At first blush, Wall Street Journal technology writer Andy Kessler makes a compelling case for why bitcoin’s 2017 meteoric 1,368% rise was not “real.”
In an article published on Sunday, Kessler cites a University of Texas study that argues manipulation was behind half of bitcoin’s 2017 move up. The study pins the blame on a crypto coin called Tether (USDT).
Tether is a fixed-value, or “stable” coin. It supposedly backs each coin by one U.S. dollar. To be clear, I have never been a fan of Tether because it requires you to trust there is $1 backing each coin.
In January 2018, I wrote:
[Tether] claims that for every Tether in the market, it has an actual dollar bill in a vault somewhere.
Let me be clear: I HAVE NEVER BELIEVED THAT CLAIM. That’s why I never recommended the token.
To date, I still haven’t seen proof of Tether’s reserves.
Many people share my misgivings about Tether… but that hasn’t stopped it from issuing more than $2.5 billion worth of coins. Does Tether have $2.5 billion in cash reserves to back that up… or is it just printing its own money at will?
Nobody knows.
The decentralized revolution is about getting rid of “trusted” third parties. Ultimately, coins like Tether will fail if they can’t find a way to become “trustless.”
(With trustless technology, you don’t have to know or trust the person you’re doing business with. The blockchain records and verifies every transaction transparently. So the system builds in trust, by default.)
Back to the University of Texas report… It suggests that more Tethers were issued than had backing by actual dollars. The report makes the Tethers were used to prop up and ultimately manipulate the price of bitcoin higher.
Kessler’s article attempts to use the Texas study to bolster his argument that bitcoin is just another balance sheet-driven bubble, like every bubble since the South Sea Bubble of 1720.
He argues that temporarily shifting assets from one balance sheet to another inflates a bubble. And when the money runs out, the bubble pops.
It’s the type of argument that initially reads well… But it doesn’t really hold up under scrutiny.
For instance, Kessler tries to pin the dot-com crash on America Online’s dot-com era ad policies. I read his explanation three times, and I still don’t understand how AOL’s ad policies caused the dot-com crash.
The dot-com boom was a $5 trillion bubble. It seems a bit of a stretch to pin $5 trillion of destroyed value on one company’s ad policy.
He also blames the infamous Dutch Tulip Mania during 1636–1637 on balance-sheet manipulation. But that doesn’t work either. If he had really done his research, he would have found out that Tulip Mania was an overblown myth. It had nothing to do with balance sheet manipulation.
(The Smithsonian did a great write-up on the Great Tulip Mania and called it more fanciful fiction than a serious financial crisis. You can read the essay here.)
If we poke a little more, we can find more holes in Kessler’s bubble theory.
If Kessler is right about last year’s action, how does he explain the so-called bitcoin bubbles of 2011, 2013, and 2014?
That’s right… This is the fourth time bitcoin’s “bubble” has popped.
2011 bubble “pops”: $32 to $2—down 94%
2013 bubble “pops”: $230 to $70—down 70%
2014 bubble “pops”: $1,200 to $173—down 85%
2018 bubble “pops”: $20,000 to $5,800—down 71% so far
If Kessler is going to attack the 2017 action as manipulated, why not attack the 2011 “bubble,” the 2013 “bubble,” and the 2014 “bubble”?
Were all of those moves manipulated, too?
If they were, then they’re the most unique bubble manipulations I’ve ever seen. Here’s what I mean… If you bought at the peak of each move, your average “old” peak-to-“new” peak gain is 9.8x your money.
How many bubbles do you know that could make you money if you bought at the peak of every move?
I don’t know of any.
I fear Kessler has confused market volatility with market bubbles. Just because something is volatile doesn’t automatically make it a bubble (or mean it’s been manipulated). Bitcoin is volatile… but it’s also very valuable.
Fraudulent assets go to zero. True bubbles don’t continue to make higher highs and higher lows, the way bitcoin has done.
Bitcoin is a highly volatile asset, not a fraudulent asset.
And that’s why I always recommend that my readers keep their position sizes small. (As always, we recommend investors with smaller accounts place no more than $200–400 per trade. And we recommend investors with larger accounts place no more than $500–1,000 per trade.)
It’s the only prudent way to invest in assets like bitcoin and other cryptocurrencies.
But let’s get back to Kessler’s central theme on manipulation…
Has the issuance of unbacked Tethers manipulated the market higher? It’s possible. I don’t know if we’ll ever really know for sure.
But in the long run, does it really matter? I don’t think it does.
The truth is, sometimes bad people co-opt great companies and great technology.
Speculators used to manipulate the early railway stocks all the time. In the early days of General Motors, founder Billy Durant routinely manipulated company stock.
These short-term blemishes did nothing to diminish the long-term value the rail and automotive industries ultimately created.
Meanwhile, amid all the manipulation hubbub, we continue to see signs of mainstream adoption of bitcoin and cryptocurrencies.
The St. Louis Fed recently announced it created an index to track the top four cryptocurrencies.
Goldman Sachs announced plans to start a bitcoin trading desk.
Japan’s Nomura Holdings (a $100 billion-plus financial firm) just announced it’s creating a custody consortium called Komainu.
There’s more.
By 2002, the dot-com crash caused the Nasdaq to drop 80%. In 2002, venture capital (VC) investment dropped by 90%.
Contrast that with crypto.
Right now, the crypto market is down 70%. It seems logical that funding for new VC deals would dry up. But it’s not.
VC investment has already doubled from last year, and it’s expected to 4x by year-end.
The key takeaway is that even with the news of manipulations, government meddling, and massive volatility… institutional money is flowing into this asset in droves.
And what an institution chooses to do with its money will always carry more weight with me than a Wall Street Journal op-ed piece.
