Ponzi Would Be Scared By Bitcoin

Ponzi scheme (/ˈpɒn.zi/; also a Ponzi game) is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities. ~ Wikipedia

As a grizzled old vet of investing (I started on the Boston Stock Exchange right before the crash of 1987), I’ve seen my share of bubbles. They tend to come and go like clockwork. We had stocks in 1987, tech stocks in 2000, and real estate again in 2008, plus a myriad of other mini-bubbles along the way.

These manias are easy to spot if you are a contrarian by nature and just keep an open eye to the craziness that is happening around you. For instance, in 2000 it became obvious to me when my neighbor Ron, a contractor, told me his business was hurting because he was spending so much time online trading stocks…a much easier way to make money. He was back to swinging hammers full-time not shortly thereafter.

The latest craze is Bitcoin and, even scarier, the ICO (Initial Coin Offerings). These financial instruments are based on blockchain technology, an invention that is incredibly unique and is certainly changing the world. Of this I’m sure.

However, what is not at all unique is that when you have an invention of incredible proportions, there will always be an immediate and large uptake by fraudsters and schemers who look to take advantage of the mania for personal gain. This is occurring right now in the ecurrency markets.

This is not to say that the mania can’t go higher. I wrote positively about Bitcoin in February, Bitcoin Emerging as a Golden Investment, where I said that Bitcoin was replacing gold as a way to squirrel away assets.

Since that time however, Bitcoin has rallied from just over $1,000 to $6,000. This is the definition of a mania. It will end. And, it will end badly when it does.

How do I know that Bitcoin is a bubble? Well, I guess we’ll only know for sure in hindsight. However, there are a lot of telltale signs from people far smarter than I, along with the scammers of the world piling into the trade.

Let’s start with the smart people. How about Ray Dalio of Bridgewater?

Or Jamie Dimon, CEO of JPMorgan?

The list of smart people negative on Bitcoin is large and growing. These are very smart people with great track records. Ignore them at your peril.

But, even more frightening than smart people saying to avoid Bitcoin is the growing list of people and companies looking for innovative ways to sucker investors in this market.

A lot of companies are looking at blockchain technology. But, Riot Blockchain (ticker BIOP, formerly called Bioptix) is my favorite. A failure in biotech, they now claim to be the a pure play on Bitcoin. Oh boy, this seems destined for failure, however the stock did make a huge move on the announcement of being a Bitcoin company.

But, it gets better. Check out the next one.

The above company, called Tezos, appears to have some real technology. They also have $230M that is being cashed in to the tune of $10M per week.

Investors in Tezos received digital coins called Tezzies. Per Reuters: The launching of the Tezos network, which will trigger the coins’ release, has been delayed. Until the network launches – and no date is set – contributors to the fundraiser will receive nothing. Under the terms of the Tezos coin offering, there’s no guarantee participants will ever receive a single Tez. Participants agreed to accept the risk that the project “may be abandoned.”

I’m not sure how the investors feel about it, but I’d be a little concerned that this Company doesn’t ever have to do anything to keep the money. Abandon the project? No problem, keep the money. It’s unreal that someone would invest in this, yet they received $230M. Mind-boggling.

The thing about Bitcoin is that it has become a Ponzi scheme. The original idea that people would use Bitcoins to purchase goods is getting abandoned. Do you ever hear about stores accepting Bitcoins anymore? Not really because the value fluctuates so much it has become difficult for anyone to actually conduct business in Bitcoin.

Meanwhile, the value keeps going up as more investors (suckers?) enter the market. And, it will continue to go up until the last fool is in. Bitcoin has now become a giant, global game of musical chairs. And, we all know how that ends. When the music stops, there’s a rush for the chairs and the last one loses. Play Bitcoin if you like, but beware, this song is almost over.

Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit: www.tailwindsresearch.com/disclaimer/

5 COMMENTS

  1. Dan, you are citing some specific cryptocurrencies in your article, are there any that you have come across that seem to be sensible? As you know, in each of the other crisis you mention, there were a few gems that also took a hit when the markets collapsed in ’87, ’00, ’08 etc and rebounded well.
    Also, I think governments that rely on the strength or convenience of their currency to do various things, will eventually figure out a way to either embrace cryptocurrencies or regulate it to the point where blockchain technology is used for other purposes. What do you think?

    • Sri, I’m not a believer in any of these as an investment. I think there will be several in the end that are winners, but, by winners, I mean they will have widespread adoption. I think if they have limited availability and price goes up as a result, then they won’t catch on. JPMorgan is putting an effort into asset backed currencies and these make the most sense to me. I always thought a gold based currency or one with an underlying basket of commodities would catch on.

      I think the real winner here is blockchain technology and the key is to figure out how to invest in companies that can harness that opportunity. I don’t have any real ideas on that at this time.

  2. Hi Dan,
    Thank you for the excellent article. You mention that blockchain technology has value. Can you elaborate on the potential impact of blockchain technology? What do you think about Ethereum which is more focused on blockchain and its applications for transactions?

    • Hi Ray, sorry for the late response. I don’t consider myself an expert on Blockchain, however the smartest minds in the world think it will upend the payments industry…hence my appreciation for it. I’m, honestly, unaware that ethereum is “more focused on blockchain” as I have assumed it’s just another cryptocurrency. All of which employ blockchain technology. They are also in a bubble now and ready to come down soon, I think.

LEAVE A REPLY