Bitcoins, Tulips, and The Barrel of a Gun

Since everyone else is talking about it, I might as well throw in my two cents on the subject. Jamie Dimon, CEO of J.P. Morgan Chase, largest of the big four American banks, announced that bitcoins are a fraud and that the governments of the world are going to put an end to cryptocurrencies very soon. It wouldn’t surprise me if that happens. Jamie Dimon, a former governor of the Federal Reserve Bank, is privy to sources of information not available to retired engineers. He also has a hand on one of the levers or power that could put an end to the world’s latest version of tulip bulb mania.

This morning the price of a bitcoin dropped on the news that the Chinese are closing it down at the end of this month.

Money ultimately has value because you and I believe it has value. It could be seashells, gold coins, big rocks, or pieces of paper imprinted with pictures of dead presidents. If it serves as a medium of exchange and a store of value, it is money. The ability to create money, as opposed to the ability to create wealth or the desire to trade collectibles for a profit has always been a monopoly controlled by governments. Jamie is probably correct. If the bitcoin is perceived as a threat to that monopoly power, the bitcoin exchanges will be reminded that political power grows from the barrel of a gun, another area where the world’s governments hold at least something close to a monopoly.

Jamie and the Chinese government certainly haven’t helped things for the bitcoin. It has dropped from a high near $5,000 to today’s price of $3,500, but I wonder if this wouldn’t have happened anyway. The increase in the bitcoin value was beginning to look like a hockey stick. That kind of rapid increase in value is not sustainable. These events usually end in a catastrophic collapse, like the Dutch tulip mania of 1637.

Jamie Dimon also said, “Markets have always been wrong.” He got that one right. If markets aren’t always wrong, there wouldn’t be any need for a market. Every time a share is bought or sold on an exchange, someone believes that it is going to go up in value and someone believes it is going to go down in value. They both can’t be right. Should the market capitalization of Tesla exceed that of General Motors? In 2016, Tesla lost $773 million producing 76,000 cars. GM produced over 10 million cars while earning $9.43 billion.

It is at moments like this that it is important to have an agreement with yourself to direct your investments. My prime directive is, “If I don’t understand it, I am not going to buy it.” The truth is, I don’t understand why one cell phone is sexy and another cell phone isn’t when they look pretty much the same to me. I don’t understand why a normal person would buy an electric car until you can charge the batteries in less than 5 minutes at a cost of less than $30.00 (today’s price) and then drive over 300 miles at 60 mph or better. Taxpayer subsidies can only sell a finite number of automobiles. Unless I was someone looking to move money without the possibility of discovery by my government, I don’t understand the ultimate value of cryptocurrencies. I do understand that traders can make a lot of money buying and selling anything from baseball cards to antique Christmas tree stands, but I am not a trader.

What I do understand are companies that have been around for a while that have a track record of paying a dividend that is trending in an upward direction over a long period of time. This is not a get rich quick scheme and I am vulnerable to value traps that occur when things look good on the surface, but the inside of the company is starting to rot away, but it works. It worked for a genius like Warren Buffet and it has worked for an overly cautious retired engineer, like me. Johnson & Johnson has a long history of selling high quality medical products. Chevron sells the gasoline and oil that goes into my cars. Coca Cola turns fizzy sugar water into money. Aqua America provides water for important functions like flushing toilets in cities across America. These are all examples of things that I understand.

As an investor, I am content with who I am.

Now, if I could just come up with contracts with myself for the other dimensions of a healthy, fulfilling life….