Bitcoin More Dangerous Than the Markets of 2008

I have seen reports that people are mortgaging their homes to speculate in bitcoins. Online marketing companies are suggesting that bitcoins could be worth $40,000 by the end of 2018, and one person suggested that a bitcoin could be worth $1,000,000 by 2020. Bitcoins are being marketed as a suitable investment for one’s IRA. Nothing could be further from the truth; a bitcoin is a pure, high-risk speculation. If you want to buy a bitcoin to have in your IRA, you have to have a minimum purchase of $20,000. I find it hard to believe that ERISA (Employee Retirement Income Security Act of 1974) would approve the buying of bitcoin within a retirement account.

I have been a Registered Investment Advisor for almost 45 years, and during that time, I saw the stock market crashes in 1974, 81, 87, 99, 2008-09 and many more. The sell-offs in stocks in 1999 and 2008-09 were followed by the real estate collapse from 2007 through 2015. These three crashes dropped stocks and real estate value by as much 40 percent in each example. The amount of wealth lost in real dollars was astounding, and some people still have not recovered back to their 2007 levels.

I will never forget the talking heads on Wall Street, who told Americans in 2007 and '08 that the mortgage market was stable. One person, who was banging his drum and saying that everything was ok was Larry Kudlow of CNBC. Many people who had mortgage investments were led to believe that the investments were safe when in fact, they were not. I have often wondered why people trust their money to the talking heads on TV and let them make their investment decisions.

This time around with the bitcoin, as it has been said many times before, “It will be different this time.” I can’t find any time in recent history that has equaled the rampant speculation we have seen with the bitcoin. I did find another speculation, though, that could rival the bitcoin; it was the Tulip fever in the mid-1600's. People began to speculate in Tulip Bulbs from Holland. It was a classic speculation of supply and demand, much like the bitcoin of today. Holland could only grow so many bulbs, and as demand exceeded supply, the price of bulbs started to increase, slowly at first and then as speculators came into the market, prices started to soar. Prices for one bulb in February 1637 sold for an amount equal to 10 times the annual salary of a skilled craftsman.

Today people are mortgaging their homes to buy bitcoin, while back in 1637, people began selling or trading their other possessions to speculate in the tulip market. One such offer was 12 acres of land for one of two existing Semper Augustus bulbs. This rampant speculation was called a mania, and with what we have today with bitcoin, I think it is more than a mania; it is insanity. Back then you had a tangible asset, a bulb that you owned and could sell. There was a market based on a specific bulb, and granted the price could go wildly up or down, but you still owned something. If you own a bitcoin today, there is nothing behind it, no government, no hard asset, nothing but a computer bit. You can only sell it, and you have no idea what it will be worth or what it will cost you to sell your bit.

As of today, the number of bitcoin in circulation is just short of 17 million out of 21 million possible, and that is just one coin. According to Coin Market place, there are 100 different issued coins with a current market value of $540 billion.

I have a small business radio show called Recalculating.biz, and recently I had a guest who is rethinking the starting of his own bitcoin exchange. He said that the volatility makes him wonder if it won’t just come crumbling down, and thousands if not millions of people will lose their money.

One of the most challenging things for me to do as an adviser is manage the risk a client thinks he is willing to take. A few years ago, the hot investment item that was going off the charts was gold. Several of my clients asked me if I thought it was a good idea to invest in gold at $1,800 per ounce. They wanted to buy the actual gold, and I said no for the following reasons: I didn’t think it would go much higher, and if I'm right, you may have a significant downside risk; next, it pays no dividend, and lastly, it is very costly to sell gold. The clients didn’t buy, and gold has fallen from the high of $1,860 an ounce in September of 2012 to about $1,250 per ounce in December 2017. Over that intervening 5-years or so, a gold investment fell by 30 percent, not counting inflation, and one received no income.

With the bitcoin currently selling for just under $18,000, a 50 percent correction would cost the investor $9,000 per coin. A correction of this magnitude would drop the market value from $540 billion to $270 billion, and long before we got to $270 billion, the liquidity in the market would dry up. Even if one wanted to sell, there could well be no market in which to sell.

In the movie “Wall Street,” Gordon Gekko said, “Greed is good.” Greed is only good if what you buy goes up.

Dan Perkins is an author of both thrillers and children’s books. He appears on over 1,100 radio stations. Mr. Perkins appears regularly on international TV talk shows, he is current events commentator for seven blogs, and a philanthropist with his foundation for American veterans, Songs and Stories for Soldiers, Inc. More information about him, his writings, and other works are available on his website, DanPerkins.guru. To read more of his reports — Click Here Now.