Are crypto investors being forced to sell?
When you’re going broke you sell wonderful things. You have no choice—or rather you only have a set of bad choices.
We think that’s what’s been going on with people who invested in Bitcoin and other cryptocurrencies. These tech-oriented folks have been speculating on a potential new asset class, and those speculations have resulted in major losses (most are down more than 80%!). It’s even worse if they borrowed the money to buy.
The crypto mania bears a strong resemblance to the Dotcom mania at the turn of the century. Take a note of the parallels: (1) investors believe we’re “in a new paradigm,” they (2) race to own the newest initial offering, and they (3) wildly bid up the price of things that don’t have any clear economic value.
The argument in favor of Bitcoin was that it offered gold-like scarcity value. But after a seemingly endless supply of Initial Coin Offerings (ICOs), it’s hard to take the scarcity thesis seriously—with over 2000 different cryptocurrencies, they’re simply not scarce.
Crypto bulls also argued that Bitcoin is a currency. But that argument creates an unresolvable paradox. If Bitcoin is supposed to become a major currency, then people need to buy lots of real things and pay with Bitcoin. But if Bitcoin is dramatically undervalued (as they also assert) then it would be irrational to spend any now. The argument undoes itself.
Now what does this have to do with us? After all, we didn’t buy any Bitcoin.
We’ve been asking ourselves what “normal” things did these cryptomaniacs also own? It takes no major stretch of the imagination to think that if they also owned any stocks, they owned technology stocks. And now that they face major losses in the cryptocurrencies, they’re selling the good ones because they need cash.
When does this end? Frankly, we don’t know. But here’s what we do know. We own a collection of really good businesses. And owning really good businesses places the odds in our favor.