It never ceases to amaze me how markets so often rhyme, but not quite repeat. If I didn't know it is December 28th, 2020 I might have guessed that it is December 28th, 2017. The current crypto euphoria is of course only rivaled by the blow-off top the sector experienced exactly three years ago.
On December 27th, 2017 I wrote a blog post titled "Drunk on Crypto' in which I conveyed the mood of the moment:
"The absurdity of the evening reached its height when one of the attendees asked our expert if Ripple could really hit $100. I attempted to offer that if Ripple reached $100 it would mean its total market cap would be in the several trillion dollar area in an attempt to add some common sense to the discussion. Our expert quickly chimed in that Ripple could not only easily reach $100, but it could rise far above $100!!"
For those who aren't fluent in crypto alt-coins, Ripple is XRP. Not only did XRP never come close to reaching $100, it trades at $.29 today despite having the 4th largest market cap among cryptocurrencies (due to its massive circulating supply of more than 45 billion coins).
What cryptocurrencies lacked in December 2017, the sector now appears to have in December 2020:
- In December 2017 there was little practical application for cryptocurrencies. They could not be easily used to make payments and the exchange infrastructure was still relatively cumbersome.
- Today, I can use cash app to buy/sell bitcoin and transfer to fiat currency instantly. I can also use the Voyager app to buy/sell more than 30 cryptos and then send/withdraw cash to/from my bank account. I believe it is this practical payments application aspect and easier functionality that has been the primary driver of Bitcoin's most recent ascent to new highs above $27,000.
- We are also witnessing a 'DeFi' revolution in which all sorts of companies are working hard to decentralize finance, and disintermediate the legacy banking/financial system.
- Cryptos also now suddenly have institutional backing and big name stock market investors preaching the bitcoin gospel. This did not exist three years ago.
While crypto is clearly here to stay, in one form or another. We are seeing incredible levels of greed displayed by relative newbie investors who suddenly believe that Bitcoin can only go up. Many of these same characters also believe that their short term TSLA call options can also only go up.
A textbook bubble occurs when a combination of extreme euphoria among investors mixes with the suspension of disbelief and a healthy dose of leverage. While we may not be there yet, we are well on our way there.
We might not be drunk just yet, but we certainly have a good buzz working.
Gold, in all its forms (ETFs, futures, physical), is now old hat for the novice stock market/crypto gamblers who prefer the ability to double one's money in a single trading session. Remember, prices can only go up.
While gold can't shake a stick at Bitcoin or TSLA's performances in 2020, it was never meant to compete with either of them. Gold is a tried and true store of value, and it has been exactly that in 2020. Gold will continue to be a store of tangible value, even if we are living in an increasingly intangible world.
In recent weeks, many people have asked me for advice on cryptocurrencies and stock market plays on crypto. I have been reticent to offer such advice due to the innumerable pitfalls and frauds that are out there. Bitcoin and Ethereum are the best and simplest ways to own cryptocurrency and while they may not produce 200% overnight gains, they also won't fall 95%, or go to zero.
Keep it simple stupid.
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