So, I last penned an article on Bitcoin here back on 11 July 2017. If you listened to me then and not bought Bitcoin, you would have missed out on buying it at $2,322.18. Which means you’d also have missed out on selling Bitcoin at its all-time high of $19,190.33, netting you an absolute return of 826.4% in just five months.
Which investor/trader wouldn’t salivate at an opportunity to make multiples on their money in just a matter of months? Hedge funds run by the brightest people on earth can barely eke out gains that can beat the S&P 500’s 2017 year-to-date returns of around 20%, let alone Bitcoin’s stupendous rise in just a few short months. People have even been taking out mortgages to buy Bitcoin.
There’s a Bitcoin Pizza tracker on Twitter – following the news back in May 2010, where developer Laszlo Hanyec bought two pizzas for 10,000 Bitcoins. At the time, it was worth just $41. I shared the same story in my previous article; at that time of writing, it was worth $21,000,000. As at 17 December 2017, it was worth nearly $200,000,000. I hope Domino’s did not cash out.
To put this into perspective, Bitcoin could lose 90% of its all-time high price to just $1,919 and it would still be almost double the price it was back in January 2017, when it was trading at around $1,000. Its current “crash” of just 40% seems like just another bump on the track for the gain train. In fact, Bitcoin has already bounced back 40% in one day since the crash.
I remain adamant that this is a bubble despite being 826.4% wrong on the price movement of Bitcoin. I further believe that this bubble has reached its mania phase – its effects are spilling over to other cryptocurrencies and markets. As steam from Bitcoin sort of slows, the crazed market is still hungry for multi-bagger returns and they look to other avenues for similar returns.
Litecoin, Ethereum, Ripple
Litecoin has seen its price surge in early December, essentially tripling in a few days to reach a high of $370 from $100. Ethereum’s price doubled in the same timeframe from roughly $400 to $800. Ripple has seen its biggest move in a similar timeframe as Litecoin – from $0.20 to a high of $1.20, a six-bagger return in the span of barely two weeks.
But the real craziness was actually spilling over into the equities world – a realm that’s familiar to regular readers of The Fifth Person. Do you remember by way of experience or news how back in 2000, any company that listed with a dot.com to its name (or announced that it was in the Internet business) saw its shares rocket in just a day?
It may seem that we should have learned our lesson from past mistakes. History does not repeat itself, but it sure does rhyme.
Here are some ridiculous-but-true examples of how companies have jumped on the crypto-bandwagon:
1. LongFin Corp. The stock had an IPO in mid-December and went from $5 to $100. That’s a 20 times return in less than a week. The first two days of its IPO saw little price action, but then it went crazy after they announced they were acquiring Ziddu.com – a business lender that deals only in, you guessed it, cryptocurrencies. Some sharp-eyed Twitter user then did a little digging and found that Ziddu.com was a domain that was registered by LongFin’s CEO himself.
Here’s their website’s description of its business:
“Ziddu.com is a Blockchain technology empowered solutions provider that offers Microfinance Lending against Collateralized Warehouse Receipts in the form of Warehouse Coins to Small and Medium Enterprises (SMEs), Processors, Manufacturers, Importers and Exporters using Cryptocurrencies across continents. Ziddu Warehouse Coin is a smart contract that enables Importers and Exporters to use their Ziddu coins that are loosely pegged to Ethereum and Bitcoin Crypto Currency. The Importers/Exporters convert offered Ziddu coins into Ethereum and Bitcoin Cryptocurrencies and use the proceeds for their working capital needs.”
They further describe that they are in artificial intelligence and machine learning. Hell, why not mention augmented and virtual reality while they’re at it, people might not be fully convinced until you bring out the big buzz words. Their stock could have gone to $1,000.
2. Riot Blockchain. If Riot Blockchain’s hilarious name and business description do not convince you that it is dubious, you might be in serious trouble. Its homepage states:
“Riot Blockchain Inc. is a first mover on the NASDAQ focused on blockchain technology. We aim to be part of the disruptive blockchain technology ecosystem that is revolutionizing transactions. We have also launched our own Bitcoin mining operation.”
The mere fact it had “blockchain” in its name sent its shares soaring 375%. Its original business strategy, if there is any, was in biotechnology — a sector that’s famous for eye-watering returns on companies announcing FDA-approval on their new drugs or pure speculation. So Riot’s management presumably were bored with themselves and figured out a fool-proof way to make tons of money by simply changing their company’s name.
3. Long Island Iced Tea. Yes. That drink. This has become really ridiculous and painfully hilarious. Its original business was selling beverages and unprofitable. But then it announced it would seek to partner with or invest in companies that dabble in blockchain technology. Here’s an excerpt from the press release:
“Long Island Iced Tea Corp. today announced that the parent company is shifting its primary corporate focus towards the exploration of and investment in opportunities that leverage the benefits of blockchain technology. In connection with the shift in strategic direction, the Company has approved changing its name from “Long Island Iced Tea Corp.” to “Long Blockchain Corp.” and has reserved the web domain www.longblockchain.com.”
