Free Reports

Bitcoin at $10,000?

Jun 14, 2017

27

BALTIMORE - We live in an age of miracles. With some paradox and claptrap thrown in for good measure.

Over the last four years, almost all the stock market gains in the US came from just five technology stocks - Facebook, Apple, Microsoft, Amazon, and Google.

Those five have tripled in value since 2012. In this year alone, they have gone up, on average, 25%.

The Big Five

What has the rest of the market done?

Owen Williams, via The Gloom, Boom & Doom Report editor Marc Faber, took these top five stocks out of the S&P 500. This left him with the S&P 495.

How well has it done since 2012?

Well, it's up about 25% - or about 5% a year. The Big Five, meanwhile, rose 226% - or about nine times as much.

These five companies are not priced so high because they are earning so much money. Most of the increase comes from 'multiple expansion', meaning investors are willing to pay more for each dollar of earnings they produce.

And if you put them together, says Williams, and figure out the price-to-earnings (PE) ratio for the group, you get an incredible 59.4 times trailing net earnings - more than twice the PE for the S&P 495.

Remarkable?

Then again, investors are lending money to the governments of Switzerland and Japan and paying for the privilege. And they're also paying nearly $3,000 a pop for bitcoin - a crypto 'currency' they can neither see nor hold in their hands nor (generally) use to pay for groceries.

So why shouldn't they be willing to wait sixty years before their Big Five companies have earned enough to match their investment?

And what's this? Another miracle!

On Friday, the Big Five began selling off. For example, Apple fell 6% from its peak.

Surely, there is another shoe still to drop in the tech sector. We wouldn't be surprised if it had a steel toe...and went right through the floor.

Advertisement
  Free Report: Three Crisis Scenarios, and How They Could Impact India  
   
  India in Crisis 2017 special Report Claim your FREE report and learn the three disturbing reasons why the Diary editor Vivek Kaul believes India may be headed for a big crisis in the years to come.

Plus you will get the Diary...absolutely free.
Download This Special Report Now. It's Free.
 

Crypto Boom

In the meantime, we return to one of the wonders of our time: the aforementioned cryptocurrencies.

What your editor doesn't know about cryptocurrencies includes most of what could be known on the subject. But he is surrounded by enthusiasts.

Word came last week that one of our former analysts is on Easy Street, prompting a comment from another young analyst in the office: 'Oh, man...he made it big in bitcoin. Now he's on an extended vacation in Fiji.

'This guy set up a bank of computers in our office in Buenos Aires when the government was keeping the price of electricity low. And he used them to 'mine' bitcoins. His computers solved the complex mathematical puzzles required to verify bitcoin transactions...and he got rewarded in new bitcoin in return.

'And that was when the price was in the pennies. Now we're watching the price go up by more than $100 in a single day. I mean, it's unbelievable. Did you know that just $1,000 worth of bitcoin in 2010 would be worth $90 million today?

'And bitcoin is not the only game in town. There are new initial coin offerings - or ICOs - almost every day. Basically, crypto startups are selling 'crypto-tokens' to raise money to fund their businesses - much like companies issue new stock to fund their businesses through IPOs, or initial public offerings. And not all of them are about currency or money.

'For example, there was recently an ICO for a company that allows you to rent out spare memory on your computer to people who need extra storage space. Another is trying to bring basic financial services to the 2.5 billion people around the world without bank accounts.

'And another ICO helped fund a company that allows you to get rid of all ads online and instead pay websites directly for their content. That one raised $36 million in just thirty seconds!

'There are over 800 cryptocurrencies now in existence. The one I like best is in the No. 2 position, Ethereum. It's got nothing to do with currency at all. Basically, the developers behind Ethereum have created the first decentralised 'world computer'.

'Businesses can use this decentralised computer to referee all kinds of global transactions without the need for a third party or centralised authority as arbiter.

'It's like this "Galt's Gulch" in cyberspace - a place you can go to get away from corrupt institutions and do business without outside interference...'

Virtual Gold

'Of course, there are a lot of complete frauds, too,' continued our young analyst.

'When you get a sector this hot, the shysters get in on it. These are guys who sell mining companies in a gold boom...tech companies in a tech boom...and cryptocurrencies in a cryptocurrency boom.

'Is bitcoin in a bubble now? Maybe. I certainly wouldn't be surprised to see prices crash again. But here's the important thing. People said it was a bubble when bitcoin hit $1. They said it was a bubble when it hit $100...and again when it hit $1,000.

'Over the long haul, bitcoin - or some version of it - is here to stay. And it wouldn't be surprising to see the price of bitcoin go to $5,000...or $10,000.

'Why? It's a better form of money.

'Remember, the creator of bitcoin was a big fan of the gold standard. That's what bitcoin is designed to be - virtual gold. It's why the total supply of bitcoins is capped at 21 million. It has to be in finite supply, like gold, to have value.

'It's also why you have to use lots of expensive processing power to 'mine' new coins. Unlike government fiat money, bitcoin is based on how gold was dug out of the ground at the cost to the owner of the mine.

'And if you're in Venezuela with sky-high inflation...or in China with capital controls stopping you from moving your money overseas...or in India where the feds recently banned 86% of all banknotes in circulation...or in the US with another financial crisis on the horizon...and you want to protect your wealth, you need real money.

'All the government has on offer is funny money. So what do you do? If you have the right contacts, you buy gold. Or you go online and buy bitcoin.

'Then you've got this digital currency that's outside of the banking system...is immune from the next sovereign debt crisis...and goes up in value when bad stuff happens in the world.

'Of course, the authorities have already tried to outlaw...or control...cryptocurrencies. But it's hard to control these things.

'First, they're global and decentralised. So it doesn't really matter what one government does. Second, they're based on hardcore cryptography. That's why they're called cryptocurrencies. They're not something governments even fully understand.'

Digital Referee

'We don't know which cryptos will emerge as the Hertz and Avis of the sector. But there is no doubt that cryptos are here to stay.

'Because when you boil it all down, the technology that powers cryptocurrencies - the 'blockchain' - is trustable computing. It's a technology that allows you to digitally referee win-win deals without the need for lawyers, central banks, financial middlemen, or government regulators.

'In fact, cryptocurrencies are an entirely new asset class. And right now, they represent just a tiny part of the financial ecosystem. But they are going to take over more and more of it.

'For example, bitcoin is more secure than any other form of money ever invented - even, you could argue, gold. Just look at what happened to the Incas, who saw all their gold looted by the Spanish. Or the British, who lost significant amounts of gold to German U-boats in World War I and World War II.

'This is the biggest change to money in probably 5,000 years...since gold was first used as money.

'You want to give your grandchild a cool present? Give him a crypto-coin. Better than a lottery ticket.'

Regards,
BILL BONNER Founder, Agora Inc
Bill


Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Get 'India's Big Government' at Just Rs 199 Now October 18, 2017
Vivek's latest book is now available at a rare discount. Grab a copy now.
Our Plan to Save the Ranch October 18, 2017
How to increase fertility in the kingdom of cows.
Nobody Honks in Bali - Lessons for Indian Tourism October 17, 2017
Things India can learn to promote tourism from this small island.
We Rode Out... Unarmed October 17, 2017
Money is the tape measure for the carpenter economy.

Equitymaster requests your view! Post a comment on "Bitcoin at $10,000?". Click here!

1 Responses to "Bitcoin at $10,000?"

Atul Maheshwari

Jun 15, 2017

It's a good article like many others recently on the rise of Bitcoins, however would like to have some articles on how to mine bitcoin etc

Like (1)
  
Equitymaster requests your view! Post a comment on "Bitcoin at $10,000?". Click here!