Is Bitcoin in a Bubble?

  • September: “The Chinese just killed crypto.”
  • October: “Never mind.”
  • James Altucher takes on the “B” question
  • India helps put a hurt on gold
  • But long term, “we are running out of gold”
  • The one undeniably good thing about the GOP tax plan
  • What that tax plan giveth… and taketh away

Remember all those end-of-the-world headlines about cryptocurrency last month? They’re starting to look a little ridiculous.

We chronicled them as they were happening. First the Chinese authorities lowered the boom on “initial coin offerings” — similar to IPOs for a stock. Then they moved to shut down cryptocurrency exchanges.

That all happened in the space of a week after Labor Day. Yes, bitcoin took a 30% spill as a result. But as we write this morning, it’s recovered well over half of that loss.

If you didn’t know about the China news, you might look at a bitcoin chart and surmise that the September swoon was just a necessary “consolidation” after a massive six-week rally starting in mid-July…

Bitcoin price chart

With apologies to Mark Twain, reports of cryptocurrencies’ demise in China were greatly exaggerated.

Exchanges? Who needs ’em? “Traders have now moved to buy and sell bitcoin directly with each other on peer-to-peer marketplaces and messenger apps,” Reuters reported last Friday. “Industry insiders say some overseas-based initial coin offerings (ICOs) are still being marketed.”

This is exactly what we told you amid the “crypto is doomed” talk three weeks ago: The Chinese can throw up roadblocks, but tech-savvy crypto mavens will find workarounds.

So with the China scare behind us… and bitcoin up 258% over the last six months… it’s time to tackle “the B word.”

“One of the questions I’m often asked about cryptocurrency is ‘Is bitcoin in a bubble?’” says James Altucher — the newest big-name contributor to the Agora Financial team.

James reminds us that in March 2014, Warren Buffett went on CNBC and told viewers to stay away from bitcoin. “Viewers persuaded by the Oracle of Omaha missed out on a 620% run-up in the past 3½ years.”

More recently JPMorgan Chase CEO Jamie Dimon and Bridgewater Associates’ Ray Dalio, chairman of the world’s biggest hedge fund, did their own bitcoin-bashing.

“How is it,” James muses, “that they can be so incredibly wrong about digital currency?”

The problem that establishment types have with cryptocurrencies is the same one they have with currencies in general.

“Valuation of currency is difficult,” James explains. “Unlike real estate or stocks or bonds, currency doesn’t intrinsically produce an income stream — dollars stuffed under a mattress won’t increase in value over time by themselves, although ownership of a stock might.

“This difference is important because existing financial models depend on income streams in order to determine a fair price. Because currencies do not produce income, the price is driven by supply and demand, making long-term price projections almost impossible.”

Then there’s what economists call a “network effect.”

Consider the telephone, James says: “If I’m the only person in the world that has a telephone, it’s not very useful. If my friend gets one too, it becomes more useful. If everyone in town has a telephone, it’s even more useful. In economic terms, the value of my telephone grows with each new person that gets one.

“Currencies benefit from the same phenomenon. If I’m the only person in the world that accepts a currency, it’s not very useful. However, as more people are willing to accept a currency, the utility of the currency actually grows.

“This is essentially what makes cryptocurrency fundamentally different from other investments. When you buy stock in a company, it doesn’t impact the cash flow of the company, so the value of the company is the same whether you buy it or not.”

Not so with currencies. “The more people accept it, the more value it has.”

And don’t forget that crypto threatens to gore the oxen of Buffett and Dimon and Dalio.

Think about how Uber has turned the taxi business upside down, says James: ‘Before Uber became commonplace, the idea of getting into a stranger’s car seemed borderline insane. Taxi companies would have you believe that the minute you stepped into a stranger’s car, you were going to get stabbed (best-case scenario).

“Now it seems that they were on the wrong side of history. New York City taxi drivers who were unlucky enough to buy a medallion in 2013 for $1 million would’ve found that same medallion was now worth $186,000 at this month’s medallion auction.”

Likewise, “Existing financial systems greatly benefit from the limited access to capital to members of their boys’ club. JP Morgan’s ability to profit is dependent on customers depositing funds in a bank. However, cryptocurrency negates the need for a bank to safely store funds.”

James’ conclusion: “When people ask whether I think cryptocurrency is in a bubble, the best response I can give is which side of history do you want to be on?”

[Ed. note: We still have copies available of James crypto primer, Cryptocurrencies 101: How to Make a Fortune From Digital Currencies. This book will answer all of the most common crypto questions you have.

