Is there a bubble? Yes, sure. Is there going to be a market crash? Yes, absolutely.
Should you pull your money out of the US stock market and instead invest in speculative alternative digital “currencies”?
No. No, you should not.
Let us say for the sake of argument that we assume that the United States is about to come crashing to the ground and the former republic will be resigned to the dust-bin of history. During this ensuing collapse, prices will go all screwy; there will be shortages of basic goods like food and electricity, and most American cities will descend into a Mad Max-esque state of post-civilization in which only the strong and the cruel will survive.
Of course, the herald of the collapse will be a stock market crash and a hyperinflation spike. The price of a loaf of bread rises to $10, then $20, and by next March it will cost $100 for a loaf of that gross Wonderbread stuff. People start using dollar bills as toilet paper. You shake your fist and blame that accursed Federal Reserve and their fiat currency.
If you’re like most people, you have some savings stashed away in a 401k or similar plan which is mostly invested in stocks. Being a clever apocalypse prepper, you decide to pull all your money out of your 401k before the inevitable collapse. Stocks are worthless anyway, you say. The US dollar is a worthless fiat currency, so you can’t keep your money in cash. Instead, you decide to put it into a real asset like gold or cryptocurrency. You have $100k in gold sitting in your basement and another $100k between bitcoin, ethereum, doge coin, and ten other cryptocurrencies.
Hold on. Let’s pause for a moment.
real asset like gold or cryptocurrency
What makes these “real” assets? The fact that they have a limited supply? The fact that they aren’t controlled by the spooky Federal Reserve?
Well, shit, beanie babies were in limited supply, too. And about 25 years ago, a whole bunch of people were so convinced that beanie babies were valuable that they emptied our their retirement accounts to “invest” in these little guys.
If it’s limited supply that makes an asset class “real”, then why not beanie babies or rare books or faberge eggs?
But Robert, are you suggesting that I buy and hold US dollars?! The dollar is subject to inflation. Waahhhh!
Nobody is suggesting you buy and hold dollars. Dollars are not meant to be bought and held. Dollars are meant to be circulated.
Unlike beanie babies or rare books or bitcoin, dollars are actually useful for everyday commerce. You can bring a handful of dollars into one of dozens of establishments in your area and walk out with food. Dollars can be exchanged for sustenance.
I am not familiar with even one location in the metro area where I live where I can pay for groceries with a crypto wallet.
Why am I harping on food for these examples? Because if the whole point of buying “real” assets like bitcoin is to survive the end of civilization as we know it, then not being able to buy food is a pretty big problem with this plan.
To buy almost anything that matters with crypto, you must sell it and exchange it for US dollars. Your local grocery store or your landlord doesn’t want crypto, they want dollars. Is it because they are brainwashed? No. It is because the grocery store or your landlord knows what a dollar is worth.
The value of bitcoin shoots up or down 50% at the drop of a hat, for no discernible reason. What would happen in the US dollar experienced the same surges in value? You might go to the store and find that that loaf of bread is now $200. But then later that afternoon, the store has to update the price to $125 because Elon Musk tweeted something. Mass starvation would surely follow.
The whole point of cryptocurrencies is supposed to be that they wouldn’t be subject to inflation and so would function as a useful world currency. Cryptocurrencies are supposedly more stable compared to the yucky dollar which is subject to inflation. But does this look like a stable currency to you?
People were freaking out over a 4.2% rise in price of goods in US dollars, which actually includes additional costs caused by constrained supply chains. But imagine if the price of goods shot up or down 15-20% every day so that the cost of basic necessities was completely unpredictable. Landlords would be forced to start leasing apartments with a variable rate rent so they could adjust the price accordingly at the end of the month. If you had a job paying you $3000 a month, that might be equivalent to only $2000 a month by the end of next week. Do you want to be paid in this crazy, erratic currency?
Proponents of cryptocurrencies are proving exactly what they want to argue against – that the Federal Reserve’s system actually works quite well for what it is meant to achieve. Not only does it work, but the alternative proposed – that we switch to erratic and unpredictable cryptocurrencies – would absolutely fail on every level. Yes, dollars are subject to inflation – planned inflation. Everyone knows this, and if you have any sense at all, you’re keeping tabs on how your cost of living is increasing compared to your income. As long as your income keeps up with inflation, what do you care?
Let us also pause to question why the value of cryptocurrencies like bitcoin are exploding currently. The acolytes will say it’s because inflation is “proving” that the dollar is going to collapse and out of control government spending will lead to national decline, so our only choice as free people is to “invest” in “real” assets that cannot be inflated. But in fact, as I have demonstrated, cryptocurrencies are useless! You cannot do anything with them even after 10+ years except buy illegal drugs or make ransom payments. You can’t pay your rent or mortgage. You can’t buy food. To do anything that matters, you have to convert them to US dollars first.
The truth is that cryptocurrencies are exploding because people are buying them, hoping that the value will increase. It is speculation, plain and simple. Forex traders do the same thing with international currencies. This activity make the price of “assets” like bitcoin increase dramatically in value. The result is a bubble that looks like pets.com stock in 1998:
Cryptocurrency value is determined not by any global economic forces, but rather by the whims of quasi-criminal “influencers” like Elon Musk, and the mob-like groupthink surrounding crypto as an alternative to the Federal Reserve.
Unlike assets like stocks, bonds, or real-estate, cryptocurrency “assets” do not represent a claim on any real wealth. Crypto only has value if someone else will buy it from you. You can’t use it as a currency. It doesn’t track global economic performance the way that stocks do. It doesn’t provide any interest earnings the way bonds do. And it can’t be rented out unlike real-estate. So why are people clamoring to buy this stuff? It doesn’t make any sense.
But Robert, what am I supposed to do? The world is ending. AMERICA IS ENDING. How can I protect my money?
If America is destroyed, and we’re all sent off to re-education in Xinjiang, we have much bigger problems than how to protect our retirement money.
Furthermore, even if that were the case, cryptocurrencies are still a bad place to store your money for all the reasons outlined above.
If you are investing by moving your money around every week based on whatever the crisis-of-the-day happens to be, then you’ve already failed. The only strategy that will work is to know what your goals are for investing in the first place. If your goal is to save for retirement, then you should be investing in stocks and bonds and not touching that money until retirement age.
It is as simple as that. Don’t do anything.
My concern now is that a lot of smart people with bad ideas are going to lose everything because of groupthink and an unwillingness to question received wisdom and go against the grain. Ironically, this groupthink is most prevalent among the libertarian milieu, who normally pride themselves on being independent thinkers. While I have found that many libertarian groups are pleasantly tolerant of a diversity of views on many subjects, cryptocurrencies as “the future of finance” are one that is still sacrosanct.
Don’t say I didn’t warn you.