As far as I recall, the phrase “stupid is as stupid does” was first used in the film Forrest Gump in 1994. I was only 21 at the time, but it really had some resonance with me for reasons that I wasn’t quite certain of at the time. However, the advent of retail investors speculating on Bitcoin and other similar crypto currencies has now really brought home to me what it means.
I am literally aghast at the way people are parting with their hard-earned money ‘investing’ in an asset (or is it a commodity?) when they really have no idea what it is, how it works, what governs the price and how it is regulated, or not, as the case may be.
Much of this euphoria has been brought about by clever people using sharp marketing to draw people in. I myself had a text message last week promising that someone (quite who I don’t know) would pay me 4.2% PER MONTH, seemingly without any risk at all, by ‘investing’ in Bitcoins. What’s not to like?!
In my (not inconsiderable) experience, if something looks too good to be true, it probably is.
I really do think that this phrase applies perfectly to Bitcoins. There are so many phrases that you could use to warn of the risks: what goes up, must come down is the first one that comes to mind!
But what is behind the euphoria? I understand perfectly well why “alternative” currencies could be good for society. I also understand that these kinds of unregulated markets would be ideal ways for criminals to legitimise their ill-gotten gains. Indeed, the JP Morgan CEO Jamie Dimon said a few months ago that Bitcoin “is a fraud that won’t end well” and that it would only be useful if “you were North Korea, or a drug dealer”.
He isn’t the only one offering such advice. Nobel Prize-winning Yale economist Robert Shiller says that Bitcoin is fitting the same kind of bubble pattern that he saw when he predicted the credit-crunch.
Shiller’s thoughts have more to do with the motivating qualities of Bitcoin. In the third edition of Irrational Exuberance, Shiller said:
"there’s a fundamental deep angst of our digitization and computers, that people wonder what their place is in this new world. What’s it going to be like in 10, 20, or 30 years, and will I have a job? Will I have anything?”
By giving people a tangible asset whose prices seems to only go up, Bitcoin has served as a salve for that anxiety, Shiller explained that Bitcoin “gives a sense of empowerment” in such an atmosphere. It allows people to feel like “I understand what’s happening! I can speculate, and I can be rich from understanding this!
The problem is, of course, that speculative bubbles generally burst, and no one knows exactly when they’ll pop.
As I sit here writing this, Bitcoin is up over 11% today and its price now sits 20 times higher than it was just a year ago. Given the meteoric rise, we have had clients asking us whether they should buy Bitcoins and my answer is always a flat no!
We could be criticised for this approach it is continues to rise in value - perhaps Jamie Dimon is wrong and in fact Bitcoin isn’t a fraud …… but I really do doubt it. This kind of euphoric investing rarely ends well. My view is that the smart people are already out of this market and have moved on; the ordinary man in the street who bets his life savings on the price continuing to go up will be the one who really suffers.
As legendary investor Warren Buffet says, investors should be “fearful when others are being greedy” and that really has some resonance in the context of Bitcoin.
For what it is worth, my advice is to avoid it at all costs. If you are still tempted to 'invest', remember what the great man said as well; stupid is as stupid does.