Paddy says to Mick ‘Do ya wanna buy a token?’
Mick asks, ‘What sort of token?’
To which Paddy replied, ‘A bitcoin.’
‘How much is it?’ queries Mick.
‘$72,500’ Paddy proudly boasts.
‘Holy hell Paddy, that’s a lot of money for a token. What do ya get for it?’
‘Mick, you’ll be buying the right to sell it for even more money to a bigger idjit than you.’
‘Oh Paddy, sounds great. Where do I get one?’
‘From someone selling the tokens’ says Paddy.
‘Why would someone want to sell me a token, Paddy.’
‘Because he’s no idjit Mick.’
(Idjit in Irish is idiot in English.)
We’ve seen this ‘bigger fool’ story play out many times over the centuries.
The first (and still the best) recorded example of collective stupidity was Tulip Mania in the 1600s (emphasis added):
‘When word got out, during the 1630s, that tulip bulbs were being sold for ever-increasing prices, more and more speculators piled in to the market.
‘Tulips even began to be used as a form of money in their own right: in 1633, actual properties were sold for handfuls of bulbs.’
The smart speculators were the ones who figured out how the ‘bigger fool’ game worked.
The bulbs were only worth the price of a house while people believed this to be the case…best to cash out and get your money into hard assets.
Once the bubble of baseless belief was popped, tulip prices plummeted like a stone.
In 1640 (a few years after the bubble burst) artist Jan Brueghel the Younger painted Satire of the Tulip Mania.
In it, Tulip speculators were depicted by Brueghel the Younger as brainless monkeys.
Source: BBC Culture
What parodies await today’s equally enthusiastic and misguided speculators?
Naïve innocents following a Pied Piper? Sheep going to the slaughter? There’s plenty to choose from.
Because we’ve been there and done this so many times throughout history.
South Sea Bubble. Mississippi Land. British Railway mania. The Roaring Twenties. Japan’s ‘miracle’ economy. Tech boom. US housing bubble.
Yet we never learn.
Assets pricing driven more by belief than substance always ends badly.
The following is a screenshot from an interview Jeremy Grantham (the 82-year-old founder of Grantham Mayo Van Otterloo & Co — a Boston-based investment firm with US$120 billion in funds under management) did with Bloomberg in late January 2021:
History (repeatedly) tells us the answer to the question posed by Jeremy Grantham.
The only people who make money out of manias are the ones who are in on the joke…they laugh all the way to the bank…with the dollars they made from selling something they convinced people was more valuable than cash. Ah, the irony.
The others…well, in the cold light of day, they become the objects of satire.
What’s bitcoin worth?
This was a question pondered by the February 2021 issue of The Gowdie Letter.
Here’s an edited extract:
‘In 1992, Laguna Quays Resort (located between Mackay and Airlie Beach) was opened to great fanfare. The Japanese owners had spent $250 million developing the luxury resort and golf course.
‘To promote the development, Greg Norman, Ian Baker-Finch, Nick Price and Craig Parry played (at the owner’s expense) in an internationally televised tournament.
‘This is an extract from an article on Melbourne property developer, David Marriner, in The Age on 22 February 2003…
“…his latest project is a gargantuan 2400-hectare north Queensland ‘gateway to the Whitsundays’ development that he bought for $25 million after a Japanese banking consortium had spent $250 million on infrastructure there and gone broke.”
‘Over a decade after the resort opened, it sold for one-tenth of its development cost.
‘Having lived in North Queensland and, on occasion stayed at Laguna Quays, this lesson in cost versus value has always stayed with me.
‘What’s this got to do with the price of bitcoin?
‘The latest line of reasoning as to why bitcoin is worth X thousands of US dollars is…because of what it costs (in electricity usage) to “mine” new coins.
‘To quote from tradeblock.com:
“Using our above assumptions and the current network hash rate of (~113,000,000 TH/s) and the number of bitcoin mined per block (~12.73, which includes transaction fees), the gross cost to mine one bitcoin at current levels with current device types would be US$6,851.
“Our breakeven price estimate of US$6,851 is in line with similar break evens calculated in other reports: Cost to breakeven US$8,000 (11/11/19); Cost to breakeven US$7,600-3,600 (12/5/19).”
‘These are the assumptions used to calculate the “mining” cost…
‘I wonder if the environmentally conscious millennials who are buying bitcoin realise how much additional CO2 their responsible for creating?
‘Using the “cost to mine” as a floor in the price, makes about as much sense as the original developer of Laguna Quay’s saying “well that’s what it cost me to develop, so that’s the price.”
‘The market couldn’t give a flying fig about your cost…it’ll offer a price based on prevailing supply and demand.
‘And at present, for bitcoin, demand exceeds supply.
‘The only reason these coding whiz kids are spending serious money on high tech computer “rigs” and paying eye-watering power bills, is because crypto cult members have made it well worth their while.
‘But what if that demand wanes?
‘I can hear the howls of protests now…that won’t EVER Happen.
‘Can you state with absolute confidence that in the next year or two or 10 that someone else won’t come up with an even better computer code or that government won’t intervene to regulate the market or that some hacker/s won’t penetrate the firewalls and destroy the value?
‘Ray Dalio (founder of Bridgewater Associates) recently published an article titled “What I really think of Bitcoin”
‘Here’s a teaser (emphasis added):
“Although Bitcoin is limited in supply, digital currencies are not limited in supply because new ones have come along and will continue to come along to compete so the supply of Bitcoin-like assets should, and competition will, play a role in determining Bitcoin and other cryptocurrency prices. In fact I assume that better ones will come along and displace this one because that is the way the evolution of everything works—i.e., new ways of doing things and new things always have and always will replace old ways of doing things and old things. Since the way Bitcoin works is fixed, it won’t be able to evolve and I presume that a better alternative will be invented and pass it by. I see that as a risk.”
‘Whereas, gold is gold…it cannot be replaced by a process of evolution. Gold has remained gold for many thousands of years…and will continue to do so.
‘What’s the price of bitcoin?
‘Whatever Ponzi-scheme members decide to push it to before someone finally starts laughing at the “naked Emperor”.
‘But more importantly, what’s the value of bitcoin?
‘Not a lot.’
Don’t let the bitCON joke be at your expense.
Happy Saint Paddy’s Day.
Editor, The Rum Rebellion
PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.