The world has clearly lost its mind.
There are any number of phenomena I could cite to support that contention, but steering away from politics and economics and focusing narrowly on markets, this week witnessed the richest man on the planet one-upping himself by Photoshopping his own head onto the body of Rafiki and replacing the face of baby Simba with the circumspect Shiba Inu from an eight-year-old meme that inspired a cryptocurrency created initially as a joke.
To appreciate the extent to which things have gone totally off the proverbial rails, note how many different references you have to be familiar with to even make sense of what I’ve just said.
First of all, you have to know that Elon Musk leapfrogged Jeff Bezos to become the world’s richest person, which entails knowing about the absurd rally in Tesla’s shares over the course of 2020. Second, you have to know who Rafiki and baby Simba are. Third, you need to know that a skeptical dog had its picture taken in 2013. Fourth, you need to somehow wrap your mind around the idea of a digital token based on that picture. Fifth, you have to come to terms with the fact that a man who should be a kind of real-life Tony Stark, instead spends an inordinate amount of his time being a social media troll.
Oh, and you’d also have to know that late last month, the same centibillionaire drove up the “value” (and I use that term as loosely as it’s possible to use it) of the same digital token by tweeting out a magazine cover featuring a picture of an arrogant looking whippet dressed up in a crimson turtleneck.
Read more: Markets Are Musk’s ‘Toy’ As Mania Hits ‘Whippet In A Turtleneck’ Phase
Lest you should think this is all immaterial, or otherwise not worth mentioning, do note that the value of the cryptocurrency market hit a new record Saturday above $1.23 trillion (with a “t”) in very small part thanks to Musk’s Dogecoin antics and in no small part due to his simultaneous social media pseudo-advocacy of Bitcoin.
The figure (below) is based on data from “CoinGecko.” If you’re wondering whether that’s reliable, I’d just refer you to everything said above. In other words, my answer is “I have no idea,” because none of this makes any sense whatsoever in the first place. But, Bloomberg has cited CoinGecko, so I’ll do the same with plausible deniability.
In their own coverage, Bloomberg described Musk’s Dogecoin tweets as “tongue-in-cheek.” In some sense, they doubtlessly were. But what I wonder is whether it’s responsible to encourage people to put money (real money) into a literal joke “asset.” Dogecoin’s market cap rose above $6 billion thanks to Musk.
Beyond that, though, there’s another problem with Musk’s Dogecoin tweets, and it’s rooted in the psychology of penny stocks.
If something trades for one penny (or a fraction of a penny), almost everyone can afford to speculate in it, by definition. Because there’s usually no way to “value” a stock that trades below 50 cents (let alone one that trades below 10 cents), it’s virtually impossible to know when to take profits.
In cases like these, people generally know that what they own has no real value. But until a given unit of something costs more than, say, a dollar, it’s very easy to make the case (to yourself) that there are still innumerable “greater fools” out there. As the price rises, the odds of those “fools” piling into the trade increase. To a point.
For most people, “Why not?” (as a rationale for speculation) is almost equally applicable at 5 cents, and 10 cents, and 20 cents, and even 50 cents, as it is at 2 cents. People who bought at 2 cents know that, so it’s very difficult to decide when to book gains. And because the initial investment was essentially costless (on a per-unit basis, anyway), it’s easy to characterize prospective losses as trivial.
Ultimately, it becomes impossible to know when to get out. The initial bet makes sense, as much as something like this can. You buy Dogecoin for a penny and hope that a catalyst — a Musk tweet, for example — comes along and pumps it to a nickel. You can then cash out with a huge gain.
But it’s rarely that simple.
Because once Musk gets bored in the middle of the night and your bet pays off, who’s to say he doesn’t tweet something else three hours later? And who’s to say 5 cents (your initial “target”) doesn’t woefully underestimate the extent to which the dynamics just described could push it to 50 cents? Even if it only goes to a dime, you’ve missed a huge gain (in percentage terms anyway) if you sell at a nickel. And God forbid you end up being the person who sold at a nickel if it eventually goes to $40,000, like Bitcoin. Then you’re on suicide watch.
