{"id":2608,"date":"2019-01-11T07:12:12","date_gmt":"2019-01-11T12:12:12","guid":{"rendered":"https:\/\/www.rixtrema.com\/blog\/?p=2608"},"modified":"2019-01-11T07:23:28","modified_gmt":"2019-01-11T12:23:28","slug":"cryptocurrency-fiduciary-asset-or-verruckt","status":"publish","type":"post","link":"https:\/\/rixtrema.com\/blog\/cryptocurrency-fiduciary-asset-or-verruckt\/","title":{"rendered":"Cryptocurrency: Fiduciary Asset or Verr\u00fcckt?"},"content":{"rendered":"

\"\"<\/p>\n

Cryptocurrency: Fiduciary Asset or Verr\u00fcckt[1]<\/a><\/span><\/span><\/p>\n

My colleague Daniel Satchkov has put forth a couple of compelling pieces (Why Bitcoin Drop Was Good and Why Cryptocurrency Just Might Become a Fiduciary Asset<\/em> <\/a><\/span>and 2019 Will Be The Year That Crypto Decouples From Equity Markets<\/a><\/em><\/span>) on why the rout in Bitcoin and cryptocurrency should be seen as a positive and why we may be closer to considering crypto a fiduciary asset. While I agree that the rout is good for the long-term prospects of cryptocurrency (for many of the reasons he lists that I won\u2019t go into here), I disagree that it is on the verge of becoming a fiduciary asset.<\/span><\/p>\n

It is hard to fathom that just weeks removed from one of the most dramatic boom-bust cycles we have ever witnessed, that cryptocurrency is nearly ready for inclusion in a portfolio as something other than a highly speculative asset. After all, outside of big banks exiting the market and a huge price adjustment, not much has really changed.<\/span><\/p>\n

Whenever one thinks of asset bubbles, thoughts invariably shift to tulips or the internet, and maybe now Bitcoin. The chart below shows the recent Bitcoin performance against the Nasdaq during the dotcom bubble.<\/span><\/p>\n

Exhibit 1: Bitcoin and the Dotcom Comparison<\/span><\/h4>\n

\"\"<\/span><\/p>\n

You can see from the chart that the Bitcoin rose logarithmically compared to the Nasdaq with the boom-bust cycle lasting just months. But for me to show that comparison to you, I had to switch Bitcoin to plot on the secondary axis \u2013 meaning that the magnitudes of the bubbles are not equal as it seems from Exhibit 1. In fact, the rise in Bitcoin absolutely dwarfed that of the Nasdaq. If I show them on the same axis, the Nasdaq looks like a flat line.<\/span><\/p>\n

Exhibit 2: What Dotcom bubble?<\/span><\/h4>\n

\"\"<\/span><\/p>\n

There may have been a few internet companies that had prices rise 120x, but I couldn\u2019t find one. I remember people talking about the holy grain of getting a \u201c10 bagger\u201d or a company that would increase 10-fold over a short holding period. I never heard of a \u201c100 bagger\u201d, but maybe they were out there. Like Bigfoot or the Loch Ness monster.<\/span><\/p>\n

Bitcoin was created as an asset immune from central bank interference while allowing for (near) frictionless transfer of value. Cryptocurrency and the blockchain technology that they are built on are great ideas. Just as the internet was a great idea and many of the companies that experienced bubbles in the dotcom era were also great ideas that have changed the world.<\/span><\/p>\n

But many, if not most, of the companies that contributed to the dotcom bubble were simply ideas that should never have seen the light of day. Investors had to learn how to value internet companies properly and understand their value. When valuations or bubbles were brought up in relation to internet stocks, it was often said that \u2018things are different this time\u2019, or \u2018valuations don\u2019t matter here\u2019. Things weren\u2019t different, but investors had to learn how to value these companies and these companies had to learn how to actually make money. Some of these companies survived the bubble and thrived in the aftermath (Amazon) and some were created out of the ashes (Facebook), while most simply went away (Exhibit 3). I believe that it will be the same with cryptocurrency.<\/span><\/p>\n

Exhibit 3: Everyone\u2019s favorite bubble company:<\/span><\/h4>\n