Crypto Bubbles

Photo by Kanchanara on Unsplash

Predicting when bubbles will pop is an impossible task. Market prices can stay irrationally high for longer than most people expect.

However, when you see articles like this one from Yahoo Finance, Michael Saylor’s bitcoin imitators are multiplying, from Trump to GameStop, it is probably time to realize that things are getting weird.

The premise of the article is that bad companies can become good companies if they take all their liquidity and borrowing capacity and use it to buy Bitcoin (as MicroStrategy has done) rather than reinvest in the business itself.

To quote the article:

“It's not complicated, it's not even risky, in my opinion, it's just novel,” Saylor last month said to an audience that showed up for an Orlando, Fla., conference focused on showing other firms how to adopt his bitcoin treasury strategy.

“If you want to 10x your money, you buy bitcoin,” he added. “If you want 100x your money, you buy bitcoin with someone else's money. If you want to 1000x your money, you buy bitcoin with someone else's money and then you leverage the bitcoin.” [emphasis added]

The stock market’s consolidation into the major tech giants has eliminated the chances for smaller firms to give their shareholders returns in line with major stock indexes, he told the audience of corporate treasurers, financial officers, and other executives.

Bitcoin, Saylor explained, was their best chance out of this predicament.

“MSTR’s Bitcoin acquisition playbook demonstrates how small-low growth companies can optimize capital allocation from a low growth business to a high yielding BTC treasury,” Bernstein's Chhugani wrote in a May report.

I imagine that all the people quoted above said these words with a straight face, but when I read things like “optimize the capital allocation from a low-growth business to a high-yielding BTC treasury,” I’m reminded of similar financial alchemy attempted during the dot-com bubble.

For example, below is a quote from a 2002 Washington Post article, Broadband Strategy Got Enron in Trouble

Enron Corp. was already a formidable company in January 2000, after a decade-long transformation from a stodgy gas-pipeline company into the nation's largest energy trader.

Then it spoke the B-word -- broadband. Chairman Kenneth L. Lay and chief executive Jeffrey K. Skilling told stock market analysts that month that Enron was about to create a market for trading space on the high-speed fiber-optic networks that form the backbone for Internet traffic.

Asking few questions, investors sped to buy the stock, as they did with most things Internet-related at the time. Enron shares shot up from $40 in January more than $70 in less than two months and went as high as $90 that summer.

The article continues:

Enron's broadband foray collapsed this year. A business that Skilling had said would eventually add $40 billion to Enron's stock value produced just $16 million in revenue in this year's second quarter, before it was closed down.

Bitcoin doesn’t have cash flow, and the “high-yielding treasury” they speak of today is no more real than Enron’s broadband trading business was in 2000. However, when a company is struggling and someone promises a solution to boost the stock price that doesn’t require the hard work of improving the business, it becomes tempting to believe that this time will be different.

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For more on this craziness, here are two other articles on the topic published this week:

• WSJ: Businesses Are Bingeing on Crypto, Dialing Up the Market’s Risks

• CNBC: GameStop shares tank on convertible bond offering to potentially buy more bitcoin

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Last weekend, we picked the kids up from camp. They all seemed happy to see us.

This afternoon we’re off to a lacrosse tournament in Austin. With any luck, the turf temps will stay low enough that the kids’ cleats don’t melt.