There’s an old joke on Wall Street: when pressed as to why a stock is selling off, a clueless broker offers up, “more sellers than buyers.” Believe me – as someone who used to field calls from anxious friends about why a particular holding was collapsing, and thought that people like me working on Wall Street had all the answers, that cliche has come in handy more than once.
Today, it’s probably a pretty useful response for all those advisors out there who put their insistent clients into Bitcoin. While yesterday crypto currencies including Bitcoin staged a decent rally, in recent weeks the price has tumbled, and no one seems to know why. There are articles about the drop, such as this one from the Wall Street Journal: Bitcoin Rout Picks Up Steam as Investors Fret Over a New ‘Crypto Winter’, available here.. And Bloomberg has a similar story out: Crypto Downturn Wipes Out Almost $1 Billion in Levered Bets.
But I challenge anyone to find not just reporting on the slide, but a real explanation. Hint: it doesn’t exist. Sure, there is some discussion of levered bets being undone, or money flows going into Bitcoin ETFs, but that commentary does not answer the key questions: where should the coin sell and why has that changed?
This is a lesson: there is no way to value the crypto currency, and therefore no coherent reason why it should sell at $100,000 per coin or $45,000, or $200,000. That should make “investors” wary.
But really it is not investors who have bought cryptocurrency. Rather, it is speculators, and some of them have made a fortune riding Bitcoin higher. After all, when Bitcoin was introduced in 2009, it had a value of exactly zero. The price jumped from its long-running level of $0.10 to $0.30 in 2010 and then ratcheted in short order up to nearly $30 the next year. Then came a bust, and the price plummeted to around $5.
There have been several booms and busts, mainly caused by thefts, which alerted buyers to the reality that crypto is not totally secure, or because of changes to regulations, or for some other completely inscrutable reason. But, over the past five years owners saw their holdings rise 371%; those lucky enough to have bought in 2016 have made a gain of nearly 20,000%! Those folks probably don’t care what the underlying valuation rationale is.
There is value in blockchain. Being able to transfer funds instantly and discreetly around the world has value. But the idea that crypto currencies would quickly become a popular medium of exchange, supplanting the use of the dollar or other currencies, is still – in my view – a long shot.
When a stock price goes down, it is generally because the fundamental outlook for the company has changed. Stocks are theoretically valued on an expected long-term income stream which stems from earnings; that income stream is discounted to create today’s price. We all know there are many reasons stocks gyrate, having to do with Fed moves or legal issues or even shifts in geopolitics; but at the end of the day, profits and growth determine value.
I’m not negative on Bitcoin; I’m not positive. I just think it’s useful for buyers to remember that there is very little supporting the price. And we know that is true because no one can explain why it moves up or, just as important, why it moves down.
Caveat emptor!
