One of the smartest Wall Street strategists, Richard Bernstein of Richard Bernstein Advisors, recently shared his view of bitcoin. Deeming it “Bitcon,” Bernstein noted that the currency is displaying all five of his criteria for a speculative bubble, namely:
- There’s plenty of liquidity to facilitate and encourage speculation. Gobal central banks are still providing oceans of easy money.
- There’s increasing use of leverage. The new ‘bitcoin futures’ markets allow you to buy a lot more of the stuff with less money down.
- There’s “democratization” of the market as normal people join in. My dad recently asked me about bitcoin. A tennis pro I know asks me about it every time I see him. Financial TV has become crypto-currency TV.
- There are increasing “new issues” to satisfy the exploding demand for ways to play. There are more than 1,000 crypto-currencies now. And dozens of “Initial Coin Offerings” that have collectively raised billions of dollars.
- Trading volumes are increasing. The number of crypto-trades per day continues to rise as more and more gamblers take a seat at the table.
Happily for bitcoin fans, Bernstein doesn’t think the bubble will burst anytime soon. What pops bubbles, he says, are two things:
- A reduction of liquidity (the Fed choking off the flow of cheap money, for example), and
- A sudden lack of new “greater fools” to dive into the market and drive prices higher.
Bernstein thinks the Fed will stay easy for a while. And, so far, there seem to be plenty of greater fools.
So Bernstein concludes that “the crypto-bubble will continue until the Fed and other central banks remove too much liquidity from the economy, the availability of “greater fools” decreases, and the bubble deflates.”
For what it’s worth, I generally share Bernstein’s views.