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Sound Advice: January 18, 2023

Crypto Eulogy

Late last March, when bitcoins were at their year’s peak above $47,000, I was interviewed by Paul Vigna of The Wall Street Journal, who asked me about my thoughts on cryptocurrency.  Rather than an extensive response with all the reasons for my opinion, I offered a simple answer: “My clients would kill me if I bought bitcoins for their accounts.”  Since then, the ceiling has all but caved in on this and other fantasy currencies, not surprising since, in the words of Mihir A. Desai, professor at Harvard Business School and Harvard Law School, “. . . they are a manifestation of a magical thinking that had come to infect part of the generation who grew up in the aftermath of the Great Recession . . .”

Cryptocurrencies have no underlying value.  There is no consumer protection.  There are no dividends.  So long as they are trading and prices are swinging up and down, those who are willing to accept extraordinary risk may buy for brief periods in expectation of quick gains.  But there is no assurance that will happen.  Indeed, a steady plunge from current levels to the basement is not out of the question.

There have been numerous parallels to cryptomania.  It was only a couple of decades ago when the vanguards of the Dot.Com Era disappeared into the Great Unknown.  Companies such as Pets.com, Webvan, and TheGlobe.com gained extraordinary followings among “investors” in short order and then exited stage left.

Pets.com went public in February, 2000, rose to a high of $14 a share, then fell below $1.  The company went under only nine months after its initial public offering.

Webvan was a grocery delivery service that expanded too quickly.  It went public in November, 1999 with plans to expand to 34 cities within two years.  Its shares rose to $30 shortly after the offering.  Then, only 20 months later, the stock fell to six cents a share and the company announced it would close up shop.

TheGlobe.com was even more exciting.  On the first day its shares were traded, the stock jumped 600% to $97 a share.  Less than two years later, the price fell below $1 a share and the stock was delisted from the NASDAQ exchange. Thereafter, the company briefly continued its online gaming sites, but finally went out of business in 2007.

The common denominator for this cast of characters was the failure to deal with reality.  What seemed to matter at the time was that the stocks were going up.  What was ignored is that the fuel for long-term market success is the profitability of the underlying company.

Crypto and tulips. Amen.

  

 N. Russell Wayne, CFPÒ

www.soundasset.com

 

Any questions?  Please contact me at nrwayne@soundasset.com 


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