How can you tell when an asset bubble is about to burst?
How can you tell when an asset bubble is about to burst?
Joseph Kennedy Sr., father of US President John Kennedy, famously claimed to have sold his holdings ahead of the 1929 market crash because a shoeshine boy offered him a stock tip. Financier Bernard Baruch offered a similar cautionary review of the period immediately preceding the crash, saying that when taxi drivers were advising customers on which stocks to snap up, it was a clear sign that the market was due for a tumble.
In the Michael Lewis book The Big Short, not long before the 2008 real estate crash, investor Steve Eisman learned that a baby nurse he’d once hired had teamed with her sister to purchase six New York townhouses, despite the pair’s relatively modest net worth. After buying the first home and seeing its value increase dramatically, the sisters refinanced and borrowed more cash to buy another home, repeating this process multiple times, only to find themselves underwater when interest rates reset. (The Big Short movie chose to dramatize this anecdote by making the nurse a Florida stripper.)
On February 21, 2021, actress Lindsay Lohan — who played a stripper in the box office turkey I Know Who Killed Me — posted a tweet proclaiming ‘bitcoin to the moon,’ adding a rocket emoji just in case anyone missed the point. Lohan’s acting career hasn’t been a going concern for years now, and while she’s not yet become a taxi driver, I wouldn’t be entirely surprised if she showed up the next time I order an Uber (or a lap dance).
Given the previous examples of neophyte investors plowing into sectors for which they’ve previously displayed little interest or knowledge, Lohan’s hopping aboard the crypto bandwagon should sound major alarms for those investing in Bitcoin (BTC), Ether and other cryptocurrencies.
In his book The Ascent of Money, Niall Ferguson cited five stages common to every asset bubble. The third stage, ‘mania’, occurs when “the prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money.” The fourth stage is ‘distress’, in which said swindlers exit the market by cashing in their ill-gotten gains. This final stage, ‘revulsion’, starts when late-stage buyers finally sense the danger and rush to sell their shares, but the sheer mass of other panicked investors attempting to do likewise means these assets are sold at a fraction of their purchase price.
Crypto now appears firmly rooted in Ferguson’s ‘mania’ stage, given the volume of new investors snapping up tokens, egged on by the BTC promoters who’ve added ‘laser eyes’ to their social media profile photos. The red-eyed phenomenon is based on BTC maximalists’ goal of pushing the token’s value to $100,000, a feat that will require an uninterrupted supply of fresh meat.
In George Orwell’s dystopian novel Nineteen Eighty-Four, the Party-run Lottery is described as “the one public event to which the proles paid serious attention.” As a result, “there was a whole tribe of men who made their living simply by selling systems, forecasts and lucky amulets.” But Party members understood that the Lottery was a fraud, as “only small sums were actually paid out, the winners of the big prizes being nonexistent persons.”
Back in the real world, legions of prole investors are being conned by the laser-eyed forecasters who claim to see an endless supply of riches on the horizon. Their forecasts are unfailingly bullish, exulting whenever a token value surpasses a new $1,000 increment, while finding easy excuses for value declines and suggesting it’s simply an opportunity to buy the dip.
The reason these shillers focus on token price is because the technologies they’re promoting don’t actually do anything. Originally designed as a peer-to-peer electronic cash system, BTC is now pitched as an inert store of value, devoid of any real-world utility.
This lack of any practical application is in part due to BTC’s artificial one-megabyte block size limit and the high transaction fees that plague both BTC and Ethereum. Much has been made of Elon Musk’s announcement that Tesla will now accept BTC as payment for its cars, but the token’s extreme volatility means that buyers are required to transmit payment within minutes of agreeing on a price, otherwise the haggling has to start from scratch. There’s efficiency for you.
As The Ascent of Money observed, “it is when the bulls are stampeding most enthusiastically that people are most likely to get taken for the proverbial ride.” The hyperbolic anticipation of BTC hitting $100,000 continues to attract new investors like moths to a flame, and these human moths will prove equally combustible.
A post-mortem of the 2000 dot-com bubble found that a handful of tech firm insiders sold $43 billion worth of shares in the 12 months immediately preceding the crash, twice the sum they’d unloaded in each of the previous two years. Meanwhile, 100 million individual investors collectively lost $5 trillion. Around 40% of these small-scale investors were newbies, having not made any stock trades before 1996.
A recent report by fintech firm Robinhood showed that 9.5 million of its customers traded crypto on the platform in the first quarter of 2021, a nearly six-fold increase from the fourth quarter of 2020. An entirely organic, not-at-all-irrational shift in investment priorities that in no way suggests a rapidly forming bubble, to be sure. (Diamond hands, lead boots.)
In the latest ‘peak crypto’ signal, socialite Paris Hilton added laser eyes to her Twitter feed this spring, later telling CNBC that she’d made an unquantified investment in BTC. Hilton is one of the world’s more successful influencers, but bear in mind that in 2017 she tweeted her support for an upcoming initial coin offering by Lydian Coin, a cryptocurrency that also didn’t do anything, other than reserve the future services of the marketing firm behind Lydian.
Hilton deleted her Lydian tweet a few weeks later, following media reports that the primary individual behind Lydian had a history of physically abusing the women in his life, which ultimately landed him a six-month jail sentence. Lydian Coin itself no longer exists, joining a lengthy list of scammy ICOs that have long plagued the crypto sector.
While Hilton’s Lydian tweet included the hashtag #ThisIsNotAnAd, her spokesperson later told Forbes magazine that Hilton was ‘no longer involved’ with Lydian, appearing to suggest that Hilton’s claims of not having a personal financial interest in promoting Lydian didn’t quite meet the definition of full disclosure.
The fact that both Hilton and her mid-2000’s frenemy Lohan are garnering headlines for crypto involvement makes us wonder if we haven’t suddenly time-traveled back to 2007. All that’s missing is a public spat over which non-functional token (the real NFTs) is more deserving of the ‘that’s hot’ designation and Brandon ‘Greasy Bear’ Davis calling Lohan ‘crypto crotch’.
If we were to magically find ourselves in 2007 again, we’d have the opportunity to ditch our stock holdings before the market went on to redefine the word ‘plunge.’ But if we remain stuck in the year 2021, there’s still time to ditch our BTC, Ether and other shitcoins before the laser-eyed price-pumpers ditch them first. One thing investors won’t be able to say later is that they weren’t warned.