Fool’s Gold – The Crypto Con and The Boom-Bust Cycle

Cynic. Dinosaur. Out of touch.

These are the distilled (and censored) comments to last week’s Rum Rebellion titled ‘Barriers to Entry’.

It was my reference to crypto currencies being a ‘bigger con’ that drew the ire of the new age cult followers.

Common ground was found in the comment ‘you just don’t get it.’

Absolutely correct…I don’t get it.

I’m pulling the age card here, which is bound to p*ss the millennials off…again.

But what the heck.

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I’ve been around this business for longer than most millennials have been alive.

Went through the 1987 crash. The dotcom boom and bust. The subprime debacle.

And now, the ‘everything’ bubble…which includes this fascination and dalliance with an alternative currency.

In the fullness of the boom and bust cycle — when uptrend boom turns to a downtrend bust — the notion of an alternative currency will be laughable…except for those who were silly enough to buy into this nonsense.

Every boom brings a different con.

People desperately want to believe in these flights of financial fantasy.

In the mid-1980s it was the entrepreneurs. These were the new titans of industry. Brash. Confident. Flamboyant. Buying up companies (often with little or no synergy to the core business) with unlimited lines of credit.

The ‘greed is good’ era was good until it turned bad in October 1987.

Investors who cared little about or failed to understand value, were suddenly taught about how a fool and their money can soon be parted.

In the late 1990s it was the well-documented dotcom boom. Unless you were old enough to have lived and invested through this period, you really have no idea how disconnected from reality people can become.

The Reality of Boom and Bust Cycles…

In December 1996, the then Fed Chair Alan Greenspan asked the question (emphasis added)…

But how do we know when irrational exuberance has unduly escalated asset values […]?

Greenspan’s curiosity on the madness of men was made a full three years BEFORE the tech bubble finally found its pin.

The longer the bubble inflated, the greater the belief in that old chestnut…‘this time is different’.

All sorts of weird and whacky reasoning were used to validate the ‘values’ being placed on these dotcom dogs.

As reported in Forbes magazine (emphasis added)…

An academic study, published several years after the peak of the dot-com bubble, accurately described just how whacky internet valuations grew until the bubble burst. The study’s first sentence basically stated that valuations lost touch with reality. During the internet frenzy, there was mention of “new economy” stock references to new valuation zones that should be considered reasonable. At the time, valuation metrics included measures such as customers per click, measuring “eyeballs” or time spent visiting a website.

Those established and boring valuation metrics — P/E ratio; Discounted Cashflow Models — had no place in the new economy with its new valuation zones.

People who didn’t buy into the hype had their sanity questioned.

The 27 December 1999 edition of Barron’s, ran this headline…

Barron’s - Whats Wrong, Warren? - 17-10-19

Source: Barron’s

[Click to open in a new window]

Here’s the opening paragraph…

After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.

Buffett couldn’t see value in dotcom stocks, so he didn’t buy them.

This lack of participation in the boom hurt the performance of Berkshire Hathaway. Buffett was past it. A dinosaur who didn’t understand the new economy with its new valuations.

What a difference 15 months can make.

The BBC News on 13 March 2001…

Investor Warren Buffett took a pasting for ignoring the 1999 surge in stocks. Now he is enjoying the last laugh […]’

Then came the US housing bubble, fuelled by subprime lending.

That boom was built on the false premise, pedalled by none other than (Fed Chair) Ben Bernanke in July 2005, that…

We’ve never had a decline in [US] house prices on a nationwide basis.

Three-years later, the markets served up a large slice of humble pie to Bernanke. Not that he ate it. He was far too busy cleaning up the mess he helped create.

Every bubble brings a new belief system.

This time is different.

The players are different.

The object of the con is different.

But the result is NEVER different.

People were tricked into believing in a myth and did their dough.

BitCON and the other cryptos are no different.


Please explain to me how you value BitCON or any of the other cultish cryptos?

There is no formula.

There’s no income stream to which a multiple can be applied.

Where are the tangible assets? There are none…unless you consider blockchain an asset. Which could be made obsolete or improved upon by some 15-year-old in Shanghai, Mumbai or Brisbane.

Those peddling this ‘new age, digital currency’ alternative had to make one up.

Hmmm, let’s see, how can we create a mind-blowing price for something that’s worthless?

Got it.

Let’s start with scarcity.

Conjuring up a belief in limited supply is hardly a new motivator.

According to the BBC

One of the curiosities of the 17th Century tulip market was that people did not trade the flowers themselves but rather the bulbs of scarce and sought-after varieties.

In case you’re not aware how Tulip Mania ended, here’s an extract from the BBC article (emphasis added)…

Things came to a head during the winter of 1636-37, when tulip mania reached its peak. By then, thousands of people within the United Provinces, including cobblers, carpenters, bricklayers and woodcutters, were indulging in frenzied trading, which often took place in smoky tavern backrooms. Some bulbs even changed hands up to 10 times during the course of a single day.

And then, overnight, the tavern trade disappeared. In early February 1637, the market for tulips collapsed. This was because most speculators could no longer afford to purchase even the cheapest bulbs. Demand disappeared, and flowers tumbled to a tenth of their former values. The result was the prospect of financial catastrophe for many.

Scarcity is a sure way of getting the crowd whipped up into a frenzy.

The next part of the formula is to theorise about the percentage of the population that might buy a nominal amount of BitCON.

The valuation model looks something like this…

X population multiplied by Y amount of crypto = Z price.

The input for the two factors is in the twinkling eye of the promoter. Therefore, the price can be inflated to anything you want it to be.

And the longer the bubble stays inflated, the bigger the made-up numbers become.

The reality is this whole scam relies on the ‘fool theory’.

If you’re going to make AND keep a dollar out of BitCON, you have to find someone more stupid and more gullible than you are.

The secret to all the stuff that cannot be truly valued on traditional measures — Tulips; entrepreneurial shares; tech stocks — is to recognise it for what it is…a period of collective irrationality.

If you choose to participate in this temporary suspension of sanity, that’s fine.

Just make sure you act early enough to find that bigger fool who thinks this crypto stuff is as good as gold.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Greg Canavan recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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