Bitcoin: The Folly of Millennials

Every decade a new batch of investors (make that speculators) are taken to the financial slaughterhouse.

In the late 1960s, the hottest stock in the country was Poseidon NL. The promise of a lucrative nickel discovery sent Poseidon shares soaring from 80 cents in September 1969 to a high of $280 in February 1970.

From Wikipedia: ‘[After the initial announcement] very little further information came to light, but the price continued to climb due to speculation; at one point, a UK broker suggested a value of up to $382 a share.

Haven’t we heard something like this recently?

What happened to Poseidon shares? They collapsed in value.

A decade later and investors were bitten by the ‘gold bug’.

After US President Richard Nixon abolished the gold standard in 1971, the price of gold rose from US$35 to a high of US$850 in 1980.

What happened to gold? Nearly 20 years later, the price hit a low of US$250…a 70% fall in value.

Then came the entrepreneurs — Alan Bond, Christopher Skase, et al. These titans of industry were flush with OPM — other people’s money. The 1987 share market crash shattered all illusions about the magical powers of this new breed of businessman.

What happened to them? Bankruptcy. Jail. Exile.

And the poor (literally) shareholders? Wiped out.

We had to wait another decade before the imagination of the investing public was (once again) captured by the next ‘sure thing’: technology stocks.

Anything with ‘dotcom’ in its name was touted as a guaranteed winner.

The tech-heavy NASDAQ index increased sixfold over a five-year period — going from 800 points in 1995 to over 5,000 points in 2000.

What happened next? The NASDAQ fell nearly 80% in value over a two-year period.

After that, we only had to wait a few years before the US housing market and securitisation of sub-prime loans made headlines. The world was booming…until 2008.

Then the boom went kaBOOM…and almost blew up the world’s financial system.

Houses repossessed. Debts written off. Margin loans called in. Fixed interest products (secured by property-related debt) frozen.

Are you noticing a pattern here?

It takes a little time for a new wave of novice investors (mugs) to come along…those who believe ‘this time is different’.

coin Baby boomers were largely responsible for the aforementioned acts of foolishness.

However, the latest ‘sure thing’ appears to be the folly of millennials.

Whenever I read, watch or listen to a panel discussion about the transformational powers of bitcoin or cryptos, the spokesperson tends to be under 40.

This whole ‘you can’t go wrong buying cryptos’ gig is all wondrous and new to them. There are all sorts of reasons given as to why ‘this time is different’…and they believe them.

Their life experiences — as a group — do not extend to losing serious amounts of money…at least not yet.

Therefore, they have no reason to be cynical, mistrusting, sarcastic or sceptical. The millennials are not ‘doubting Thomases’…they are true believers.

This is their bubble. It’s the millennials’ turn to find out what the boomers had to learn the hard way.

Bitcoin is going to be their rite of passage into the school of hard knocks.

Previous booms and busts have made boomers — in the main — distrustful of all things crypto. And with good reason. We’ve been there, done that…and, in the end, couldn’t afford the T-shirt…

But we must give credit where credit is due. When it comes to bubbles, the millennials have shown the boomers a thing or two. This one is a doozy.

Bitcoin’s advance dwarfs all but one bubble in financial history — the Dutch tulip mania in the 17th century.’

The Irish Times, 12 December 2017

Know how the tulip mania ended? Of course you do…like all the other bubbles.

The following chart puts the bitcoin bubble into context with other famous 20th and 21st Century asset bubbles.

Rise and fall of some famous asset bubbles 15-12-17

Source: Value Walk
[Click to enlarge]

Bitcoin is going to be one for the ages

Well done millennials…you’ve reserved yourselves a special place in the Bubble Hall of Fame.

Booms always bring out stories of excess — lavish parties…waitresses buying six homes. People just lose touch with reality.

The bitcoin mania is no different.

Bitcoins are created through the solving of mathematical problems…a process called ‘mining’.

As bitcoin grows in popularity, and the more difficult the problems become, the deeper you have to dig.

Solving these complex problems requires a tremendous amount of computer power.

Running the problem-solving algorithms day and night is serious business, as this photo showing bitcoin mining equipment illustrates:

Bitcoin mining equipment 15-12-17

Source: Bitclub
[Click to enlarge]

According to Grist — an online environmental magazine — the energy needed to keep the computers whirring away is becoming a major problem.

This is an extract from an article Grist published on 5 December 2017:

Today, each bitcoin transaction requires the same amount of energy used to power nine homes in the U.S. for one day. And miners are constantly installing more and faster computers. Already, the aggregate computing power of the bitcoin network is nearly 100,000 times larger than the world’s 500 fastest supercomputers combined.

The total energy use of this web of hardware is huge — an estimated 31 terawatt-hours per year. More than 150 individual countries in the world consume less energy annually. And that power-hungry network is currently increasing its energy use every day by about 450 gigawatt-hours, roughly the same amount of electricity the entire country of Haiti uses in a year.

That sort of electricity use is pulling energy from grids all over the world, where it could be charging electric vehicles and powering homes, to bitcoin-mining farms. In Venezuela, where rampant hyperinflation and subsidized electricity has led to a boom in bitcoin mining, rogue operations are now occasionally causing blackouts across the country.

In just a few months from now, at bitcoin’s current growth rate, the electricity demanded by the cryptocurrency network will start to outstrip what’s available, requiring new energy-generating plants… By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today.

This is an unsustainable trajectory. It simply can’t continue.

That last sentence could just as easily relate to bitcoin’s price as it does to the exponential trend in energy usage.

The higher the price goes, the greater the effort that goes into ‘mining’.

What will ease this absurd burden on the electricity grid?

A complete and utter collapse in the price of the commodity being mined…just as we saw with Poseidon nearly 50 years ago.

There’s nothing new in the world. This time is not different. Bubbles always burst.

Bitcoin is the millennials’ folly. They too will learn these lessons the hard way.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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