Déjà vue...

In my past career I traveled to quite a bit of places in the World for professional reasons. I met sometimes wonderful people, sometimes brilliant people and in a few rare occasions I met brilliant+wonderful people.

One of those business trips had as a destination: the United States of America and more precisely to California, San Francisco: Silicon Valley. I am talking roughly 2006. Very last minute, an extra meeting popped up in my agenda, so I took a local flight to Burbank, for those who don’t know Burbank, at that time it was a very nice suburb of Los Angeles, … ;-)

What followed was a very enriching business conversation followed by a visit to one of the most delicious Tex-Mex experiences I remember in my life. But that is more of a context to a story/feeling I want to share here.

On the trip from the local airport “Burbank” to the place of meeting, I was “Blaster-Flastered” by the many huge houses and the impressive residential areas. Beverly Hills at the max… I was asking my local business contact how people were able to buy/finance such beautiful big houses.

He explained the “game” of real estate. You buy a house of 1 million US$, you pay 100K or 200K with your savings, the house doubles in price and you sell it. You now have roughly 1.1M$ or 1.2M$ and buy a property of 10M$. Having Belgium/Flemish roots with a little above average global risk aversion, my stomach made a U-turn…

When flying back to Europe (towards a more conservative Flanders/Belgium, you save, you buy a house and you probably live in it for the rest of your life) I had a feeling of wow this is going to turn bad, very bad, extremely bad. I understood the fundamental “wrong doing” in this approach. The game works as long as prices go ‘up’, the moment they go down, you are in live BBQ. Afterwards I turned out, that my biggest problem was, that I didn’t actively pursue a way to monetize this ‘insight’… I later worked at one of the big banks, I knew CDO/CDS, collateralized debt, ..Something that was at length illustrated in the movie “the big short”. I nowhere claim to have the same visionary talent like the people mentioned in the movie.

To cut a long story short… Today I have the same “vision” / “feeling”

All 2017 I watched BTC / USD going up and especially in the last few months the appreciation of BTC / USD has been exponential. I am nor a believer nor a hater. I have a background in computer science, solid understanding of finance, expert knowledge of old and incumbent payment systems, traditional and more forward-looking investments and I think the underlying ‘block-chain’ technology is a game changer. It will be disruptive to the finance industry, as much as the internet was to the world in 2000.

However, while being very open-minded and not formatted in traditional business models and actors, under no reasonable circumstances I can “see” nor “understand” why a Bitcoin should have a value of 11.350 US$ per bitcoin?

I think “Block Chain” is still a more than promising technology but….

But Bitcoin has run way beyond its goal and its value/return. Similar to the “stomach U-turn” I had in 2000, when profit was not important, burning cash was not relevant, growth (non-profitable growth) and cash burn and number of money losing customers was more important. The “new economy” had new rules. Making money / profit was no longer relevant, growth was important, but at the end I had was thinking: “take a deep plunge, but the return needs to come at some point of time and that was missing in the picture of many of the ‘Dot.Coms’ that went belly up”…

Today we see two camps with regards to BTC (Bitcoin), I think we need to avoid being believer or hater, but try to analyze/think about the situation without feelings.

BTC having touched above 11.000$ per BTC, why would a BTC be worth now 11.000$ while it was worth less than 1.000$ a year ago? What justifies a value creation in BTC or value destruction in US$? These types of returns seem unrealistic, even considering the very best technology..

I think value of BTC would be dictated by:

- Acceptance (being able to globally pay everywhere with it)

- Efficiency / Flexibility of the payment method as such

- Return on the investment (to my knowledge BTC does not yet yield interest like other currencies)

- Stability, taking all excitement apart, as a global payment method, I don’t think people and companies like to see the value surge and drop +10% per day, roles of traditional currencies is to provide stability. How does the bag-holder feel who bought today at 11.193, while the rate is 9.400 in the same day ?

- Ease of transacting. I have a feeling buying BTC is 10X, 100X easier than selling BTC, try it yourself !

Bottom-line I have an impression that some people are making fortunes and some people will lose fortunes. Nothing new under the sun, but keep in mind that in the majority of the cases, you have nowhere to turn to in case of a disaster.

At 11.000 US$ / BTC I have a feeling this is more of a sell than a buy…

The problem with bubbles is that it is very difficult to predict the top, but my feelings tell me we are close to the top than the bottom. When betting against BTC , be careful, as was illustrated in “the big short”, craziness can go one for a while, before the bubble explodes.. You need to have a deep breath to survive…

Always consider proper risk management...

Disclosure : I have no position in BTC, this is not a recommandation, do your own due diligence...

Regards,

Ron

I can't agree more (and won't touch BTCUSD).
It could go much higher than $11k but it's clearly a bubble.

Enlightening post and analysis Ron, thank you. I'm no finance guy, really appreciate your insight.

BTC is all the rage these days, to the point that even my 80 year old neighbor is talking about it lol. I'm just casually observing and waiting for the bottom to drop out...

Rrrracer 

Enlightening post and analysis Ron, thank you. I'm no finance guy, really appreciate your insight. BTC is all the rage these days, to the point that even my 80 year old neighbor is talking about it lol. I'm just casually observing and waiting for the bottom to drop out...