To be absolutely clear, I have no idea how one even goes about buying Dogecoin. There could be associated costs, or hurdles to access, or something unique to the crypto universe (or to Dogecoin itself) that makes this situation somehow different or otherwise alters the psychology as described above.
The point is just to say that in most cases, simply looking at a chart like the one below and imagining what “could have been” (for you) had you just been willing to wager a nominal sum, is almost never the correct way to conceptualize of things. It rarely works like that.
What’s especially perilous about Bitcoin is that the same psychology applies, only the financial stakes are comparatively huge. All protestations aside, it’s not possible to fundamentally “value” Bitcoin. With apologies to the readers who will invariably insist I’m wrong, there’s absolutely no way to know whether Bitcoin is “expensive” at $40,000 or “cheap.” In a sense, it’s both. $40,000 is a lot of money to most people. It’s expensive. But without a way to reliably value it, Bitcoin could go to $4 billion. It’s the world’s “greater fool theory” asset par excellence. So, it’s ridiculously cheap.
“Earlier this week, Musk said on social audio app Clubhouse that he doesn’t have a strong view on other cryptocurrencies and that his comments on Dogecoin are meant as jokes, adding ‘the most ironic outcome would be Dogecoin becomes the currency of Earth in the future,'” Bloomberg wrote Thursday, noting that the coin “is riding a wave of newfound popularity… after being promoted by Musk, as well as porn stars.”
This is all highly unfortunate and extremely ridiculous. It doesn’t help that ostensibly serious people continue to entertain this nonsense. Also this week, Bloomberg’s Joe Weisenthal (himself an internet troll, albeit one who everywhere and always couches his own tweets in terms that allow him to claim he’s being serious), spoke with Goldman’s Jeff Currie on a podcast and asked him to weigh in on crypto as a replacement for precious metals. Here’s an excerpt:
[Retail investors] are not treating Bitcoin and cryptocurrency as a defensive asset like gold. Instead, they’re like a turbo charged risk-on asset that trades very much like copper or iron, which trades off of positive growth news. And so at the current environment, do I want to own crypto as a defensive asset? The answer is not really, no.
Currie was just doing his best to answer the question, but I’d ask again: Does any of this make any sense? That is: Does it make sense to even speak about crypto in terms of whether you’d “own it as a defensive asset” or, on the other hand, treat it as a leveraged bet on the risk-on environment associated with the reflation trade?
The answers are clearly “no” and “no.” This is all insane. And the WallStreetBets saga just amplified it.
Speaking of that, the same interview found Currie weighing in on Reddit’s short-lived effort to corner the silver market. “You go back in history for hundreds of years, silver has always been associated with populist movements,” he told Weisenthal. “And the way we view the WallStreetBets group is this is just a continuation of the rise of populism.”
Musk, commenting on Dogecoin this week, called it “the people’s crypto.”
Make no mistake, folks. This is not the revolution you’re looking for. The only thing that most “people” are going to get by participating in any of this is hurt — financially, yes, but emotionally too.
I thought you were buying this Dogecoin a couple of weeks ago. I should ask my eight year old nephew if he has any he can sell to me. I should have given him some for Christmas. But I do not want to apear like my drunken old uncle who gave me a couple of silver quarters and told me to hang on and some day they would be worth alot.
I should have spent the quarters then when they had purchasing power.
I truly hope little kids are not getting in on this.
Once again weekend fare , so I indulge .. What makes anyone or even the author of this post think that a one Billion Mega lotto jackpot or adding a few extra T’s to the none debt of this countries none balanced sheet doesn’t qualify as a cause to check into the local ‘ Nuthouse ‘ as a permanent fixture… Just because the wealthy crazies are playing this game is no excuse to miss out on all the fun…… If the reason for all this is frustration or desperation with the state of the place we all call home we are probably in a heap of trouble collectively.
So I bet , Monday or maybe a Monday down the road will bring us face to face with the real answer as to why the markets have it appears gone mad…
I don’t know what you’re trying to ask here. I can’t make sense of this question/comment.
