There is a virtually unlimited supply of bitcoin-buyers in China
(Image credit: 2014 AFP)
Bitcoin relies on greater fool theory, say the naysayers. People are only buying it because they think they'll be able to sell it to somebody else at a higher price.
And so they sit on the sidelines and watch while the price rises ever higher.
Who is the greater fool? The guy who participates in the greatest investment mania any of us will ever see in our lifetimes, or the guy who misses out?
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That shoe-shine boy? He may be a bitcoin billionaire
When Joe Kennedy sold stocks just before the 1929 crash, he did so because he was given advice by his shoe-shine boy. When an outsider as far removed as that is giving you stock tips, you know the bubble has gone too far. The shoe-shine boy strategy worked well for Joe Kennedy.
But if you applied it to bitcoin, you'd have missed much of this year's astonishing 1,000% move. That's not a typo: 1,000%. In one year.
But you'd have missed it.
Shoeshine boys have been talking up bitcoin since 2010. It's designed for shoe-shine boys, in that it's designed for every man. It's a practical system of cash for the internet.
In the case of bitcoin you don't want to be worried about the shoe-shine boys. It's the institutional blokes in suits you want to be concerned about.
I'm 48. When I go to a gold or a mining conference, I'm about the youngest guy there. When I go to a bitcoin conference, I'm the oldest guy there. They're full of shoe-shine boys and greater fools.
But now, everywhere I look people are talking bitcoin. Every ad that pops up on my computer screen is for some bitcoin-related company. Every new venture seems to be bitcoin related.
I'm getting texts from people who have never speculated in anything in their lives about bitcoin. The shoe-shine boy alarm warning has gone so red the screen has exploded.
Yet bitcoin's market cap is still under $200bn. Institutional money is not positioned. It is desperate to get in. Career-risk depends on it. I bet every financial adviser in the land has his clients on the phone going "Get me some bitcoins!" and they barely know how. Which pension funds are invested in bitcoin? I bet you could count them on the fingers of one hand.
There aren't enough bitcoins to go round
There are wallets sitting dormant with tens of thousands of bitcoins on them. It looks like the keys have been lost. This isn't something where you can phone up customer services and get them to sort it out. This is cryptography. If you've lost the means to access those coins, they're gone.
And think of all the hard drives that have been lost or corrupted. My buddy used to mine them on his computer at work. When he came to leave the company, they took the computer back and deleted the hard drive!
How many similar stories are there? Bitcoins on old phones that have been thrown away. Ditsy people (like yours truly) who experimented a bit and bought a few, but can't now remember where that USB stick is. Coins lost when the Silk Road was shut down, with criminals perhaps throwing away their computers to hide the evidence.
I bet at least another 10%20% of current supply is either lost or can't be got at.
If you search Google trends you'll find that "buy bitcoin" is now more popular than "buy gold" (though not yet in the US). Where "buy bitcoin" obliterates "buy gold" is in Russia, in Korea, in China. There may be a finite supply of bitcoins, but there is no finite supply of Chinese buyers.
The sheer volume of greater fools in relation to limited supply is creating the mother of all squeezes.
If Marvel comics were to designing a template for the ultimate super-bubble, bitcoin would be it. A finite supply of a new global money system, brought to market just at the time when the world's populace was sick with central banking and money manipulation.
Its potential has greater implications than the South Sea Company, than railways, than Mississippi swamp, than dotcom. It's an entire system of money!
So, yes, it's a bubble. Yes, it's gone bananas. But, yes, it could go a lot higher.
So what do you do? You can either ignore it, like Warren Buffett did with dotcom, and keep your powder dry, while dealing with the psychological issues arising from watching a load of wretched kids who know far less than you are getting rich, while you're not.
Or you dive in, all guns blazing and speculate with huge percentiles of your net worth, risk losing it all but also possibly make a mint.
Or you could perhaps speculate with a small amount of capital, and take the philosophical view if it all goes belly up.
My advice for the newbie is to familiarise yourself with the tech. Buy twenty quid's worth. Get a friend to do the same. Practise sending each other small amounts of money. Register with an exchange. Flip some bitcoins for some dash or some monero. Read. Watch tutorial videos. Learn. (Here's a quick run-down on how to buy bitcoin in the UK.)
Almost invariably those who dismiss bitcoin are unfamiliar with the tech. By all means dismiss it but it makes sense to know what you're dismissing.
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Dominic Frisby (“mercurially witty” – the Spectator) is as far as we know the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He has also taken several of his shows to the Edinburgh Festival Fringe.
His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government.
Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on X @dominicfrisby
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