There is a saying, the moment the taxi driver and the hair dresser is talking about something
(with bitcoin this starts to be really the case), you can be sure that we hit the top, the in
the exaggeration..

I think the technology (block chain) is great and will be a game changer
but i can just not understand that BTC will be the vehicle to change the world...
it will not happen that way, I'm sorry.. too much at stake..

Imagine a guy like warren buffet creates a crypto currency, the software is all most open source
you just need a handful engineers, and you can of run a distributed ledger, give me good reasons
why we really need BTC and can not replace it with a less inflated alternative with more
underlying guarantee ?

Very true It will be most interesting to see how it all pans out. I'll have to look more into block chains, personally know virtually nothing about crypto but it is intriguing to see how the concept affects people on a daily basis.

Very similar to the internet reference you made IMO... (especially young) people are interested and attracted to it, no question crypto is a look toward the future of currency, and it will become pervasive in some form or another. Your comments really get down to the nuts and bolts of what it will take to get there.

@rleplae Check Burbank prices now. The price increase of real estate is tremendous. The same happened in Miami, NYC, and many other areas in the USA, not to mention San Francisco where programmers who earn $175K per year live now in apartments that some could consider a bicycle storage.

If you used leverage to speculate, a mortgage with no money down, variable rate, etc. you have been caught in a bubble. However, if you just lived in your house, and did not speculate, and even lived through the crisis, you would have been just fine today. I am not saying we did not have a crisis with the housing in the USA, we had a bad one. But, it was due to the unethical and irrational bank terms that were given out. It was not because real-estate is a bad investment per se. The terms that you use when you have a long-term outlook could make all the difference.

I do not advocate the purchases of Bitcoins. However, we do not have the tools today, in my opinion, to evaluate whether it is a bubble. We have a product which is highly mathematical, limited in its quantity (max 21mil could be mined), and we can not gauge how adaptable this technology would be. Further, those who have followed the price of Bitcoin for the last decade could attest to the fact that we have been through "crashes" and recoveries just to make new highs. Consider 2013, where the prices went from 1,300 back to $200. One thing I could agree on is that these crashes occur when there are tremendous media interest and coverage and everyone is in a FOMO state. Using the same 2013
math, we could have prices going back to $2000 and potentially new highs thereafter. But as they say, past performance is not indicative of future results.

As a trader, you can not rely on hunches. "seems like", "maybe" "gut-feel" are things that should be avoided at all costs, especially in futures trading where leverage is involved. Price will go higher than anyone anticipated, the price may crash to levels that no one predicts.

Matt Z
Optimus Futures

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

Cullen Roche at Pragmatic Capitalism had a piece out a couple of days ago with his thoughts on how to act during asset price manias, it's an interesting read.

https://www.pragcap.com/manage-asset-price-mania-like-bitcoin/

That was at the very least an entertaining article. Thanks for sharing.

I particularly enjoyed the bit about people with big piles of dumbass money are probably not dumbasses

Sent using the NexusFi mobile app

Excellent post @rleplae.

rleplae 

BTC having touched above 11.000$ per BTC, why would a BTC be worth now 11.000$ while it was worth less than 1.000$ a year ago? What justifies a value creation in BTC or value destruction in US$? These types of returns seem unrealistic, even considering the very best technology.

I think there are several factors effecting bitcoin, that significantly distort it's value, and render it useless as a currency or commodity. I know this will be laughable to the believers but to me bitcoin is somewhere between the biggest short squeeze ever and a Ponzi Scheme. Why do I say that? From my perspective at least, the overriding fundamental effecting bitcoin, is lack of supply. I like you see no underlying economic reason why it should be worth $11k. But maybe I just cant see the Forest through the trees.

Sorry for going off topic, but ... a pet peeve of mine.. (Sorry Matt!)

mattz 

But, it was due to the unethical and irrational bank terms that were given out.

I really don't understand why everybody blames ONLY the banks (other than its popular to hate on Wall Street). In relaity most mortgages were sold by mortgage BROKERS and just packaged into CMO's by the banks. Sure they are obviously complicit but the financial crisis couldn't have happened without 5 major participants - remove any 1 and it probably doesn't happen.

1. Federal Goverment inciting and enabling the house ownership boom
2. House buyers, getting mortgages they knew they couldn't afford
3. Rating Agencies rating CMO's to generate fees regardless of risk
4. Banks being the middlemen, bringing buyers and lenders together
5. Investment companies buying CMO's with yields to good to be true.

Now - how foreclosures etc were handled is a whole different story.

SMCJB 

In reality most mortgages were sold by mortgage BROKERS and just packaged into CMO's by the banks.

Mortgage brokers are not the one who approve the loans, set the standards for the loan or dictate the terms.
There is a loan officer, compliance, etc they need to approve it. The banks lowered their standards as a result of competition. Having said that, some of the mortgage brokers who were hired at the time did not have the best of backgrounds. That definitely did not help either.

Matt Z
Optimus Futures

There is a substantial risk of loss in futures trading. past performance is not indicative of future results.