To be honest, I haven’t a clue.
Now I’ll be even more honest. I don’t really understand it at all.
Not just the technology of the blockchain, which sounds like a vital part that’s just fallen off my car (after many years managing value portfolios, I’ve never been a great fan of tech).
No, the whole crypto-thing baffles me.
To repeat, I’m used to equity market action. Shares generally move by, at most, a few percent per day. Even when a company announces that profits have doubled or halved, it’s unusual to see short-term price changes of between 50% and 100%.
That’s because the stock market is a discounting mechanism. Without getting involved in all those arguments about efficient market theory, we know what this means in practice. Equities ‘factor in’ investors’ hopes and fears about a company’s financial performance. By the time that a set of results is published, much of the news is already ‘in the price’.
In contrast, Bitcoin’s price action has been truly spectacular.
A year ago the price was around $750 a shot. At the time of writing, it was around £11,700each (and that will almost certainly have changed by the time you read this).
Double-digit daily moves have been commonplace. So what on earth is the Bitcoin market discounting with these dramatic changes?
Unlike conventional currencies or precious metals, Bitcoin isn’t backed by anything of real value. Yet it’s quoted as having an overall market cap of $0.19 trillion!
One conclusion: Bitcoin could be a massive Ponzi scheme. That’s where the profits made by early buyers are paid for by the purchases of later players in the game.
Alternatively, we may be looking at an extreme case of ‘greater fool theory’. That’s where speculators pile into something expensive that’s already gone up a long way, hoping to sell out at even higher prices to someone even more gullible.
In other words, the whole cryptocurrency concept is quite dangerous. It cons people into thinking that making money is very easy. It’s not that simple.
Last week I read a news story about an Australian pole dancing instructor who bought the cryptocurrency back in July and has since tripled her initial investment.
Good luck to her.
But the really telling bit was what she said about buying Bitcoin (emphasis mine).
“It’s volatile at times, especially cryptocurrencies. The good thing is when it goes down, you can buy some more, and you know it’s going to go up at some point. As long as you’re calm and you don’t let emotions run you when you’re dealing with any sort of cryptocurrency, particularly Bitcoin, then you’re safe.”
It reminds me of the famous tale about John F. Kennedy’s father, Joe Kennedy.
Joe made most of his money in the stock market. He traded shares in the roaring 1920s when there was little regulation (with no compliance officers then!) and an ‘anything goes’ attitude prevailed on Wall Street.
But one day a shoeshine boy gave him some stock tips. He concluded that when shoeshine boys are playing the market, it has become too popular for its own good.
Put another way, he reckoned there was no one left to buy.
He then dumped his entire portfolio…just days before the 1929 crash.
Even US stocks in 1929 were much more credible than Bitcoin, though. At least they represented a stake in American industry. There was some inherent value there, even if it was totally overblown.
To my mind, a more apposite comparison is the 17th century Dutch tulip mania.
In short, tulip trading went mad. In 1623 a single tulip bulb of a popular species cost around 1000 Dutch Guilders, which compared with the Netherlands’ average annual income of 150 Guilders. As more people became involved, active trading developed not only in tulip bulbs but also in tulip futures. Prices went stratospheric. The record was set by the ‘Semper Augustus’ at 6,000 Guilders, then the price of a luxury house.
But in February 1637, the tulip trade suddenly collapsed. Traders were left with tulip bulbs which were unsaleable. Many traders had sold futures contracts of bulbs which they did not possess to people who could not afford them. It was chaos.
Will this happen to Bitcoin? I’ve no idea whatsoever. It feels like a massively inflated bubble. And I won’t be getting involved – at any price.
For a moment, though, let’s assume that I’m totally wrong.
Maybe Bitcoin will go to $100,000. Or even $1m.
Yet most of the media coverage has missed out one of the more interesting and unintended elements of its soaring price. That’s the surge in global electricity used to ‘mine’ more Bitcoins.
Bitcoin mining requires expensive and power-hungry computer hardware. According to Digiconomist’s Bitcoin Energy Consumption Index, as of 20 November 2017 Bitcoin’s current estimated annual electricity consumption stands at 29.05TWh.
That equates to 0.13% of total global electricity consumption. No big deal, you may say. But Bitcoin mining is now using more electricity than 159 individual countries including Ireland and Nigeria. Indeed this activity ranks at No.61 in the world in terms of electricity consumption.
Here’s the scary bit. If Bitcoin mining continues to use electricity at recent growth rates, it’ll consume all of the planet’s power by February 2020. En route it’ll overtake UK electricity consumption by October 2018 and US usage by July 2019.
Where will all that power come from?
Here we are talking my language. In Strategic Intelligence I’ve been writing extensively about the need for more nuclear power to plug the gaps that renewables can’t fill. If cryptocurrencies meet some of the more optimistic expectations, the world will need every bit of electricity it can get its hands on.
Maybe we can pay for it all with more Bitcoins…