Grant's Daily Interest Rate Observer: Bitcoin and other Cryptocurrencies

Let’s take a brisk tour of the most exciting, confounding, lucrative and, yes, dangerous financial realm in recent memory: Bitcoin and its fellow crytocurrencies.   Bitcoin, which fetched about $963 per unit on Jan. 1, changed hands at around $10,044 in mid-afternoon, good for a 944% return year-to-date.  Over a five year period, its price has advanced by approximately 85,000%. 

As might be expected, the digital store of value’s meteoric rise is leading to no shortage of interesting behaviors and remarks from market participants.

Elon Musk, CEO of Tesla, Inc. and SpaceX, was moved yesterday to debunk a blog post theorizing that he is in fact the mysterious Satoshi Nakamoto, the pseudonym of the still-anonymous creator of bitcoin’s source code.  Meanwhile, cryto-ficionados looking to score some digital ducats have come up with an innovative solution:  Using Musk’s own Tesla charging stations to mine for them.  EcoMotoringNews explains:

Some creative Tesla owners came up with a way to make a few [thousand? – ed.] bucks from their parked EVs: Cryptocurrency mining.

One member of the Tesla Owners Worldwide [group] on Facebook suggested the idea, possibly in jest. Then another owner went ahead and did it, posting a photo of his setup.  Some members suggested that his setup could pull as much as 3 kilowatts of power and would probably require the vehicle’s air conditioning to be on for cooling.

Last week, when the price of bitcoin still hovered near $8,000, crypto bulls caught an unwelcome surprise from the operators of a smaller e-currency called Tether (for more see the Sept. 8 Grant’s, “Crypto 36,000” and its subsection, “Tethered to What?”). Tether, which claims a one-for-one backing with U.S. dollars, announced that some $31 million worth had been stolen by hackers, and that it would not redeem the coins.  A Nov. 21 piece in the New York Times noted that the operators of Tether and the largest bitcoin exchange known as Bitfinex are one and the same, and went on to mention some other curious details about the incident:

Tether and Bitfinex have insisted that the two operations are separate. But leaked documents known as the Paradise Papers, which were made public this month, show that Appleby, an offshore law firm, helped Mr. Potter and Mr. Devasini, the Bitfinex operators, set up Tether in the British Virgin Islands in late 2014.

One persistent online critic, going by the screen name Bitfinex’ed, has written several very detailed essays on Medium arguing that Bitfinex appears to be creating tether coins out of thin air and then using them to buy Bitcoin and push the price up.

Tether and Bitfinex have countered this criticism in statements on the companies’ websites and promised that every Tether is backed up by a dollar sitting in a bank account. In September, the companies provided an accounting document intended to prove that Tether is financed with real money.

Lewis Cohen, a lawyer at the law firm Hogan Lovells who advises many virtual currency projects, said the document, because of the careful way it was phrased, did not prove that the Tether coins are backed by dollars.

Among the cohort of crypto True Believers, perhaps none boasts the stature and track record of Murray Stahl, co-founder and chief investment officer of Horizon Kinetics. In a recent interview with Barron’s, Stahl was coaxed into providing his assessment of bitcoin’s potential value. To say the least, if he is on the beam, today’s levels will represent a screaming bargain.

Barron's : How high can the price go?

Stahl: I've got a value, but it is so preposterous I wouldn't tell anybody, because it is much higher than today's price; it would be meaningless to anybody. I think it is worth much, much more than what today's price is. I won't tell you a number. I'll tell you how I get to a number. So, basically the premise is that bitcoin or some cryptocurrency is accepted as a means of the exchange. Let's say that premise proves to be valid. Well then, because it is a worldwide currency it is valued by a law of no arbitrage. It has to be equal to the nominal value of all the fiat currencies in the world. At least that, maybe even more because it is non-inflationary.

Barron's : So is your price target the value of all fiat currency in the world?

Stahl: Yes, whatever that number is. 

Barron’s went on to cite an estimate by The Money Project pegging the total value of the world’s fiat currency wealth at $7.6 trillion, which would make each bitcoin worth $361,000.

Needless to say, not everyone shares Stahl’s opinion. John C. Bogle, progenitor of the Vanguard Group, minced no words this afternoon at the Council for Foreign Relations, according to Bloomberg: “Avoid bitcoin like the plague. Did I make myself clear?”

Finally, a Nov. 20 Bloomberg dispatch titled “A Bitcoin Bubble? Here’s The Bet It’ll Survive the Apocalypse” details the increasing popularity of cryptocurrencies among so-called doomsday preppers.

Across the North American countryside, preppers . . . are storing more and more of their wealth in invisible wallets in cyberspace instead of stockpiling gold bars and coins in their bunkers and basement safes.

That one elicited an enthusiastic rebuttal from investor Bill Fleckenstein on the most recent Grant’s podcast: 

When you can overcome the intellectual hurdle of the fact that the amount of bitcoin is supposed to be limited, but the amount of potential forks (i.e. a split of one cryptocurrency into two or more smaller ones) is unlimited and the amount of potential alternative cryptocurrencies is infinite. Oh by the way, the blockchain is what most people yap about, but yet, you don’t own it [when you buy a crypto], I submit that if you can overlook all those things . . . why can’t you overlook the fact that you need electricity in an apocalypse and you wouldn’t have any, that’s just a simple inconvenience.  

Crypto is certainly one of the defining characteristics of this cycle. As for its prospects, place your bets accordingly. Or don’t.