Crypto Madness. Will it end in tears?


If you bought Bitcoin, Ether or any other Crypto assets during the late 2020 hype, you’d have doubled, tripled (or even 10X) your money in April 2021. But if you bought it after then (when your 89yr granny considered yoloing into it) you’d have lost half or up to 70% of your investment. 

In 1841, the journalist Charles Mackay published Extraordinary Popular Delusions and the Madness of Crowds. In it, he wrote “Men… go mad in herds,”, “while they only recover their senses slowly, and one by one.” 

Cryptocurrencies Bitcoin, Ether & many other alternative coins is a mania worthy of Mackay. Nearly valueless just a decade ago, prices reached an all-time high in April this year. While the price has now dropped to little more than half that, don’t be fooled. Much of the herd is still mad, and Crypto could remain irrationally valuable for a long while yet. 

Bitcoin is a currency or maybe it’s an asset

If Bitcoin isn’t a currency, then it must be an asset, right? But its volatility makes it a bad asset too. Other assets with limited real use are at least stable. Gold, for instance, has held its value for centuries. In the past two weeks alone, the value of bitcoin & Ether fell by nearly 40% (alternative coins did much worse). 

But those who see this recent drop are wrong to write it off entirely. After all, a price of over £28,000 is still an awful lot of money for a single unit of digital currency. The first time Bitcoin was ever used, 10,000 coins bought two large pizzas. At today’s prices, those pizzas cost £130 million apiece. 

Bitcoin will eventually collapse under the weight of its own absurdity, as all speculative assets have before it. But predicting when is a fool’s game. After all, as John Maynard Keynes famously warned those who try to pick the top of the market, “the market can stay irrational longer than you can stay solvent.” 

Are you the greater fool?

There is, in truth, some rational underpinning to most speculative investing. It is called, gloriously, the “greater fool theory.” Many speculators don’t really believe that the stock they have purchased is worth its current valuation. Instead, they think that there is someone out there foolish enough to buy it off them at its overinflated price. The speculator might be a fool, but they invest on the assumption that there is a greater fool out there than them.

Crypto investors do the same, of course. They buy Crypto because they think they can sell it to someone else, for a profit. But Crypto is different from most speculative stocks, because it is even more irrational than most speculation. 

Power of social media & joke coins

In a year when retail investors have used social media to send asset prices soaring, no move in digital-currency markets has defined the power of memes more than the rise of Dogecoin. It is a cryptocurrency that was created as a joke but has risen more than 10,000% in 2021.

Dogecoin’s total market value ballooned to more than $80 billion at its 2021 peak reached earlier in May, up from less than $600 million at the end of 2020. Heightened attention on the joke Crypto from Elon Musk and rapper Snoop Dogg, among others, has turned social-media users into day traders who have encouraged new buyers to enter the fray with the goal of pushing it to $1. It is trading around 30 cents now. If you invested in early May 2021, you’d be down 54% today.

Dogecoin’s creators never intended for it to have any meaningful value. Traders instead are speculating that it can keep climbing solely on social-media momentum. That can leave investors more vulnerable to losses and sharp price swings when the hype fades.

Dogecoin’s wild swings are a warning to other Crypto investors as well. While the first cryptocurrency’s backers point to its utility as an inflation hedge or store of value, it has no long-term history as either, and its value is closely tied to sentiment and momentum. If sentiment turns against it, the price can tumble, and a rising price is Crypto’s biggest draw for new investors.

Crypto and politics 

To many, Crypto’s appeal is not just monetary, it is political. To buy Crypto is to raise two fingers to the financial establishment, because Crypto is currency freed from the grip of central banks and the financial elite. It is the financial manifestation of the anti-establishment politics of Trump and Brexit. 

Crypto investing isn’t just speculation, it is also a statement of identity. If speculation sounds irrational, identity is less rational still. “Reason,” wrote the Enlightenment philosopher David Hume, “is slave to the passions.” As recent years have shown us, there are few passions stronger than a sense of our identity. 

Crypto in Context

Due to the prolific rise of Bitcoin, Ether and Dogecoin, the value of the total Cryptocurrency market has swelled to more than $2 trillion, up from $260 billion a year ago. Dogecoin alone—with a market value of about $67 billion—is worth more than 75% of the companies listed in the S&P 500 – America’s largest 500 companies.

Despite making inroads, Bitcoin has struggled to find a use beyond serving as a tool for speculators. Some industry watchers say it must gain traction as a form of payment to become more acceptable. Spending it isn’t easy, and its use is generally limited to high-end purchases.

One of the stumbling blocks: transaction fees built into the network’s code, which change depending upon traffic. Users paying higher fees get to move their transactions to the front of the processing queue. The fees have skyrocketed as cryptocurrencies have exploded in popularity, limiting the rationale for using Bitcoin for small transactions.

Cryptocurrency addiction – The crack cocaine of gambling

A news article published by BBC recently raises concerns about people being addicted to Crypto trading and risking their life savings. According to experts, cryptocurrency trading addicts show the same kind of behavioural addictions as problem gamblers. Tony Marini, the lead counsellor at the cryptocurrency addiction clinic at Castle Craig hospital in Peebles, Scotland said “This is the crack cocaine of gambling because it is so fast, it’s 24/7. It’s on your phone, your laptop, it’s in your bedroom.”

“There are so many people out there that are trading cryptocurrency that are making money,” he said. “And they’re telling everyone that they’re making money. We are not hearing from the people that are losing money.”

You can read the full article here.

Will it end in tears?

In life, there are winners and losers and in the Crypto world some will make millions & most will lose everything. As the saying goes “A rising tide lifts all boats” and at the moment all Crypto boats have been lifted (including thousands of scam & joke coins) but when the tide recedes, it may just be too late to run for the exit. 

One day, Crypto enthusiasts will wake up to discover they were the greater fool, and that their coins are worth nothing at all. But you’d be foolish to try to guess when. The price of Bitcoin, Ether and Alt coins may have fallen, but the passions are still running high. As Mackay observed, we only come to our senses slowly. The extraordinary popular delusion that is the madness of Crypto will last a while yet.

 

Nazrul Hoque – 1 June 2021