And you couldn’t ask for a better expert: James has had a hand in the crypto market since 2013. He sold his book Choose Yourself in a bitcoin-only store he created a month before it was released on Amazon. He’s had a hand in some ICOs — initial coin offerings — these last 18 months. And he’s made $1.8 million off a single crypto trade.

The book is available only through us — not Amazon nor anywhere else. Click here and reserve your copy today.]

The major U.S. stock indexes are reaching still higher into record territory on this Thursday morning. The Dow has crested 22,700. The S&P 500 is now past 2,540.

No big economic numbers today. The monthly jobs report is due tomorrow, which will likely be distorted by the effects of the September hurricanes. Well, distorted more than usual — heh.

Gold is once again spinning its wheels at $1,274 — and its weak performance of late might have something to do with events in India.

Ordinarily, gold demand in India perks up this time of year in advance of the holiday Diwali — when gold is often given as gifts. That’s the “love trade” in gold described by longtime friend of The 5 Frank Holmes, from the U.S. Global mutual fund family — his shorthand for the cultural affinity many Asians have for gold.

But not this year: The Economic Times of India reports that demand has been cut in half because the government is giving extra scrutiny to all gold purchases above 50,000 rupees — about $768. In contrast, sales of cars, TVs and refrigerators are up 15% from a year ago.

It’s all part of the Indian government’s ongoing efforts to track and tax as many transactions as possible — going back to a sudden ban on the country’s most common bank notes in late 2016.

“High-value sales is not happening,” says Joy Alukkas, chairman of a major jewelry retailer. “We are therefore focusing on small pendants, small earrings and other such items.”

On the plus side for the Midas metal is the fact “we are running out of gold,” says the chief of a major gold miner.

At the Mines & Money conference in Toronto this week, Goldcorp Chairman Ian Telfer spoke up about the “peak gold” phenomenon we mention here from time to time.

“We’re running out of gold as an industry,” he told Kitco. “I think we’re spending significant amounts of money exploring but it’s getting harder to find.”

If you’ve been reading us longer than a year, you might be familiar with this chart. On the left side, you see how discovery of gold deposits peaked in the mid-1990s… and you see that gold production peaked in 2015.

Key point: It takes about 20 years to go from discovery to production…

Mining chart

Now it’s time for supply and demand to do its thing, Telfer said: “Production is starting to turn down and once that starts to turn down, I think you’ll see the gold price really start to move.”

Now for the part of the Republican tax plan that might turn out to be “beautiful,” to use the president’s term.

We took some shots at the plan yesterday and especially the day before. But it delivers one unalloyed good, says our income specialist Zach Scheidt.

“Currently,” he says, “U.S. corporations pay a tax rate of 35% on earnings. While we consider ourselves a ‘capitalist’ society, this tax rate is actually one of the highest in the developed world.”

And Uncle Sam has his hand in corporate pockets not once, but twice.

“Don’t forget that this is part one of our ‘double taxation’ system. Because corporations are taxed on their profits first and then when they pay investors a portion of profits, the investors pay taxes again on the same profits.

“Under the new tax plan, corporations will pay just a 20% tax rate on profits.

“Now, before you get upset about a tax break for the ‘evil corporations,’ remember that the actual owners of these corporations are investors like you and me who own shares of these companies,” Zach points out. “Even passive investors who own funds in their 401(k) or IRA retirement plans still get their returns from these ‘evil corporations.’”

Stands to reason more money for corporations means more money for investors by way of healthier share prices and fatter dividends.

“So if the Republicans are successful in getting this new tax plan passed into law, I expect to see a material boost in our Lifetime Income Report investments.”

Perhaps the biggest winner will be Apple — sitting on $261.5 billion in cash, much of it parked overseas. To learn about some of the other winners Zach is eyeing, give this a look.

“Tax reduction or tax increase?” a reader writes skeptically about our coverage of the Republican tax plan earlier this week.

“While the details need yet to be worked out I am afraid the ‘expert’ analysts are overly negative. The worry about health care and investment cost deductions, even mortgages, shows a lack of tax code understanding.

“Example: The national average home mortgage interest deduction is less than $12,000. The Trump plan provides for $24,000 standard deduction. In other words itemizing is meaningless for average taxpayers, as they already get $24,000 without the need of saving receipts. With an average median income of $80,000, you’d pay $6,720 in taxes, or an effective rate of 8.4% — That’s half of what a billionaire has to put up.

