Saturday, May 27, 2017

"Bitcoin and Tech Stocks: A 21st Century Tulipmania?"

From Barron's Up and Down Wall Street column:
Investors’ enthusiasm is reminiscent of the mania that struck the Dutch in the 1600s.

It was 50 years ago today Sgt. Pepper taught the band to play, if that can be believed by aging baby boomers. It seems only yesterday that we were listening to the Beatles’ iconic album of the Psychedelic ’60s while driving around in our VW Beetles, Mustangs, Minis, or Fiat 500s. Plus ça change and all that.

The release on Friday of the newly remastered version of Sgt. Pepper’s Lonely Hearts Club Band on the occasion of its half-century anniversary inspired more than a bit of déjà vu. But it was more about partying like it’s 1999, as in the immortal anthem of the late, great Prince.

Instead of internet stocks, Bitcoin was the center of attention. The crypto-currency has taken flight and taken hold of the public’s imagination like the dot-com bottle rockets before the turn of century.

The story of bootblacks offering stock tips in the 1920s is the oft-told fable warning of the Great Crash. My experience relates to my commuter train, where topics of conversation typically are the polite ones about kids and work—except when markets heat up. On one memorable ride in the late 1990s, I listened to a quite exuberant passenger chatting rather too loudly on his cellphone, a device far from ubiquitous then: “Do you have Sun Microsystems? It split again. Life is goooood!”

Sun would increase 100-fold to a split-adjusted peak over $309 a share by 1999. Between 1988 and 2000, Sun’s stock split six times, including twice in 2000 alone. Then came the dot-com crash. In 2007, there was a 1-for-4 reverse split, after which it was acquired by Oracle (ticker: ORCL) for $9.50, some 300 bucks below its peak.

What brought that to mind was the overheard conversation of a couple of fellow travelers last week, in which one extolled the potential of Bitcoin, whose price has gone parabolic in recent days. Bitcoin has more than doubled since mid-April, from under $1,200, to a peak around $2,800 Thursday, before settling into a range between $2,052 and $2,583 Friday. Where it stops, nobody knows, although it was trading around $2,300 at this writing.

The favorite way to play at home is the Bitcoin Investment Trust (GBTC), a fund that’s supposed to track 1/10th the price of the crypto-currency. But the trust’s closing price of $405 on Friday represented a 76% premium over Bitcoin’s intrinsic value (if you believe Bitcoin has such a thing).

There probably is great potential for electronic currencies not controlled by governments. But for something to be a viable medium of exchange or store of value, it needs stability, which clearly is not evident. Bitcoin’s fans claim it is a technology and not something that can be valued like a stock, which probably echoes conversations in Amsterdam coffee houses in the 1600s to rationalize paying any price for tulip bulbs.

There also was an echo of such exuberance, rational or not, in the stock market as it hit records again last week. The Nasdaq Composite ended Friday at a record, with a 2% gain for the week, while the Standard & Poor’s 500 index added 1.4% on the week, also a record, and the Dow industrials ended just shy of their peak, but advanced 1.3% on the week.

What’s striking is the role played by the biggest technology leaders, again reminiscent of the dot-com era. According to Bespoke Investment Group, Apple (AAPL), Facebook (FB), (AMZN), Microsoft (MSFT), and Alphabet (GOOGL) accounted for 4.6 of the 7.89 percentage-point gain this year in the S&P 500. Through Thursday, S&P data maven Howard Silverblatt calculated, the top 15 S&P 500 stocks generated half of the big-cap benchmark’s year-to-date increase. (What has changed is that Amazon and Alphabet both flirted with $1,000 share prices, while two decades ago stock splits were all the rage.)...