I wrote this back on August 7, but it’s worth posting again in light of recent crypto-volatility.
Writing in The Wall Street Journal, Andy Kessler explains the mistake Isaac Newton made with his investments in the South Sea Co. After investing well and earning 100%, Newton initially sold his shares profitably. But when the South Sea Co.’s shares began to take off into bubble territory, Newton was afraid of missing out and invested once again, ultimately losing what would be millions in today’s dollars. Kessler writes of today’s bitcoin investors:
Why relive this painful history? Because half of bitcoin’s price increase over the past year came from market manipulation via another cryptocurrency known as tether, according to a paper last month from University of Texas researchers. Bitcoin has a fixed number of coins. Tether is the opposite. Its price is fixed at $1 and as buying increases, more coins are issued—now 2.7 billion of them. Turns out it was pretty easy to issue tether coins and use the proceeds to buy bitcoin. Hence the price of one bitcoin rose from around $2,500 a year ago to about $19,000 last December. Except it was the tether balance sheet and not real demand driving the purchases. Like Newton’s apple, bitcoin is trading below $6,500 and dropping.
Now the frenzy is in initial coin offerings, or ICOs. They have raised 800% more money so far in 2018 than the same period last year, according to TokenData. But don’t be surprised to find some balance sheet arbitrage there. Learn from Newton: When this kind of thing goes up, sooner or later, gravity works.
Read more here.