Guess what happened. The stock went from around $2.50 to $9.50 in just a few days. They could make it go to $100 if they announced that their beverages would now be brewed by a machine-learning robot that runs on blockchain technology utilizing augmented reality to analyse their clients’ drinking needs.
Even a gold mining company got sick of gold mining and instead switched to Bitcoin mining. In their defence, Bitcoin mining is way more profitable and requires less capital expenditure than gold mining, it is a good strategic move. They could have gone a little further and announced that their existing gold mining operations would continue but the miners would now be replaced by robots powered by artificial intelligence.
These companies aren’t alone, they join the growing list of companies that were originally in normal businesses of e-cigarettes, medical marijuana, and furniture making before making the “jump” to the all-exciting cryptocurrency business.
It’s not just the micro-cap companies cashing in on this craze: Goldman Sachs recently announced they were setting up a cryptocurrency trading desk, apparently the first large bank to make markets in cryptocurrencies. This follows the Chicago Board of Options Exchange’s decision to start Bitcoin futures trading.
I’m still waiting to see if any Singaporean company is enterprising enough to change its name to enjoy the same privileges as the Americans. SGX is filled with many penny stocks that have traded at fractions of a cent for years. They could get out of this rut if they simply watched the news. Although the MAS and SGX may not take this issue with the same apparent nonchalance as the SEC.
Under-performing REITs could announce a name change (Blockchain REIT? That will be a first) and convince investors that their cash balances will now be held in Bitcoin. Old economy industrial stocks could announce a side-investment in blockchain technology and see their stock prices rising quicker than Venture Corp.
Maybe the big technology companies that are in the race to a trillion-dollar market valuation could use some ideas from their microscopic cousins. Their case would be far more believable as they are already in the right industry with products or services that may even be powering cryptocurrencies.
When the bubble pops…
In the previous article, I shared what to do when the bubble pops. One recommendation was to buy Bitcoin itself as there is enough trust in cryptocurrencies. The only caveat would be the intrinsic value of Bitcoin – how does one calculate it? Is $12,000 fair value? Or $1,000? This is just on Bitcoin. What about the other cryptocurrencies?
I have seen more and more friends who have never invested nor traded a cent of their money show off their crypto-wallets to me. The issue during a massive sell-off would not just be price but liquidity. There’s no point in having $100 million in cryptocurrencies if you can’t realise your monies.
Here are some questions to ask yourself:
- Have you tried selling your positions before?
- Did you encounter any “technical” issues with selling, especially in a highly volatile time period?
- Have you tried withdrawing some money from your crypto wallet?
- How long did it take and was it consistent?
- Does the website crash a lot?
- How secure is your wallet operator?
- How transparent is your wallet provider on how they operate and who they are?
If you can’t answer any of those questions with full confidence, you might want to start testing the integrity of your wallet provider in terms of execution of trades and fund transfers. In times of distress, you would need a community to fall back on and commiserate, here are some of the more popular avenues you can visit
Singapore-based crypto forums
There is nothing much you can do here but to simply cut and run. Equities have less of a liquidity risk than cryptocurrencies for the obvious reason of good regulations.
There could be displacement in value for certain companies that get caught up in a massive crypto sell-down. It is inevitable that a crypto crash might have some spillover effects on the financial markets, albeit at a much lesser magnitude than an equity or bond bubble bursting. Technology companies that have real businesses in relation to cryptocurrencies such as its underlying blockchain technology (banks are also another example) could be affected.
Reading the hilarious rush for name-changing might make you want to short certain names but again beware that short-selling has its own risks. Do not get blown up for being right – Bitcoin may crash but the stock price may stagnate or rise due to unforeseen circumstances beyond your control. Refer to this article on short selling for a clear explanation on its risks.
The fifth perspective
It has been an eventful year in the financial markets. I can safely say that I can count this as my first ever experience watching a bubble balloon in front of my eyes. Its eventual fall would also be a good lesson to learn. People have been searching for asset bubbles far and wide, from junk bonds to tech stocks, but it came from the least expected place of them all. Human greed knows no bounds and transcends time – we could witness another bubble in our lifetime.
To be clear, as much as I expect this bubble to burst, I’m not in the business of schadenfreude. My intention is simply to engage, discuss and alert readers to any potential wealth-destroying event (like this one). I don’t profess to be an expert in cryptocurrency but I think its clear to me (and to many) that Bitcoin’s price rise is based on runaway greed and speculation.
To those who have made money in this, enjoy your profits but know that it may well have been sheer luck and not skill (though I acknowledge it takes some skill to know when to ride a trend). At the same time, it is for the better not to extrapolate the same strategies from this to other assets and expect the same stellar results, you could well lose what you have made.