Winter Quarterly Commentary

“I can calculate the movement of stars, but not the madness of men”
- Sir Isaac Newton, 1642-1726 Mathematician, Astronomer, Theologian, Author, Physicist, Master of the Royal Mint, Speculator

Sir Isaac Newton’s magnum opus, Mathematical Principals of Natural Philosophy, established the laws of motion and universal gravitation which underpinned how scientists thought about the physical universe for centuries. Newton did not cover the laws of financial gravitation, which appeared not to apply in 2017 as the stock market soared to another 22% return... which was disappointing considering bitcoin returned more than 1,300% and other cryptocurrencies such as Ethereum soared by more than 9,400%. In remembrance of Newton, and inspired by his ~500 page tome, we thought we would write an unusually long letter in order to cover a special topic.

For the past three quarters, we’ve been receiving a number of inquiries regarding everyone’s new favorite subjects, bitcoin and cryptocurrencies. When it comes to investing our clients’ money (and our own, which is always alongside yours), we stick strictly to stocks and bonds and wouldn’t touch these “assets” with a ten-foot digital pole. However, we will now venture a short commentary on investing in cryptocurrency, a short introduction into what bitcoin is, and *gasp* a bullish investment case for bitcoin. Those who wish to skip straight to our usual stock and economic subject matter can jump to page nine.

The most common and pressing question we receive around cryptocurrencies is, “Are these in a bubble?” That depends on how you define the term “bubble.” If we take as the definition, “Something that has risen rapidly in price, and will soon fall 80% or more never to recover,” then we can honestly say that we don’t know if bitcoin is in a bubble. (Here we will talk about bitcoin but the commentary goes for all cryptocurrencies). What we can say with confidence, is that even if it isn’t a bubble... is sure smells like one!

Bubbles are price action phenomena. They are a natural and regular occurrence throughout human history and they can be studied. Even the venerable Sir Isaac Newton succumbed to England’s South Sea Investment bubble. (See chart.) Unless you are smarter than Sir Newton (hint: you aren’t) we very seriously suggest that if you’re interested in cryptocurrencies, you spend a few hours studying bubbles in addition to studying the underlying technology. The whole episode has all the hallmarks of the price phenomenon where something’s price increases dramatically and then goes back down. To support our proposition that bitcoin looks like a bubble, we present three exhibits:

Source: Marc Faber