Investors Are About to Hit the Bitcoin Iceberg

Why would investors pour money into tiny companies that say they're in the cryptocurrency business? Because they sense the game is close to over

David Rosenberg
David Rosenberg
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A Bitcoin (virtual currency) coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, June 23, 2017.
A Bitcoin (virtual currency) coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, June 23, 2017.Credit: BENOIT TESSIER/REUTERS
David Rosenberg
David Rosenberg

Would it be an exaggeration to say that the mere existence of companies like Natural Resources Holdings or Crypto Company signals the end of an era?

End of an era? Hardly anybody ever heard of these companies, most likely, much less counts them as the fifth and sixth Horsemen of the Apocalypse.

These companies are indeed tiny and by themselves can't do much harm, except to leave a small number of nave stock market investors with some big and embarrassing losses. But they are also indicative of a fin de siècle craziness that has come when the economy has been expanding and financial markets are riding high for so long.

Everyone knows it's all got to end, but they're determined to scratch out the last profits by, for instance, investing in bitcoin or anything that has the scent of bitcoin.

We know what a flower is when we see it

Not so long ago Crypto Company was a trader in digital assets. Then it got a stock market listing by buying publicly traded CROE, a maker of sports bras. Then in November, it bought a majority stake in Coin Tracking e.K., a German cryptocurrency data platform.

Crypto's share price went into orbit, at one point valuing the company at more than $12 billion.

Natural Resources is the Israeli version of the same story. Until several weeks ago it was devoted to mining metals. Then it announced it was switching to bitcoin mining. It signed a deal to buy a Canadian bitcoin miner and changed its name to Bitcoin Mining. Its shares soared 5,000% on the Tel Aviv Stock Exchange, lifting the company to a market cap of 1 billion shekels ($290 million) at its peak.

Everyone is talking about the bitcoin phenomenon. It's been hailed as the dawn of a new era, where the dollar is consigned to the dustbin of currency history. Alternatively, it's been damned as a bubble, like tulips or companies in their times.

At least 17th-century Dutchmen knew that the tulip was a pretty flower and Wall Street investors circa 1999 could fathom the idea of the internet. But nowadays, almost nobody has a clue about what "bitcoin" is or the "blockchain" technology that underlies it. And the few that understand the nuts and bolts of it can only speculate about its economic and social impact.

And so there we have a segue to the stock market. On the one hand, share prices are looking very pricey -- not quite at the level they were before the bubble exploded, but by most measures, the room for gains is pretty constrained.  Only the most tax-cut-besotted Republicans think the Trump tax cut is going to work miracles for the U.S. economy to justify the market going much higher.

In another words, it's not a good time to be a stock market investor if you're averse to risk. The U.S. and world economies are doing well but after years chasing after a decent return in an era of very, very low interest rates, there aren’t too many financial assets that represent good value.

We know what a tulip is when we see one.Credit: Moshe Gilad

Indeed, the era of super-low interest rates and quantitative easing have created an economic environment no one can quite understand.

For instance, why are the U.S. and Israeli economies operating at capacity but still enjoying such low inflation? Even old market pros haven't seen anything like this and none can say with confidence what will happen next.

As Chris Ailman, chief investment officer of California State Teachers’ Retirement System,  told Bloomberg Television interview not so long ago, his comfort level is “about as comfortable as sitting on a pin cushion." But he's got $220 billion in assets to worry about.  “You’ve got to stay in the market because it’s going to continue to grow, but the valuations are at levels that make you very worried.”

For many bitcoin is an easy way to square the circle. You don't know what bitcoin is, it's not easy to buy or sell, and it can easily be stolen, but why not a bitcoin stock. These guys in bitcoin mining or providing "services" to the cryptocurrency world or raising money through initial coin offers must know something, right? Even better, bitcoin shares are subject to regulation, unlike bitcoin itself.

And so we have a world where the whiff of bitcoin emanating from a company that got to its feet only a few months ago and was making sports bras before that is now worth almost the same as Whirlpool Corporation, which makes the eminently useful and perfectly understandable washing machine.

Thankfully bitcoin stocks, unlike bitcoin, are regulated. Just last week the U.S. Securities and Exchange Commission suspended trading in Crypto Company for its allegedly dubious disclosure standards. The Israel Securities Authority is thinking about banning cryptocurrency stocks altogether. “We feel that the prices of bitcoin behave like bubbles and we don’t want investors to be subject to that volatility and uncertainty,” ISA Chairman Shmuel Hauser explained.

Alas, Hauser is like someone stopping a passenger from jumping off a sinking Titanic. It's a noble effort but it isn't going to make a lot of difference.