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