In a recent note, legendary fund manager Howard Marks, co-chairman of Oaktree Capital, cautioned investors against the rising phenomenon of cryptocurrencies and initial coin offerings (ICOs).
In the 23-page document, Marks talked in length about the inflated valuations of cryptocurrencies and termed them unreal.
As of last month, Oaktree was reported to have USD 99 billion in assets under management. Marks rose to prominence after he successfully predicted the dotcom bubble and the financial crisis during 2008.
Here are the key takeaways from the memo on bitcoin and cryptocurrencies:
Bitcoin and cryptocurrencies are not real
At three instances, he stressed that despite all the benefits and technological advancement, cryptocurrencies are not real.
"I’d guess these things have arisen from the intersection of (a) doubts about financial security – including the value of national currencies – that grew out of the financial crisis and (b) the comfort felt by millennials regarding all things virtual. But they’re not real."
"Some businesses accept Bitcoin as payment. Some buyers want to own Ether because it can be used to pay for computing power on the Ethereum network. Some people are eager to speculate on digital currency for profit. Others want to put a little money into these to-date-profitable phenomena rather than run the risk of missing out. But they’re not real!"
"People tell me these currencies are solid, because (a) they’re secure against hacking and counterfeiting and (b) the software used to generate them strictly limits the amount that can be created. But they’re not real!!!!!"
Digital currencies are a pyramid scheme
"In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it."
Comparison with past bubbles
"But this isn’t the first time. The same description can be applied to the Tulip mania that peaked in 1637, the South Sea Bubble (1720) and the Internet Bubble (1999-2000)."
These arguments against bitcoin have existed since its inception, but Marks admits that he might not have an adequate understanding of the technology.
"Maybe I’m just a dinosaur, too technologically backward to appreciate the greatness of digital currency," he says.
Marks further links the rise in cryptocurrency prices with the exuberance in the global market across various other asset classes and says it comes at a time when we see "some of the highest equity valuations in history".
“I absolutely am not saying stocks are too high, the FAANGs [Facebook, Amazon, Apple, Netflix and Google] will falter, credit investing is risky, digital currencies are sure to end up worthless, or private equity commitments won’t pay off. All I’m saying is that for all the things listed above to simultaneously be gaining in popularity and attracting so much capital, credulousness has to be high and risk aversion has to be low,” Marks says.
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