We’ve seen this move in Bitcoin before… Get out while you can.
By Raoul Pal
Investors are watching in awe as bitcoin takes off exponentially yet again…
I bought bitcoin at $200 a few years back. It is one of the best trades in the history of Global Macro Investor, if not THE best trade…
But today, I’m warning investors to stay away. Bitcoin, and cryptocurrencies in general, are exhibiting all the classic signs of a blow-off top.
In fact, I sold all my bitcoins a few weeks ago…
When I first looked at the crypto space, I thought that bitcoin would be the winner and that its blockchain technology would essentially be the Internet of finance over time. As I said in 2013:
It’s either worth zero or it’s worth a truly outstanding amount of money.
The price of bitcoin then looked similar to the price of gold back in the 1950s to 1980s. I even did some “back of the envelope” analysis comparing the cryptocurrency with gold – showing that the relative value of a single bitcoin could be worth as much as $1 million.
Today, that no longer looks true.
What we have created is a commodity in blockchain, some better than others.
Instead, bitcoin appears to be a very clever invention that can be copied, tweaked, and changed infinitely. Essentially, what we have created is a commodity in blockchain, some better than others.
This makes me think it’s more like cloud computing or broadband than an equity or asset. The value of blockchains should converge to near zero, with some better than others and able to offer premium value.
Bitcoin’s sheer size means that it will likely not be worth zero, but maybe should trade at a utility cost over the U.S. dollar, i.e. as a spread. It will likely be anchored to a currency via the relative valuation of assets.
Basically, if a slot on the blockchain is too expensive, people will use another.
This sort of bitcoin protocol is not deflationary as the hard-currency believers dream – i.e., it goes up every year. It has a marginal utility that declines at higher prices. The price will therefore most likely be deflationary and should trend lower as the value of somewhat interchangeable blockchains go to zero.
Though its relative value may remain elevated, it is far, far from a sure bet that it goes up further or stays up. Most of the other cryptocurrencies will go to zero, but not all of them for similar reasons.
This is a bubble. I’ve lived many before.
Passionate believers will hate you because they are emotionally involved in an investment. It has made many, many people very rich from a very small base. No one believes that blockchain technology and cryptocurrencies are possible commodities with infinite supply. Just because one has the largest market cap, doesn’t make it the winner.
I think cryptocurrencies will all eventually go down for a long, long time. Again, I am not necessarily calling a top in bitcoin, although it seems likely. I am just taking profits because the reasons I fell in love with bitcoin have disappeared.
The real riches are going to be made from blockchain applications, not blockchain owners or even blockchain mining.
When I have written about bitcoin in the past, I held some core beliefs:
• Bitcoin is a store of value.
• Bitcoin was going to develop a killer app.
• Blockchain technology was the true revolution.
However, things have begun to move away from that script…
No Longer a Steady Store of Value
One feature that attracted me to bitcoin was its scarcity.
When I bought bitcoin, about 55% of all bitcoins in existence had already been “mined.” Mining is the process of bitcoin creation that takes truly enormous computing power and gets more and more difficult to do as fewer and fewer are left to be mined.
Similarly, an estimated 65% of the world’s gold reserves have also already been mined. Gold becomes more and more difficult to get out of the ground as the low-hanging fruit has been taken and more technology and money is needed to do so. Gold requires higher prices for the remaining reserves to be mined.
For example, look at the move in gold as President Richard Nixon left the gold standard. Gold suddenly had real value in an inflationary world… It exploded higher, further than anyone could forecast. There is only so much gold in the world, and people were desperate for it as a store of value.
Bitcoin, and the underlying blockchain technology, was a solution looking for a problem, it seems.
Bitcoin was a similar store of value. There are only ever supposed to be 21 million of them. No more were ever supposed to be created, which was part of the genius of the design.
But today, there is a debate about changing this. Some in the bitcoin community are contemplating a way to split bitcoins in two, allowing for the creation of more bitcoins.
The debate continues to rage on, with a number of alternatives discussed, from “hard fork” to “soft fork” and “Segregated Witness”… the details of which are too convoluted to go into here. All I know is that a change is likely to come… somewhere, somehow…
Without going into the complex technical details, the point I want to raise is that if the core developers are talking about changing the code for how bitcoin works or talking about creating another kind of bitcoin altogether, then it cannot be deemed an irrefutable store of value. They are even talking about making it easier to change these rules.
