Two decades ago, I was earning a living as an internet commerce expert, and telling anyone who would listen that, while the internet itself was important, internet stocks were a bubble that would end in tears.
We are in a similar position today. Now the technology that matters is blockchain.
Blockchain automates trust, and movements of value, the way the internet automated communication. Blockchain can eliminate friction in finance of all kinds.
Over the next decade blockchain will completely transform how value is transferred between people and countries.
Blockchain is a very big deal.
But there is a bubble inside blockchain. That bubble is called bitcoin.
Bubble, Bubble, Toil and Trouble
Bitcoin is the product of Russian programmers and Chinese miners. It is sucking up money because of its perceived scarcity. Where real cash is scarce, as in Zimbabwe, bitcoin is incredibly dear. Even in the U.S., a bitcoin was trading at over $6,000 as of this writing.
But bitcoin is not a currency. It is very illiquid, because the blockchain controlling it is slow, and there are only 16,635,150 in circulation. Simply by refusing to sell, bitcoin owners become millionaires as otherwise-rational people are stampeding into the market.
During its recent run-up, bitcoin has come to represent over 56% of the cryptocurrency market, up from less than half just a month ago.
Three primary sources of bitcoin news are bitcoin.com, a collection of young bitcoin evangelists; Coindesk, controlled by the Digital Currency Group, which I wrote about last week; and Cryptocoinnews, owned by a 27-year old Norwegian, Jonas Borchgrevink, who also owns Hacked.com.
Thus, the media covering this market has an interest in keeping the market bubbling. Anyone who questions the market, even JPMorgan Chase & Co. (NYSE:JPM) CEO Jamie Dimon, is quickly damned as an old fogey who doesn’t get it.
I was considered an old fogey who didn’t get it during the dot-com bubble. I got it only too well.
Down the Rabbit Hole
Bitcoin is a highly illiquid index of fear and distrust of institutions, masquerading as an alternative form of currency.
The bitcoin market is intimately connected with the Dark Web, which is why authorities in the U.S., China, and even Russia are trying to control it.
Trader Josh Brown recently tried to go down this rabbit hole and if you read his piece you’ll see the truth of what is happening. All the talk is of big institutions buying into the “market” for an asset that is deliberately illiquid.