A ponzi scheme is where the price of a relatively worthless asset keeps going up as more $ keep pouring in
Many investors have fallen into a religious trance about crypto. From $100 per in 2007, the price of the largest crypto, Bitcoin, has reached the $100,000 level, before selling off a bit.
I keep getting Facebook, Instagram and other online requests to join groups putting money into crypto. I’ve talked with many crypto lovers who think crypto will go to a million.
Right now the market cap of all crypto currencies is nearing $4 trillion —compared to the $110+ trillion market cap of all global stocks.
Yet, when I say crypto is a ponzi scheme and is inherently worthless, I get yelled at, berated and told I am a foolish old man.
When I ask why is crypto soaring, the answers are 1. The US $ is worthless. 2. Crypto will be the next exchange currency 3. There is a limit to how many bitcoins are allowed.
But the truth is the intrinsic value of crypto is virtually zero. The current price of crypto is totally dependent upon new buyers being greater than all sellers.
All there is in any market, whether stocks, commodities and crypto is the asset being traded and money. Ever since crypto really started rising in 2010 there has been more money being created by the US government. More money chasing relatively fewer assets means the price of the assets has to go up.
Crypto is the result of the Obama, Trump and Biden Treasuries printing new money to pay our bills. The Covid disaster was financially fixed by throwing a $trillion at all Americans.
Since 2010 stocks and crypto have been going up as more new money chases relatively fewer assets.
More money chasing relatively fewer assets is a bull market. Rising stock and crypto prices has little to do with earnings and interest rates.
Yet all bull markets end. At some point asset prices lose any relationship to the cash generating value underlying the asset price.
A bear market occurs when money stops going into markets. Why? Many reasons. One key is when Central banks start withdrawing money from the markets and pushing up interest rates to slow a rapidly rising economy.
Also, war fears, a spike in oil prices could also stop new money going to into assets.
So what happens when there is less new money chasing more assets? Obviously prices drop and we have a bear market.
When a stock drops in price the bottom occurs when the cash flow generation is greater than the stock price.
However, when there is less new money buying crypto then there are sellers; the price has no bottom. But there is no cash flow generation by crypto. A bitcoin is just an algorithm.
The only value a crypto has is if there is a buyer. But when there are more sellers than buyers, crypto has no bottom since crypto cannot generate any cash.
In other words in a bear market crypto is worthless. Another phrase for that bear market is the unfolding of a ponzi scheme.
Technology Risk – Targeting Crypto Wallets
There is also a technology risk to crypto.
Yes creating new crypto unit requires lots or software. However, every few years technology surges. My bet is that sometime in the future there will be breakthroughs in technology where pirates will be able to target crypto wallets to steal the actual coins.
No value and possible loss of coins means crypto is indeed a ponzi scheme that will be written about, analyzed and laughed at for the rest of this century.
Charles Biderman