Bitcoin, Has it Been Manipulated?
As an appraiser I have looked like a fool for years saying there is no value here, nothing backs it, trades are manipulated, how many greater fools are out there? My very intelligent tech savvy friends jumped on it years ago, I have always been on the wrong side of the conversation. Not being a believer in Bitcoin. Is it time to capitulate and jump in?
I kick myself on a daily basis, as all I had to do was realize that there are so many fools out there that I could easily have gotten in at a price of $200, $1,000, even $5,000 and made a killing flipping them. What’s that? It is over $15,000, sure I could have made an amazing profit buying at 10,000, 12,000. Seriously, at what point does that not seem insane to everybody watching this?
2016 GDP per capita in the US is $57,467. So the average Joe in the US could set aside ¼ of their income to buy a bitcoin? A coin that just a year ago would only consume 1/57th of their income. Something isn’t right here.
Are you a video person or a reader? Well you can choose, here is my video on the subject.
In 2000 when I was in Grad school a professor told us that everything that we have should go into the NASDAQ as it had gone up 30% in 1999. We would be fools not to pour everything we had into the market that was so successful. He was really preaching to the wrong choir though as we were students who didn’t have disposable income to chase those fantastic gains. Of course, with anything else that is fueled by crazy speculation the bubble had to pop. Now think about that for a second. This dotcom bubble was fueled by market wide gains where the entire market doubled in a short time period (a couple of years). I was spared the dotcom bubble by not having anything to invest.
By the time the housing bubble came around I got swept into the frenzy I had to buy now or it would be too late. So I wanted to buy a condo in 2005 in Scottsdale. I showed up at noon to look at a place that came on the market at 8 am. It was sold for “above asking price”. I asked my agent, how did they know that I wasn’t going to show up and offer more? Agent said it doesn’t matter since it will be hard to get an appraisal at that price.
At that point I realized something was wrong and so I sat the housing bubble out until the end of 2009.
It has some intrinsic value, but it’s only worth what people are willing to pay for it. So If I mine gold and it costs me $2,000 an ounce to dig it up and the spot price is $1,250. I can’t sell it for the 2K it cost me, I’m only going to get $1,250 for it.
It doesn’t earn money. You don’t get dividends from it, it doesn’t turn a profit.
What I like about gold, people like it for jewelry, it has luster is malleable and it doesn’t rust.
I recently watched an interview of the Winklevoss twins discussing how Bitcoin is going to become Gold 2.0. It was an interesting theory and they are right about the portability of Bitcoin and other cryptocurrencies. But, can you touch it? Can you pound it thin and make jewelry out of it? Is it shiny? No, no and no. I agree with them that the portability will establish some floor value for use in drug deals, or moving money out of a country.
Anyone who is into gold or bitcoin has to hate US Dollars right?
Why is it that a dominos pizza was like $10 when I was a kid and it’s still $10? Yet a beer is now $5 when it was $3 a decade ago? Why is my cell phone hundreds of times smarter than the $17,000 computer we had in the 80s? The US dollar is backed by the faith of the government, and future earnings of the citizens who are taxed by the IRS. Imagine if I chose to stop paying taxes. Eventually the US government would show up at my door and demand money or I would have to serve jail time. The US government has tanks, military and a police force. I can’t stop them from enforcing their rules. So saying that the US currency is fiat and made up, is not a valid argument. It has real life backing. Gold is something that you can hold and people like to have.
Bitcoin is neither something you can touch nor something that is backed by workers and enforced by tanks. If the founders and whales decide to come collect, how are they going to do that? If they manipulate the market, force some trades steal some coins, who is there to stop them? Who enforces Bitcoin, or the other cryptocurrencies? Themselves? The foxes watch the henhouse.
If the founder steals the Winklevoss Bitcoin fortune, what are their options? Do the Winklevoss twins have an army? No. Can they complain to some regulators? No. Fortunately for them they are in on the scheme, so it won’t happen. When people discover that they have been manipulating the market (if they have) is there a government agency that is going to throw them in jail? Nope, they will come out clean if it turns out that they or any other whales or inventors are found to be manipulators.
The price can be manipulated by huge traders, ponzi scam operators etc.
