The Crypto Bubble, Part I

Hot news from a hot-shot Bitcoin investor...

LET'S TALK about cryptocurrencies, writes Bill Bonner in his Diary of a Rogue Economist – private digital currencies that use encryption to operate without the need for banks and central banks.

We began our research yesterday.

"How much have you lost so far?" we teased one of our sons.

He is a big fan of cryptocurrencies and has invested not only his own money, but also some of the family money.

We thought it was a bad idea, little different from gambling. But heck, the kids need to learn to make good financial decisions.

And how do you learn to make good ones? By making bad ones!

"Heh-heh...Are you kidding, Dad? I'm glad we didn't follow your advice.

"Bitcoin went up 10% on Saturday. We're up $100,000 in the family account, since the end of June. That's a 39% gain since we started. My account has done much better. But I started earlier.

"Look, cryptocurrencies are the most profitable investments in the history of the world. In 2010, if you just put $100 into bitcoin, today you have about $6 million.

"The Winklevoss twins – the brothers who sued Mark Zuckerberg over the origins of Facebook – have made billions. And ordinary people are getting rich overnight. This is no joke. I put $1500 into one of these crypto startups. It was worth $36,000 in just a few days.

"At first, there were just a few libertarian nerds investing in cryptos. Now, there's big money. If you can get a 10% gain in 24 hours, you're going to get a lot of fast money moving in and out. And the crypto startups go much farther, faster.

"That 'fork' they just had in Bitcoin. It created a new cryptocurrency, Bitcoin Cash, which went from being worth nothing to $363 in a matter of hours.

"So a guy with $10 million to play with, for example, might put it into a new 'coin'. The coin then shoots up and draws in other speculators. And then, he might pull out – in less than 24 hours – with a $10 million profit."

"Well, I suggest you sell out now...while you can," father offered sage advice.

"This looks like a bubble."

"Dad, you just don't understand," continued our son.

"Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. Because you can just put a few bucks into a new crypto and you could be a millionaire in a few months. Or you could lose all your money.

"But at the same time, it's not like a lottery ticket at all. Because there's something happening that has never happened before. It's an evolutionary leap in money itself.

"It's like the early days when people found gold and began using it as money. They picked it up off the ground. It was worth nothing. Then, it became valuable as people realized its value as money. The same thing is happening with cryptocurrencies today."

As near as we have been able to tell, when goods and services pass from one physical hand to another set of fingers, gold (or gold-backed tokens) is the best form of money. Cash-and-carry. You don't need to know anything about your counterparty. His money is good money; that's all that matters.

That's what made modern civilization possible. But in the credit-based Dollar economy, the hands disappear.

Instead, there are computer connections...and elaborate, costly barriers: your mother's maiden name, telephone calls, source of funds verification, security codes, FATCA [Foreign Account Tax Compliance Act] reports, bank exchange fees, transaction fees, bank account fees, negative interest rates, tax inflation...and even hyperinflation.

The advantages of cash are lost.

Cometh the cryptocurrencies and cometh a revolution. But what the crypto innovators discovered in the world of the future was the past.

Here's economist George Gilder in his latest book, The Scandal of Money:

"[B]itcoin's mysterious, pseudonymous founder, one 'Satoshi Nakamoto', specifically mimicked gold in developing his digital money, which becomes more difficult to 'mine' with the passage of time. Its value, like gold's, is ultimately based on its scarcity. It is not a competitor with gold but an internet money that simulates the properties of the monetary metal and offers a path toward a gold-inspired standard for the net."

The key feature of gold and bitcoin is that they are both tethered to the real world – the world of splinters and time.

"It takes energy – in the form of computer processing power – to 'mine' bitcoin," our in-house enthusiast continued.

"The more of them you mine, the more time and energy it takes to discover the next one. It's like gold. You have to go farther...and deeper...to find the next ounce. And now, some of the most powerful computers in the world are mining bitcoins.

"But since the supply of bitcoins is strictly limited to 21 million, they remain in tune with the rest of the world, where real resources – and time – are also limited.

"Governments can't increase the supply of time. Central banks can't increase the amount of real money. With bitcoin, no one can inflate the supply or use it to manipulate the stock market. It really is a better form of money...and people are gradually coming to realize it.

"It's going to be a wild ride. But we're on this train whether we want to be or not. The advantages of cryptocurrencies over the government's money are so huge...they're unstoppable now.

"Think about it...Cryptocurrencies like bitcoin do away with the need for banks altogether. And no central bank controls the supply.

"Meanwhile, you can do business with anyone anywhere in the world for just a tiny fraction of what it would cost via the banking system.

"And cryptocurrencies protect your identity. You don't have to reveal your name, address, Social Security number, etc.

"Too much toothpaste is already out of the tube. From a financial point of view, this is probably the biggest breakthrough...the most liberating breakthrough...since the discovery of gold."