Gadfly

Getting High On Your Own Bitcoin Supply

Regulators aren't the biggest threat to crowded trades like crypto-currencies and cannabis.
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Photographer: Uriel Sinai/Getty Images

Bitcoin is a risky fraud, according to Jamie Dimon, yet fund managers say it's the most crowded trade out there. It's not the only one: cannabis investments have boomed alongside crypto-currency, despite the obvious risks. The fear of regulatory crackdowns has put a downer on both markets in recent months.

But Dimon may be right about one thing: old-fashioned oversupply will probably cure investors' excitement before regulators do.

Once, virtual currencies and weed belonged together on the dark web; now, they're being pitched as asset classes on track for mega-growth. The hype has already traveled some distance: Bitcoin trades at just under $4,000, and marijuana stocks trade at valuations worthy of biotech start-ups. This week sees the launch of a new virtual currency for marijuana markets, Paragon, fronted by rapper The Game and former model Jessica Versteeg. What could go wrong?

Regulatory risks are the most obvious.  Only a tiny number of countries have attempted to actually ban Bitcoin outright, but a slew of regulatory warnings surrounding Initial Coin Offerings—risky and volatile new tokens like Paragon—has dented the price of crypto's grand-daddy and its offspring like Ethereum. And while marijuana has been riding a wave of legalization in the U.S.—despite being still very much illegal at federal level—politicians are giving conflicting signals over where the trend goes from here. Rolling up crypto, ICOs and weed into one investment seems like asking regulators to take a shot at a very large fish in a very small barrel.

But the bigger threat looks like being a very traditional one: too much supply and not enough demand.

Today, there are more than 800 crypto-currencies tracked by CoinCap, and more are on the way. Bitcoin itself split in two recently, with a spin-off called Bitcoin Cash that was intended to improve upon the original—a move that divided investors and exchanges.

True believers will say growing demand and acceptance, rather than speculative trading, justify the boom. Yet research firm Juniper reckons there has been no substantial uplift in consumer adoption in Bitcoin since 2014, despite a 50 percent jump in the number of transactions.

Hedge-fund investor Raoul Pal sold out of Bitcoin after deciding that a potentially endless supply of Bitcoins and blockchains would hurt, not help, prices. "You have so many people competing that the value of blockchain technology goes to zero," he said in June. "It's not the Bitcoin I first bought into."

Marijuana, meanwhile, is also propped up by a belief that demand will skyrocket—which in turn has boosted supply. Prices of legal marijuana have already fallen as growers flock to profit from the so-called Green Rush in states like Colorado. It's true that demand is clearly out there, with legal marijuana adding an estimated $2.4 billion to Colorado's economy in 2015. Research firm ArcView estimates recreational adult consumption of legal marijuana will grow sevenfold by 2021.

But how dependable is this market? The legacy of quasi-legal pot sales in the Netherlands is patchy: Amsterdam has lost roughly half its "coffee-shops" in two decades, and one study found young people's cannabis use fell between 1997 and 2005. The combination of social stigmas and twitchy politicians may hinder weed's adoption as a popular vice.

A rapidly growing market always brings with it fears that the bubble will burst. But overly-ambitious growth expectations looks like a bigger threat to crypto and cannabis enthusiasm than regulatory intervention. As in past market manias, regulators are likely to arrive late to the party—by which time investors' money may have already gone up in smoke.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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