valuation. I don’t think we should take either as granted.
My friends say that I sound like every dumb pundit when Bitcoin hit $1k, then $10k, then $50k… Sure, but I’m also not wrong – when Bitcoin hit $1k, it pulled back a bit; likewise with $10k and $20k. It always pulls back somewhat dramatically before further going up more. So I stand by my argument & projection that Bitcoin will likely pull back a bit before going up more.
I’ve thought about Bitcoin a lot and tried my best to investigate and talk to insightful people about it, and I hope my writing is helpful. But again, don’t listen to me – I’m just a college kid – trust in Elon…
Our interview on Bitcoin with Prof. Roach is around 32:00-43:00 if you’d like to watch. We also go over many other macro-financial topics that may be of your interest.
Disclaimer: Needless to say, my emails are just casual commentaries. I try my best to write them thoughtfully and with care to provide some alternative perspectives on various issues, but please do not treat them in any way as financial advice for your own investment.
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