Most companies pay dividends. I’m going to discuss Disney since it is front page news today for both Star Wars and since they are going to buy Fox the film & TV division of 21st century Fox for 52.4 Billion in stock. Stock: pieces of paper that entitle you to a portion of ownership of everything that company owns.
Currently Disney pays just 1.5% dividend so lets say that If I owned one share of Disney I get $1.5 each year as my share of the profits.
Let’s assume that in 1980 I purchased my one share of Disney. It split 3 times since so I would have 48 shares today, or around $72 a year in dividends. Don’t forget at around $100 a share you also have an asset worth $4800.
Compare that to gold, if you bought an ounce of gold in the early 80s at $2,076 an ounce you still have the gold, but at a loss of around $800. Had you waited to purchase that ounce until 1989 at around $714 then you would have around $536 in unrealized gains.
Do you get the sense as to which was the better investment? Forget about splits and potentially high market valuations on stocks, a pure dividend play has paid off handsomely in this example.
So that brings us back to bitcoin. A one dollar investment on 4/9/11 gets you a coin. In just 6.5 years it gained 15,000-18,000 in value. So let’s look at the Disney investment again. To buy in at today’s price you need to set aside roughly ¼ of your income if you are average.
In 1980 that was $12,500. So ¼ of that was 3,125. Had you purchased 3125 shares of Disney in the early 1980s you would now have 150000 shares valued at a more than $15M. More importantly you would have gotten cash dividends each quarter for the last 4 decades. This year alone that investment would expect to generate $225,000 in dividends.
The point I’m trying to make is that ¼ of your income is an insane risk for anyone to take on. For every Disney that was picked there are people who invested in enron, pets.com etc. So no matter what you do you need to diversify your investments.
- This island only produces one thing coconuts (which never spoil). A coconut takes a full day of labor to acquire.
- All of your needs are taken care of by the government. You can either work a day and get a coconut or sit around and do nothing.
- A magical sharpie shows up on the beach. We all agree that this sharpie can only be used 10 times after that it is useless. As the owner of the magical sharpie I put it to use by creating 10 Rosscoins. Each of these coins has my mark written with my magical pen.
- Everyone acknowledges that there is a limited supply of Rosscoins, only 10 will ever be made.
I set aside one for me (as the creator) and sell 3 more to the 3 island “whales” at a price of 1 coconut each. These “whales” vow to not sell to outsiders until prices skyrocket.
The other six Rosscoins are in my vault with notes buried in the sand (which I will exchange for Rosscoins when discovered). I then leave treasure maps for people to find these buried Rosscoins. Eventually all 6 are discovered.
Mining the Rosscoins had a bit of a cost to the miners, as it takes each miner a full week of labor to get their Rosscoins. They could have had 7 coconuts but instead they have a Rosscoin each. To the minors they have an intrinsic value of 7 coconuts.
What value do they have to a citizen who wasn’t the inventor, one of the whales, or one of the miners? At this point the community hires a business appraiser to come in and tell them the value of each Rosscoin.
The appraiser looks at the income approach and says, what do these do? Do they have some kind of utility? No
Are they really cool works of art? No
If I put a Rosscoin on the ground can it make me more Rosscoins? No. Perhaps a coconut? No.
It took “miners” 7 days to find them, and it took Ross about one minute to sign them. In the process of building out this ecosystem it had a start up cost of $10 for the wood and the pen. Is each Rosscoin worth a dollar? Nope, good luck selling them for a dollar Ross… Is a Rosscoin worth 7 coconuts? Nope, there is no way I can find someone dumb enough to trade in 7 days of labor for one of my coins.
Do they have a limited supply? Yes, there are only 10 in the whole world. Wow that’s nice, but so what?
The appraiser finds that both the asset approach and the income approach of the Rosscoin yield the same result, $0
We haven’t looked at the market approach yet. This is the valuation approach that stepped out of line in both the dotcom bubble and the housing bubble.
12 Days of Rosscoin
Then something really magical happens I huddle with the 3 whales and we do our best to manipulate the marketplace. We start to trade amongst ourselves, making sure that the market knows that these sales have occurred.
On day 3 I give a Rosscoin to Whale 1 and he gives me 3 coconuts.
Day 4 Whale 1 sells his 2 RC to Whale 2 for 4 coconuts each.
