Oaktree's Howard Marks sounded a general alarm last week about the state of stock markets, private equity, credit markets and — for good measure — new digital currencies like bitcoin and ethereum. Essentially, he wrote in his letter to investors that everything is overvalued.
On the cryptocurrencies, he went further. He stated several times that they're "not real." Furthermore, he said, they are "nothing but an unfounded fad (or perhaps even a pyramid scheme)."
Cryptocurrencies may indeed be in the biggest valuation bubble since the dot-com era.
At the same time, there is undeniable excitement about their potential today among the top tier of venture capital investors.
Former PayPal COO David Sacks, who was also an early investor in Airbnb, Facebook, Palantir, SpaceX and Uber, tweeted last week that cryptos are the best candidate we've had for the next big thing in Silicon Valley (Web 3.0):
When I read Marks' comments about bitcoin not being real, I thought back to an interview I did with the CEO of McEwen Mining four years ago:
Any currency exists only because at least two parties (a buyer and a seller) agree that it represents value. So, what constitutes money? On a South Pacific island, we might agree that chicken bones are a currency. In prison, we might agree that cigarettes are a currency. Today, while we all use fiat or paper currencies as money, a medium of exchange, there is a growing concern about the value of these pieces of paper.
I don't see why Bitcoin can't also grow and become another viable currency, an internet based currency. If enough people accept it, it will be used. It seems to have momentum behind it and it's intriguing how it's truly separate from any country or central banks' manipulation and control.
There will be growing pains, like the guy who lost money out of his electronic wallet because he left his computer on all night. Also, Bitcoin will spawn competitors, alternative digital currencies. I think it's a mistake to write off this currency as a bubble or fad.
Will it threaten gold? I don't think so. I think the two will grow in tandem as alternative currencies to fiat currencies.
In the dot-com era of the late '90s, there were many warning signs of a huge bubble that was about to pop including:
- Few of the dot coms had profitable business models
- Business schools (like Columbia where I was in the late '90s) that typically churned out MBAs going into consulting or banking now had students joining start-ups
- Taxi drivers were asking about hot stocks
- People had full-time jobs day trading like CMGI (as Marks himself pointed out in this Jan. 2, 2000, letter to investors)
By contrast, few people are quitting their jobs to start cryptocurrency companies (yet). Day trading is rare. Taxi drivers aren't asking about bitcoin.
If cryptocurrencies are a bubble, we're still in the early innings.
But there are signs of frothiness:
- Initial coin offerings this year have raised $1.27 billion.
- ICO podcasts are abundant with new episodes weekly with guests claiming their new coin is going to revolutionize some new niche area.
- And now you have respected investor Marks saying: "But they're not real!!!!!"
Bitcoin in 2017 is as real as Amazon or Priceline was in 1999.
Both those great companies had their stocks get killed when the dot-com bubble burst, but they used the nuclear winter they faced in the next few years to make themselves more profitable and take market share that they would never give back.
Amazon dropped from $76 per share (in today's post-split share value) at the end of 1999 to less than $6 after the Sept. 11, 2001, attacks. Amazon trades now over $1,000/share.
Priceline went from $283 a share at the end of 1999 to less than $8 three years later. Today, it trades above $2,000.
No doubt many of this year's batch of ICOs, as well as dozens of other existing cryptocurrencies, will disappear in the coming years as things settle out.
But if you listen to Marks' advice and tune out the crypto space, you'll miss the ICO equivalents of Amazon and Priceline. Will ethereum be the next Google? Or the next Lycos?
More importantly, what will be the magnitude of growth from here? Bitcoin has grown from nothing to nearly $3,000 today (after a big pullback when it first hit $1,000 a few years ago). But where will it be in five, 10 or 15 years from now? And will it pull back to below $1,000 again before it breaks out to new highs?
To discard all cryptocurrencies as Marks did in his letter would be a big mistake. There is real value in these digital currencies.