* In my 15 Surprises for 2018 I predicted that bitcoin would rise to $21,000 (it traded over $20,000) and would close the year at $2,000
* This morning, Bitcoin is trading under $4,400
*Beware of shiny investment objects, fads and the experts that confidently deliver and hype investment pablum.
"Thus hath the candle singd the moath."
- William Shakespeare
Surprise #4: The Cryptocurrency Bubble Pops
By means of background and as discussed previously in my Diary, bitcoin is a cryptocurrency released as open source in 2009. Bitcoin is a bearer instrument that provides a peer-to-peer exchange, allowing users to exchange bitcoin anonymously based on a trusted blockchain public ledger that does not rely on a trusted third party. I have recently written several columns about bitcoin:
My Surprise is that though bitcoin becomes ever-more popular over the near term and rises to more than $21,000, the price plummets to under $2,000 during 2018.
The publication of this surprise -- that bitcoin will collapse in price in 2018 -- results in growing public criticism on Twitter and elsewhere from bitcoin devotees over the next few weeks toward me. I am called a "no coiner," a term given to bitcoin disbelievers such as myself. "No coiners" are defined as people who missed out on the rise in the price of bitcoin and have become skeptical and bitter, and who state that it's only a matter of time before the price collapses because it's a collective delusion.
In early 2018 the popularity of cryptocurrencies such as bitcoin crests. Bitcoin ATMs even become commonplace in Boca Raton, Florida, reminding us of the historic relationship between that town and past frauds and schemes. (Boca Raton has been the home of so many fraudulent schemes -- currency trading schemes, rare coin scams and the sale of timeshares for fictitious vacation homes. Former Securities and Exchange Commission Chairman Richard Breeden famously said that Boca Raton is "the only coastal town in Florida where there are more sharks on land than in the water.")
My surprise is that bitcoin trades above my target of $21,119 by early January but crashes in 2018 to under $2,000 and falls toward and eventually below the cost of mining the cryptocurrency, which today is about $1,000 to $1,500.
The initial pause and sizable break lower in bitcoin's price is when market participants begin to realize more fully that the supply of cryptocurrencies, in the aggregate, is unlimited with low entry barriers. The threat and realization of this risk is prompted by Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) , which introduce their own easy-to-use and faster cryptocurrency blockchains. (Note: Amazon already has received a patent for its own blockchain technology -- 8,719,131 -- see here and here.)
JPMorgan Chase & Co. (JPM) causes a stir after CEO Jamie Dimon's previously negative comments on bitcoin by introducing "JPMorgan E-cash," its own cryptocurrency. Soon thereafter, other banks follow suit. As well, several governments (including the U.S.) introduce their own government-based cryptocurrencies based on their desire to continue to control policy levers such as money supply and fiscal policy.
The eventual demise for bitcoin commences in earnest when it is revealed in a New York Times expose that less than 10 entities, mostly residing in China and Japan, are found to have manipulated the price of bitcoins higher in Ponzi-scheme fashion over the last two years. The cryptocurrency bubble finally collapses in dramatic fashion and falls in value by 90% as a result of direct government intervention and a successful hacking where thieves penetrate the blockchain code and steal a large amount of coins.
Several large, well-known hedge funds desperate for "alpha" are caught with their pants and portfolios down and with a large weighting in bitcoins and other cryptocurrencies; they lose more than 30% of their funds' assets and value and are forced to liquidate their cryptocurrency holdings and close their funds.
Bitcoin will ultimately assume a permanent place in the Speculative Hall of Fame, along with tulips (1636-37), the dot.com bust (1999-2000), the housing bubble (2005-07) and the South Sea Bubble (1711-20), as traders and investors learn the lesson, once again, that an asset class founded on the notion that there is a greater fool who will be willing to buy that asset for more than the previous fool paid, almost always ends in disaster.
The year 2018 will be one in which investors come to understand that blockchain technology -- a distributed database of records of transactions that are executed and shared among participating parties and are validated by a network of users, called "miners," who contribute computing power in exchange for the chance to garner coins using a shared database and distributed processing -- is real (each transaction is encrypted and can't be replicated or altered), but that bitcoin is a mirage and becomes, like many past schemes, a byword for Ponzi-like nostalgia.
* Beware of chasing shiny objects
Within two weeks I will deliver my 15 Surprises for 2019.
One of my 2018 Surprises, was that the price of bitcoin would rise to $21,000 and then fall to under $2,000.
The absence of regulatory oversight, the lack of tax authority (money laundering is commonplace), the unlimited supply of new crypto currencies and the lack of security (seen in the regularity of hacks) formed some of my rationale for a negative view on bitcoin and most crypto currencies.
With bitcoin now trading at $4,395, I consider this... "Mission Accomplished."
As I have written, beware of shiny investment objects.
Frankly, I am shocked how many reasonably intelligent venture capitalists, innovators and otherwise professional investors have been duped in the crypt currency space.
Bitcoin is a mirage and is on the way of becoming, like many past schemes, a byword for Ponzi-like nostalgia.
(This commentary originally appeared on Real Money Pro at 8:46 a.m. ET on November 20. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)