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!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.