Before I got into investing, my first two nerdy loves were maths and physics. I’m still a big geek today. And yet, despite being a lover of tech and computers, I’m terrified of two modern-day inventions. I see these two must-have assets blowing up into the biggest market bubbles in history. I refer, of course, to Bitcoin (BTC) and Tesla (NASDAQ: TSLA) stock.
Bubble #1: Bitcoin
As a mathematician, I studied cryptography (code-breaking) under a world-leading professor. My late grandfather was a linguist and codebreaker at Bletchley Park in WW2 and then for 30 years at GCHQ, Cheltenham. Cryptography has been my lifelong passion. So I should be an avid Bitcoin bro, right? Wrong.
I understand the science behind Bitcoin, decentralised digital currencies, and blockchains. But I’m a ‘no-coiner’ — someone who has never traded crypto-assets. My biggest worries about Bitcoin are:
- the energy usage involved in mining
- high transaction costs making Bitcoin unsuited to be a currency for everyday transactions
- use in illegal activities
- risk of theft
- extreme volatility
- and the fact that Bitcoin is is a massive bubble right now.
A week ago, I warned that Bitcoin had entered a massive bubble, driven by speculative buying. Three days into 2021, the price had surged nearly a quarter (23.7%) to hit $34,545. But this gigantic bubble keeps inflating. On Friday, Bitcoin peaked at $41,962, up more than a fifth (21.5%) in another four days. As I write, BTC trades around $31,230, collapsing over $10,700 from its peak. That’s a crash of more than a quarter (25.6%) since Friday.
Today, the total value of all Bitcoins is around $579bn. At Friday’s peak, it was $703bn. That’s a loss of $124bn in three days. As with all bubbles, I pity recent buyers, who suffer the greatest losses when bubbles burst. Just as happened in 2018, when BTC crashed by more than five-sixths (84.2%) from its 2017 high. Also, newbies probably don’t realise that 98% of all BTC is controlled by just 2% of wallets. As the old saying goes, ‘Devil take the hindmost’.
Bubble #2: Tesla (TSLA)
My second market bubble is Tesla stock, much loved by Robinhood day-traders and millennial speculators. Don’t get me wrong: I’ve been for a Tesla test drive. I thought the ride was amazing — pure science fiction. But the build quality was poor (tacky plastic). I even have a grudging admiration for Elon Musk and his global goals, despite his social-media antics. But like Bitcoin, Tesla is one colossal market bubble waiting to burst.
Tesla is growing quickly — it made nearly 500,000 cars in 2020. Yet TSLA stock closed on Friday at a record high above $880, valuing the car-maker at $834bn. That made Tesla worth more than all other car-makers combined. Yet these firms together made 99.2% of all vehicles purchased last year (61.4m to Tesla’s 0.5m). This makes Tesla’s current valuation an insane fantasy. For TSLA to justify this price tag, I estimate it would need to sell half (50%) of all cars worldwide by 2030. Thus, Tesla is an even bigger bubble than Bitcoin.
When bubbles burst
On Friday, BTC plus TSLA added up to $1,537bn of fantasy, illusion, and delusion. Three days later and the combined total has slumped by $165bn. When these twin bubbles burst for real, I expect recent buyers to lose 50% to 80% of their money. That’s why I’m sticking to buying boring. cheap UK stocks for my tax-free ISA!