Bitcoin: Is Greed Back?

The financial press is filled with stories about a bitcoin bubble. But whatever the eventual future for blockchain and cryptocurrencies, the mania may reflect something broader: a return to the “greed” part of the “fear and greed” cycle for the first time since the financial crisis sent investors into their bunkers.

I write from personal experience. This past week I attended a charity event featuring a cryptocurrencies discussion with Fortress Investment Group founder Mike Novogratz and Joseph Lubin, founder of a blockchain company called ConsenSys.

Novogratz has in recent months transformed himself from a retired hedge fund manager into a bitcoin evangelist, and he's a compelling speaker. Lubin is no less an evangelist, but whereas Novogratz is all about making money, Lubin is about the changing the world (and making money in the process).

Listening to the potential for blockchain and cryptocurrencies to change the fundamental underpinnings of the economy and society, not to mention their inner workings, is mind boggling and kind of awesome. But what I realized was that I also kept thinking "How did I miss this? Can I still get in on it?" It was returns envy, aka greed.

Having written about financial markets for nearly 30 years, it reminded me of the late 1990s when the mania was such that even I found a way to get a small slice of a small dot-com IPO, which quickly went to zero when the bubble popped.

I was also reminded of how in the wake of the financial crisis, as a reporter at The Wall Street Journal, we were on constant bubble watch, looking for signs of whatever would next implode and drag the global financial markets back into disarray. Up until I left the Journal in 2015, as hard as we looked, nothing made the bubble cut. Investor caution was just too widespread.

That's not to say bitcoin and its cousins will crash the global economy. But here's why this moment is worth watching as a barometer of psychology.

First, one thing about the tech-stock bubble that many investors don't recall today--or weren't around to observe--is that stock investors had already been doing pretty darn good during the 1990s.

Going into 1999, the S&P 500 returned some 30% a year for the prior four years. But that wasn't good enough. You knew people who were making four times that and you wanted to have triple-digit annual returns too. So you wrangled a "friends and family" slot on an IPO. Or else or took money out of a diversified fund and put it into an internet-stock fund, or maybe a diversified fund that had loaded up on internet stocks and said "what's the worst that could happen?"

Today, S&P 500 has returned more than 15% a year for the last five years. Elsewhere, as The Economist put it, it's been a bull market in everything. In that environment, investors tend to start taking risks that can come back to haunt them.

Second, you'll hear what I'll call the "silver-lined bubble" argument for cryptocurrencies. It goes like this: Look around you at how the Internet has transformed literally everything. And just as the tech bubble was a bump on the road to a technological transformation, cryptocurrencies are just in the first or early second inning of a long term economic revolution when it comes to how transactions are done. (Another argument is this can't be a bubble if everyone is calling it a bubble.)

But at this point, it's really anyone guess as to whether any one of the technologies or cryptocurrencies that are around today will really be transformative, or if this will turn out to be nothing more than a spectacular flameout for today's investors. It's a risky bet.

Even if a decade from now, we're all using blockchain-based identities and bitcoins to pay for our Ubers, remember that

Third, do investors really understand what they are buying? This stuff is complicated. Really complicated. Novogratz described Lubin's work as "building the back of the TV" whereas most people buying a TV only care about the front.

Of course, as an investor, you don't need to actually know how to build a TV, or for that matter, blockchain. But you do need to know enough to understand the risks to your investment. Simple question to ask: do all these really understand the difference between the various cryptocurrencies and their individual risks? Probably not.

Along those lines, while the comparison between bitcoin and gold as a store of value is often made, these are basically currencies we're talking about. A currency trader I spoke to remarked that somebody had told him, "bitcoin can't be like a currency, it's too volatile." He laughed and said that person had obviously never traded currencies. (Case in point: as this is being written, Ethereum has lost 16% in just over 24 hours.)

So, are all these investors buying bitcoin the kind of people who would also invest a portion of their savings in the Argentine peso? More likely they are throwing caution to the wind.

For now at least, the implications for the rest of the financial markets aren’t clear should the blockchain and crypto bull market go bad. But it does feel very much like we’ve seen at least the beginning of a change in investor sentiment when it comes to that fear and greed cycle. For investors who are still keeping an eye on risks in the financial markets, that makes it a moment worth watching.