Day 5 Worker 1 gets really excited now that he knows that 1 RC is worth 4 coconuts. So whale 2 offers to sell him one for 5 coconuts. Worker 1 is thrilled to be in on this action, and makes the deal.
Day 6 Ross buys a RC from wh 2 for 6 coconuts.
On Day 7 the miners find their RCs, no transactions occur that day.
Day 8, Wh1 buys a RC from M1 for 8 coconuts.
After 8 days Ross and the whales have 40% of the market and the market is now valued at 80 coconuts. The whales started with 30 coconuts, they still have 27 coconuts and their RCs are worth an additional 32. So the top 4 people at the top of the scheme have 59 coconuts worth of value “on paper”.
Day 9 worker 2 wants in and pays miner2 9 coconuts for one RC. Worker 2 is now so rich he decides he’s done working at the coconut farm. He’s now going to live the high life as a RC speculator.
Day 10 worker 3 gets in on this and buys a RC from Miner3 for 10 coconuts.
On day 11 trading is halted. Even though some coconut wealth was created by the workers nobody is currently rich enough to purchase a RC at the asking price of 11, except wh2, and he is looking to cash in as he doesn’t think there are any fools left.
With the market at a stand still lets look at the paper score.
On paper Ross has 10 coconuts worth of RCs and the whales have a combined paper wealth of 57 coconuts.
Miners 1-3 have no RC’s but they have real wealth of 27 combined coconuts. They are winners, so far, as they could have had 21 coconuts for their combined 21 days of labor “mining” RCs.
Miners 4-6 have RCs with a paper value of 30 coconuts.
Workers 1-3 are now retired with a paper value of 30 coconuts. Worker 1 only had to work for 5 days to get his RC, worker 2 worked for 9 days, while worker three worked for 10 days to get his one RC.
If the price of an RC goes down worker 3 has the most to lose as the last one in. He gave up 10 days of labor (10 coconuts) for his.
Day 12 comes, investors in RCs are in a panic as someone asks the following question: As a society we have a total of 54 coconuts, but the paper worth of all of these RCs is 100 coconuts.
Ross and the whales are the first to realize the jig is up. They hit the sell button and find 4 buyers that are willing to make money on the down side.
Ross sells his RC at a discount of 9 to Miner3.
Wh1 sells his RC at 8 to miner2.
Wh2 sells his rc at 7 to miner1.
Wh 3 offers his up for 6 coconuts, looks around and finds out that the only people with enough coconuts to buy his RC are the other 2 whales and the inventor. He quickly realizes that his RC is almost worthless. He then sells it to miner 3 for 1 coconut.
Day 13 RC value drops to 0 as the entire island has 54 coconuts and 52 (96%) of them are held by Ross and the whales.
On day 1 the whales owned 30 of the 33 coconuts on the island (91%). So the whales now have 13 more coconuts, but control a much smaller proportion of the wealth of the island (80%). They have more “stuff” but they don’t command as much purchasing power on the island as they had before RCs were introduced to society. Without a day of labor the whales were able to swindle 13 days of labor out of the working class.
Miners 1 and 2 worked for 7 days each “mining RCs” and have 2 days of labor (coconuts) to show for it.
This leaves us with 9 coconuts in the hands of the inventor of the RC. The inventor started with zero coconuts, 5 wooden tokens and one sharpie. The real winner is the inventor of RC.
Who do you think is going to end up (or already is) the winner in the bitcoin craze. My bet is on the mysterious inventor, and the few people who pump the stock with fake back and forth transactions and bold projections to whip the speculators into a frenzy.
My guess is that there will be a massive drop in Bitcoin prices, which will bring down all of the other crypto currencies. However, there is a rule in investing which says “the market can stay irrational longer than you can stay solvent.” Even though the top may be near, it is still a huge gamble to jump in and short as the market could easily double again before people hit the panic button and realize that there is nothing backing these crypto currencies.
To be fair there is a bit of floor value for the crypto world.
As a tax dodging device there is a market for crypto.
As a method for moving money out of a country or for drug deals
The CBOE has a futures market but I can’t figure out how to actually trade those as my brokerage doesn’t offer the option. Please comment below if you are a risk taker who knows how these crypto currencies can be shorted.