Whew, I thought maybe I was stoooopid. I could not make any sense of that.
Sorry.. didn’t express point properly…Was really trying to say that about everything going on in the economy and the political system is off the charts and out of the ordinary . Why would anyone be surprised at Elon ,Dogecoin and distortions in markets or bitcoin.. Was suggesting one day things probably start to make sense and the realities will be clear with the use of 20-20 hindsight ..
I can’t believe the US Treasury and Federal Reserve don’t shut these cryptos down. But I just add this situation to my growing list of things that “I do not get”.
Too much currency chasing too few opportunities- seems (unfortunately) inevitable that some money that should be invested gets gambled instead- with the printing presses effectively going 24/7.
Thank you …You said it all in two paragraphs….
In August 2016, I put $2,300 in the Grayscale Bitcoin Trust (GBTC), because my wacky neighbor kept telling me about all the money he was making buying Bitcoin. Over the next week, it went down 15%, so I panicked and sold it. If I still owned it today, it would be worth around 90K. I’ve thought about getting back into the various “coins” many times since, but I always just figured they’d go down 15 or 20 percent and I’d panic and sell. I really appreciate the fact that Heisenberg, who I’ve now followed for over a year, largely, if not totally, discounts the coin world as just another casino. It helps make me feel much smarter about not getting back in, regardless of the opportunity cost.
I’m not trying to make anyone feel better about “missing” a rally in something like Bitcoin.
That’s never been my point. My point has always been (and will forever be) that if you want to make Bitcoin-like returns and/or if you want to gamble, there are ways to do that within markets that don’t involve putting your money on something that, at least in many traditional respects, doesn’t really exist. And that’s to say nothing of the regulatory concerns and what I imagine are tax nightmares.
There’s no protection for you in the crypto market. None. Which is ironic considering some of the claims the crypto crowd makes.
Just look at what happened over the past two weeks with GameStop, etc. Crazy stuff happens all the time and people get hurt with no repercussions in our regulated markets. It’s only after the fact that lawmakers, etc. come in and try to pick up the pieces.
It’s hard for me to fathom any recovery scenario in the event something goes “wrong” in crypto and the whole thing just implodes one day. Who would you turn to? Whose responsibility would it be to piece together what happened?
There are countless instances of investors being wiped out forever in provable frauds involving identifiable people, operating in totally legal, regulated markets. If our system can’t make those people whole after the fact, then there is no chance (none) that you’ll have any recourse in a crypto collapse.
If I were an institutional investor, that would terrify me. There is no one to complain to in the event something happens. You’d have nobody to blame but yourself. And investors would never (ever) trust you again.
And this idea of corporate management teams putting Bitcoin on the balance sheet is ludicrous. It would be like Berkshire’s quarterly results, only instead of the stock swings, you’d have Bitcoin swings. Can you imagine the chaos? Something like: “In the third quarter, our core business performed well and we were able to pass along rising costs to consumers despite a challenging economic environment. However, due to a 46% decline in the value of our cash on hand which, as shareholders might recall, was partially converted to a combination of Bitcoin and Ether last year….”
So, you know, I guess it’s just that I don’t see the “why.” Why would anyone subject themselves to all of this in a world where the opportunities to gamble and otherwise take an inordinate amount of risk in regulated markets are virtually limitless. There is no limit on the amount of trouble you can get yourself into in regular markets. Given that, why would anyone want to introduce crypto into the equation?
Have you heard of the Ether DAO, H? It was a program running on the Ether blockchain, a utopian crowd-funded investment vehicle that would Do Great Things — until it was hacked a few months after its introduction and forced to donate 1/3rd of its net worth to attackers.
https://en.wikipedia.org/wiki/The_DAO_(organization)
There are more sinister things than collapse that can happen when contracts are self-enforcing with no sanity checks on their behavior.
An interesting reason to avoid crypto.
