Electric, Digital And Dutch Tulips

by Dave Kranzler of Investment Research Dynamics

The market value of all outstanding bitcoin has risen $580bn since the start of last year, hitting a new record this week of more than $700bn. That closely matches the trajectory of Tesla: the electric car maker has added $670bn in market cap in the same period, and is now valued at $750bn…as each soars towards $1tn, they look like the clearest examples of the pandemic era’s spreading financial bubbles. – Financial Times, “Pandemic tech bubbles echo those of the dotcom era

Bitcoin and TSLA have gone parabolic, just like tulip prices in the 1600’s. The charts above epitomize the degree to which the current stock market is in a massive bubble, the scale of which is considerably larger than the dot.com bubble. The M2 measure of the money supply is nearly 4x greater now than at the end of 1999, yet real GDP has grown just 40% over the same time period. Nominal GDP has only doubled.

No one knows when the parabolic move of a stock will terminate. As happened when the Dutch tulip bubble imploded, buyers willing to pay a higher price disappeared. When this happens, the price collapse is spectacular. Bitcoin went through this cycle once already, though last time around it topped out at $20,000. It’s twice as high now.

Bitcoin is running in correlation with the run-up in the stock market, but especially with riskiest stocks like the tech “unicorns” and TSLA. Bitcoin last peaked at $20k at the end of 2017, in correlation with a move from early 2016 to the end of 2017 that took the SPX from roughly 1,830 to 2,870 (56.8%) by the end of January 2018. The SPX then dumped 10%. Bitcoin plunged from $20,000 to below $4,000.

I am highly confident that this paradigm will repeat, I am not confident on the timing. However, I believe it will be worth having short exposure of some sort when the Roman Candle burns out and plummets. At the height of a bubble, the issuance of stratospheric price targets proliferates. Right now, there’s calls for Bitcoin to go anywhere from $100,000 to $1 trillion (yes, I’ve seen articles in which the “analyst” predicts $1 trillion). Sheer insanity.

For several reasons I won’t delve into here, there’s plenty of reasons to question Bitcoin’s sustainability as a currency-surrogate, or anything beyond that of a vehicle for reckless speculation.

Several subscribers have asked me about ways to short Bitcoin, as the coin itself can not be borrowed and shorted (at least that I know of). Bitcoin futures trade on the CME but that would be the riskiest way to short the digital coin. You can short GBTC (the Bitcoin trust) but it is difficult and expensive to borrow. GBTC trades at a 17% premium to its underlying NAV. This means that investors have poured more cash into GBTC than the market value of the Bitcoins held by the Trust. This is another reflection of the degree to which bubble-mania has invaded the digital coin.

I’ve decided the best way to short Bitcoin is with “surrogate” stocks. Microstrategy (MSTR, $531) is the perfect example:

As you can see, MSTR’s stock chart looks like that of TSLA’s and Bitcoin’s. Investors in MSTR bought the stock because they were investing in the software business. Any institutional investor that wants to invest in Bitcoin can buy Bitcoin on its own. Through December 21st, MSTR announced that it had purchased $1.125 billion worth of Bitcoins, now worth $2.86 billion. As of Friday’s close, MSTR’s market cap was $4.9 billion. When it announced the original Bitcoin purchase, MSTR’s market cap was $1.2 billion. So far the ploy has worked. But if my view of Bitcoin prevails, eventually, MSTR’s stock price will get slaughtered.

MSTR is even more overvalued vs its Bitcoin holdings than GBTC. As of Friday, its stock is valued at $4.94 billion, which is 22.5% above the Company’s market cap at the time it announced its first Bitcoin purchase plus the value as of Friday of its Bitcoin holdings.

Another Bitcoin surrogate that has gone insanely “Roman Candle” is Marathon Patent (MARA):

MARA bills itself as a “digit asset technology company that mines cryptocurrencies with a focus on the blockchain ecosystem.” Huh? “Blockchain ecosystem?” In 2013 it changed its name from American Strategic Metals Corporation. At that time it described its business as an “intellectual property company” offering consulting services that allow its “clients to maximize the value of their IP assets.

In 2015, it generated $21 million in revenues. In 2017, it produced $519,000 in revenues. In 2019, it generated $1.2 million in cryptocurrency mining revenues. I think you get the idea here – this company is largely a scam operator. On a trailing twelve month basis, MARA produced $2 million revenues, generating a $6.8 million operating loss. The stock sports a $930 million market cap and trades at 465x sales.

“In my day I’ve seen a lot of wild rallies with a lot of mispriced stocks, but there is one thing they all have in common. Eventually they hit a wall and go into a major painful correction. Nobody can predict when it will happen, but when that does happen, look out below.” – Carl Icahn, billionaire investor

The commentary above is an excerpt from the Short Seller’s Journal, a weekly newsletter that dissects the latest economic reports and presents ideas for short seller’s. You can learn about it here:  Short Seller’s Journal information.