“Now, if you lived in expensive and high-tax states like California or New York with substantially higher incomes and formerly deductible state and local taxes, you might not fare quite as well. Perhaps you vote the tax grabbers in your state out of office or move, since you belong to the upwardly mobile population. Many have done so already. No tears here. Why should a Florida, Texas or other no- or low-tax state resident pay for your tax deduction?

“How ‘experts’ conclude the tax plan is actually a tax increase beats me.

“Love The 5, glad you are back, Dave.”

The 5: Remember, the GOP congressional leadership is adamant that tax reform be “revenue neutral.” That means every dollar of tax relief will have to be offset with a new dollar raised by closing “loopholes.” It’s inevitable that some people’s taxes will go up even as others’ go down.

The most potent illustration we can think of: While the standard deduction would be nearly doubled under this plan, the personal exemption goes bye-bye. For a two-child couple who doesn’t itemize, that one change would add $16,200 to their taxable income. Meanwhile, their standard deduction rises by only $11,600. All else being equal, their taxable income is $4,600 higher. The more kids they have, the worse the math gets.

Yes, the child tax credit might be raised, but there’s no guarantee. And yesterday’s Wall Street Journal points out that raising it from $1,000 to $1,500 still won’t offset the loss of the personal exemption for households in the 25% bracket.

“Your ‘Bureaucrats Gone Wild’ segment was so damn typical!” a reader writes. “I cannot for the life of me imagine a thinking human being writing that piece of garbage.”

[For a moment, we thought the “piece of garbage” was what we wrote. But reading on, we realized he was referring to the warning letter issued by the FDA. Whew!]

“I sometimes wonder what species our various governments recruit from under rocks and in swamp grass to populate their desks and cubicles. While most people probably have a negative reaction to the term ‘bureaucrat,’ our general population in its collective wisdom continues to yearn for government solutions to their problems, blissfully unaware that any ‘government solution’ will by definition involve a bureaucrat coming to the rescue.

“At least I just received my certificate of citizenship from New Zealand. My Plan B may have to become Plan A before long if this crap keeps up!”

The 5: Good choice — especially if you’ve got a bent for entrepreneurship.

As we’ve mentioned a couple of times, New Zealand is tops in the world when it comes to the ease of starting a business. “In New Zealand,” says the World Bank, “an entrepreneur can complete the entire process of company formation in just a few hours through a single online procedure.”

In contrast, the United States fell out of the top 50 in the most recent ranking…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. One more note about cryptocurrencies from James Altucher…

“Long-term investors can take advantage of potential price volatility to invest in bitcoin in advance of a bitcoin ETF or bitcoin futures. I remain bullish on the long-term potential of cryptocurrency and continue to advise my readers to buy bitcoin.”

We’ll have more to say about that in the coming days and weeks. But if you still feel as if you’re fumbling in the dark when it comes to crypto, you really need a copy of James’ book Cryptocurrencies 101: How to Make a Fortune From Digital Currencies.

There, James reveals his one-of-a-kind crypto script that delivered him a $1.8 million payday. Grab your copy right here.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

Recent Alerts

Bear Markets Don’t Matter (When You’re Starving)

We interrupt this impending bear market for another timely warning about famine. Read More

Avoid This Bear-Market Blunder

“Could you share some suggestions for people who are stuck with margin loans?” a reader asks our income-and-retirement expert Zach Scheidt. Read More

Ruble Rebound (Oops)

Let’s see… How is Washington’s campaign of economic warfare against Moscow going? Read More

The “Strong Dollar” Myth

You can’t escape headlines in the Establishment media about the strong U.S. dollar. But… strong compared with what? Read More

Finger-Pointing Time (Crypto)

Our resident crypto evangelist James Altucher tackles whether last week really amounted to crypto’s “Lehman moment” akin to the 2008 financial crisis. Read More

Here Come Gas Lines

Can you say price controls? House Dems will introduce supposed anti-price gouging legislation next week. Which doesn’t bode well for inflation… Read More

Crypto Chaos

Coinbase (COIN) is not going bankrupt. It just looks that way seeing as its share price has been slashed by… Read More

Wrong Opinions = Financial Lockout

The most important developments on the free-speech front in recent days do not involve Elon Musk and Donald Trump. Read More

Famine & Freezers

After a cheery edition of The 5 contemplating nuclear war yesterday, we turn our attention today to… famine. Read More

Normalizing Nuclear War

Sometime today, Joe Biden will sign a bill acknowledging the United States is at war with Russia — a provocative act with even more provocative timing. Read More