Will Bitcoin Cause the Next Recession?
The media is flooded with speculation about Bitcoin.
My cleaning lady even wants to get into it.
An English teacher friend of mine bought one at $400 on a recommendation from one of her students a few years ago, and she asking me what to do with it now that it has hit $17,500.
Those of us long in the tooth knowingly make comparisons with the 1987 crash, the Dotcom Bubble, and tulips.
However, Bitcoin may be about to affect us all, whether we own Bitcoin, or any of the hundreds of other crypto currencies out there.
Bitcoin may be the cause of the next recession, if not the next financial crisis.
It is easy to see how.
The current market value of crypto currencies now tops $1 trillion, compared to only a few million a couple of years ago.
Let's say that the value of the crypto currency market soars to $5 trillion. At its current rate of increase, up 1400% over the past year, that could only be a few months off.
This would still be a small market as far as asset classes go. It compares to only $5 trillion for physical gold, $35 trillion for the US stock market, and $70 trillion for the global bond markets.
But let's say the value of Bitcoin suddenly goes to zero. It could happen in any number of ways.
There could be a gigantic hack where the bulk of outstanding Bitcoin are stolen. There has in fact been several big figure hacks in recent months with no recourse whatsoever.
The government could move to regulate it, thus breaking its allure. The SEC already successfully fought off several attempts to give it respectability by denying approval of several crypto currency based securities.
Someone may decide to sell, triggering a meltdown that makes the current melt up look like a cakewalk. We have already seen an 80% correction in the past history of Bitcoin, so a repeat would not be unimaginable.
The problem is that this time, an 80% correction from $5 trillion would vaporize $4 trillion worth of global wealth. Furthermore, prodigious losses in Bitcoin might prompt investors to rethink exposure to other asset classes, like say, US stocks.
It all could lead to a long awaited big correction, if not an outright bear market.
Yes, you could say this argument is entirely speculative. But then the entire Bitcoin circus is speculative. Of the many people I know who own Bitcoin, I don't know a single one who can describe what they own in any detail.
There is a better way to play Bitcoin without having to believe that something electronic out there will be there when you need it.
Studying the history of the 1849 California Gold Rush, there is not a single miner who is known today. But the merchants who sold them shovels, food, and blue jeans have banks, hotels, and universities everywhere with names like Huntington, Stanford, Crocker, and Hopkins.
If you want to get involved in a burger war, sell the catsup.
There is a way to get into the catsup business in the Bitcoin world, and that is through buying the subjects of my last two newsletters, LAM Research (LRCX) and NVIDIA (NVDA).
The growth of crypto currencies has created an exponential demand for chips and processors needed to build the servers miners use to create them. There is a veritable Bitcoin miner's boom going on in San Francisco right now.
And if the Bitcoin business suddenly folds these two hyper growth companies have plenty of global diversification to fall back on.
Play these right, and someday YOU may have a bank, hotel, or university named after you.
Better to Sell the Shovels Than Mine the Gold
