It might be terribly overvalued, but it’s not in a bubble
The cryptocurrency market was a lot of fun this week. The Coinbase IPO drove interest and prices to all-time highs. The leader: Dogecoin, which went from six cents to 50 cents in a wild frenzy (it has since settled in the upper 20s).
Dogecoin isn’t sustainable. Its creators have minted over 100 billion coins, they mint millions more every year, and they aren’t committed to capping it. It’s like the Federal Reserve.
Bitcoin, however, is different. It’s capped. Supply will run out. Other than land, it’s the only asset that can claim such a thing.
I hear two vigorous objections to Bitcoin:
1. “Each coin is worth $60,000. How are you supposed to buy a pack of gum with a $60,000 coin?”
2. “Bitcoin is in a bubble.”
Both of these objections, I believe, are bunk. I think there are other valid objections, and I wouldn’t be surprised if Bitcoin is extraordinarily overvalued, but those two objections don’t cut it.
1. Look at the edge of your coins. You notice the serrated edges? That’s a holdover from the days when the king had the right to take chunks off coins (or “criminals” did it), in order to create sub-specie that could be used to buy small items (or melted down with others “bits” and recoined). I don’t know of any reason Bitcoin couldn’t be used like that. In fact, right now, I own Bitcoin: about 5% of one Bitcoin. My account breaks it down to the seventh decimal. Call me crazy, but I suspect these newfangled computers could break it down to the 100th decimal, then reconvert the whole thing into a new sub-species currency (“Sub BTC”), like our dollars are broken down into quarters, dimes, nickels, and pennies.
2. Bitcoin isn’t in a bubble. When bubbles get pricked, they’re finished. Ain’t nobody bought a tulip bulb for investment since 1637. Bubble assets don’t lose most of their air suddenly, then reflate the following month, which is exactly what Bitcoin has been doing for years. Something else is afoot here than a mere bubble. I don’t know what it is, and I’m not saying it’s sustainable, and I wouldn’t be surprised if Bitcoin dropped back below $1 at some point . . . and maybe really soon. I simply don’t know. I just know this is a weird time and a weird asset.
And I also suspect that the upside is shockingly high. I look at cryptocurrency like I look at buying a longshot at the horse races. I don’t really think the longshot is going to win, but the bookies are giving great odds. If he wins, hoodoggy.
Crypto is also a great, if risky, hedge against the conventional market, which isn’t conventional anymore. How much should you hold? I don’t know. Maybe 5%? Much less than that, and you’re not hedging. Much more, and you’re risking too much of your net wealth on what is, I believe, merely a form of unusual gambling.