Billionaire investor and founder of Oaktree Capital Management has said that cryptocurrencies ‘aren’t real.’
In a 22-page memo to his clients, Howard Marks calls cryptocurrencies ‘innovative investments,’ but is clear they are not real. He says:
I’d guess these things have arisen from the intersection of (a) doubts about financial security — including the value of national currencies — that grew out of the financial crisis and (b) the comfort felt by millennials regarding all things virtual. But they’re not real.
Marks believes cryptocurrencies are a fad similar to Tulipomania. Does he have a point? Certainly tulips went down in value from their peak and have never gone back up.
But when it comes Tulipomania, there are a number of issues to consider. For one thing tulips had only recently been introduced and become popular, so part of the initial high price may have been due to newness of the flower.
UCLA economics professor Earl A. Thompson says in a 2007 paper that the government had something to do with it. The Dutch parliament changed how tulip contracts functioned. In fact, futures contracts were to be presented as option contracts. Futures buyers didn’t have to buy the tulips but only compensate the sellers with a small percentage of the cost.
If we accept this explanation, then Tulipomania was not merely a outrageous outbreak of high end manipulation but more or less a rational response to market conditions. If Tulipomania can be explained as something other than a mere mania, then we can look for similar reasons in the present day as they affect the cryptocurrency market.
In fact, government has encouraged cryptocurrencies by make the dollar and other major currencies increasingly overpriced. Many of the buyers of cryptocurrencies are looking for something, anything, that will take the place of national currencies.
If this is so, as it seems to be, then we can expect that cryptocurrencies may fall a great deal during the next market crash, but at least some will not lose all value. In fact some may maintain value just like some dot.com stocks continuing strong to this day.
Is there a bubble in cyrptocurrencies. There seems to be and it could go higher, even much higher. Eventually there will be a crash. But that doesn’t mean that all cryptocurrencies will wither away. Chances are some will remain, changing the face of money with the addition of private currencies.