Something that is an irrefutable store of value cannot be changed – such as gold.
The question has to be asked – what if developers decide in the future to allow the total number of bitcoins to expand? I know that seems unfeasible now, but these debates have meant that anything is now possible, if improbable.
That, to me, destroys the store-of-value argument.
The ‘Killer App’ Isn’t Coming
Much has been said by bitcoin lovers about the “killer app” that is likely to come out of payment processing – disrupting vastly inefficient, costly businesses such as the world’s largest money-transfer company Western Union (WU), as well as debit cards, credit cards, and the SWIFT international payment system.
It has been several years since all this talk started, and we still have no killer app.
Meanwhile, in India, a mobile app called the Bharat Interface for Money (“BHIM”) and others using the nation’s Unified Payment Interface (“UPI”) have enrolled nearly a billion people and can process payments 50 times faster than bitcoin. Sure, it’s not an immutable, distributed ledger, but is it not the solution people were looking for? They wanted a virtually free way to transfer money instantaneously without a middleman.
India solved that. Bitcoin, and the underlying blockchain technology, was a solution looking for a problem, it seems.
The dinosaur that was to be disrupted – credit-card company Visa (V) – actually beat everyone to their own demise by launching its own blockchain for business-to-business payments. It seems that the killer app from bitcoin failed to kill anyone.
I also envisaged that the futures exchanges, derivative settlement systems, and custody systems were going to find the use of bitcoin blockchain technology incredibly helpful. However, what has transpired is that these key parts of the global financial infrastructure are now using private blockchains…
The incumbent businesses saw very quickly how disruptive blockchain technology was, and they acted immediately to develop it themselves to avoid being assigned to the dustbin. They have proven more adaptable than anyone deemed possible. Bitcoin has killed no one so far. Blockchain technology will make adaptable businesses stronger.
This makes me think that the bitcoin killer app is never coming. It is all hopes and dreams.
The Blockchain Revolution Is Turning Private
Recently, I spoke with one of the key players in the bitcoin industry… He is one of the owners and founders of a bitcoin exchange and has been instrumental in introducing me to other giants in the bitcoin world.
His exchange was probably the best positioned of any in the world to capture institutional business. That business was extremely slow to come. His focus has now shifted to private blockchains and away from bitcoin. The old startup pivot…
This was my biggest fear with bitcoin – that the bitcoin blockchain would be replicated by others, improved upon or tweaked for different purposes.
The rise of alternate cryptocurrencies like Ethereum and Ripple is essentially this fear coming true. But the real revolution is how many private blockchains are being developed with no need for a token or tokenization such as bitcoin. Or, if they do use tokens, they have no tradeable value outside of the system as that is superfluous to the needs of the users in these cases.
I see this trend everywhere, from banking and custody systems to Visa. It will appear in the accounting industry, the legal industry (smart contracts), the trade-finance industry, the insurance industry, and everywhere else where a distributed ledger and recorded ownership is desperately needed.
Corporations around the world have fallen in love with blockchain, just not the bitcoin blockchain. It is not in their interests to have a public ledger.
Again, bitcoin seems to be a solution looking for a problem. I know of almost no corporation or large institution that needs, or even desires, a public ledger. The level of security of a giant public ledger is of no concern to, let’s say, a group of a dozen insurance companies using a blockchain amongst themselves for insurance contracts. This would easily be secure enough for their needs.
Blockchain technology is going from strength to strength, but the bitcoin blockchain is languishing in the land of Chinese miners, retail investors, and dreamers.
This is not the bitcoin I wanted or envisaged.
Sure, bitcoin will keep going. And it may go up in price more, maybe a lot more. There will be some amazing applications. Some old giants will be killed. But I now doubt that any of it will meet the dreams we all had for bitcoin. It is not going to disrupt at the massive scale we all bought into.
Blockchain technology, however, will do that and more…
I’m happy to take my money off the table for now and see how it develops. I have made 7.5 times my investment. It’s been a colossal home run, but I don’t want to overstay my welcome now that my dreams have been broken.