OTOH, if you own a Picasso, don’t have proper alarm systems and insurance and it gets stolen… who do you turn to, to make you whole?
https://www.theguardian.com/world/2007/mar/01/artnews.france
You should have insured it.
Well, she didn’t.
You can put BTC into cold wallets and/or get Fidelity to custody them for you. Then, if the exchanges get hacked, your holdings aren’t affected.
Now, that won’t save you if the blockchain itself is found to be breakable or hackable (many have tried, so far, without success ; but quantum computers remain a potential threat) or if adoption suddenly goes into reverse but technical issues aren’t the biggest issue.
The one issue is, and remains, forever, about adoption. Will enough people get used enough to BTC as a store of value for it to actually function as a store of value. Gold is a useless shiny rock but we got, what, 3 000 years of history with it? That’s the true strength of that ‘barbaric relic’ – adoption.
If every developed market government + China got together tomorrow and decided to make conversion of Bitcoin into dollars, euro, yen, CAD, AUD, GBP, NOK, SEK and yuan illegal by overnight, coordinated decree, it’s game over. It would be tantamount to contraband.
I’m weary of this discussion, mostly because it’s juvenile. As Dimon put it, “You’ll get what you deserve” if you’re invested in crypto. That may be good. Or it may be bad. Either way, you’ll deserve it.
I’m not going to respond to any additional crypto questions/comments today.
The biggest threat to crypto is that they become or are perceived to be a threat to financial stability. Then the authorities regulate them massively or just plain ban them.
Close to 20% of bitcoin keys have been forgotten. People are hiring to unlock. What if the unlockers actually get good at it. And the big one,Governments can make it very difficult to liquidate. Ban banks from partaking. Liquidate through the IRS say. Just before such law passed what of the price?
Unlocking a wallet is different from stealing the content of the wallet.
Can governments make things difficult? Very much so. Especially the US government. But that’s true of everything. The US government made having US customers a big PITA for non-US financial providers. The US governments made settling debt in USD with some countries (Iran etc) night on impossible…
Basically, the US government is very powerful; not exactly news.
OTOH, unless most governments on Earth join to ban BTC, I think it could still work out. But the immediate consequences would be a crash and a delay in adoption. Maybe permanent impairment but I’m less sure. For many outside the developed world, a way to store wealth away from the gangsters in government is still tremendously useful.
Doge is semi interesting in that it specifically is a joke currency designed for giving people “tips” for good forum posts. It’s like crypto like buttons. Anyone can mine it pretty easy and the ultimate supply is infinite. Some exchanges allow trading it but since it’s not even meant to serve any meaningful purpose in the first place… its value increase is looney.
Crypto itself is most definitely on the razor’s edge and could end up being useful or illegal or both I guess. But that will at least come from currencies with some semblance of intent and design for some sort of utility. Doge is in that game the same way one might have a lint collection as well as a coin or stamp collection.
Another great post H, incisive and thought provoking. As a holder/investor in crypto since 2015 I really enjoy reading your views on the space. Moreover, I fundamentally agree with the core of your view, BTC and crypto is impossible to value on any metric that makes sense and it is purely speculative, not defensive, not a currency and not a store of value (at least not yet). I entered the crypto world to speculate and because it offered a “frontier” type of vibe, somewhat alluring. Anyway, I have taken nice profits on the latest bull run, it’s important to remain sane and skeptical but I do regret not buying more aggressively when I had opportunities in the past, not necessarily because I’m more bullish today on BTC and crypto but because I’m much more bullish on foolishness and the hordes of humans willing to follow other fools blindly. Add Gene Simons of Kiss and Snoop Dog to those pumping Dodge Coin. I see that, the Capitol riots, the GME saga and I it leads me to believe we will not run out of fools anytime soon, most likely than not someone will be willing to buy my BTC at 100k or my ETH at 2k if it gets there, so I remain in the space precisely because of guys like Musk and the dodge coin buyers, because the “greater fool” theory is perhaps the one that better reflects our reality and financial markets. Is crypto really more absurd and insane than negative yielding “high yield” credit? I must trade in the reality in which we exist, as absurd as it is.