Bob Moriarty on Bitcoin, The South Sea Bubble, Ponzi Schemes, and The Pilbara Gold Rush
Bob Moriarty, founder of 321gold, has never been one to swim in the direction of the crowd. He has often held a variant view and prided himself on doing the opposite of the herd when it comes to markets and life. So it is fitting that during a time in world history in which the crowd is in an absolute frenzy over Bitcoin and anything cryptocurrency related, Bob can calmly explain to me the reasons why this is the greatest bubble we’ve ever seen. Without further ado here is Energy and Gold’s December 2017 conversation with Bob Moriarty…
CEO Technician: Let’s start with Bitcoin, I know you have some comments you’d like to share regarding the recent action in the cryptocurrency version of gold. Is this a classic speculative bubble the likes of which we have rarely seen before or is this a phenomenon that is changing the world?
Bob Moriarty: Interestingly enough it’s doing both, and that’s not a good thing, that’s a bad thing. Have you ever heard of the South Sea Bubble?
CEO Technician: I know the basic story.
Bob Moriarty: The South Sea Bubble took place in the 18th century in England. Sir Isaac Newton who was one of the great intellects in history lost his fortune in the South Sea Bubble. Strangely enough he invested, took profits, but then was lured back into the mania near the peak of the bubble and ended up losing his fortune.
Without going into great detail the South Sea Company was a joint stock company created to consolidate and reduce the cost the national debt of England in the early 18th century. Before the bubble burst Sir Isaac Newton was famously quoted as saying “I can calculate the movement of the stars, but not the madness of men.”
I highly recommend all readers go to Howe Street and listen to the interview with Gerald Celente talking about Bitcoin. He makes two key points: 1. Unlike tulip bulbs Bitcoin has utility value, you can use it to trade things 2. Bitcoin is limited.
Now let me ask you, does point #1 mean that Bitcoin cannot go into a bubble?
CEO Technician: No.
Bob Moriarty: Absolutely correct. Stocks have utility value and real estate has utility value, both the stock market and real estate have gone into bubbles numerous times throughout history.
Regarding point #2, is Bitcoin really limited?
CEO Technician: The original intention of Bitcoin was that it would be limited to 21 million Bitcoins, however, what we’ve seen is that Bitcoin can ‘fork’ off and create new cryptocurrencies under different names. In addition, there are more than 1,200 other cryptos out there.
Bob Moriarty: You’re 100% correct. There have been 2 spin-offs (Bitcoin Cash and Bitcoin Gold) from Bitcoin and there are currently more than 1,300 different cryptocurrencies. So the idea that it’s limited is actually not correct.
The long term chart of Bitcoin is curvilinear and just like at every other market top there are 100 reasons to buy (just as there are 100 reasons to sell at every market bottom). People are irrational. You don’t need to know anything about Bitcoin, you just need to understand human nature. This is a bubble and some of the brightest people alive fell for it.
Bitcoin (Weekly – 5 Year)
People have begun to take out mortgages and borrow money using their credit cards to buy Bitcoin. This is classic bubble behavior.
CEO Technician: I think your viewpoint is quite grounded and reasonable Bob. The only problem is that markets and people can be unreasonable for longer periods of time than anyone could ever imagine. I believe we can only determine if something was a bubble in hindsight. There have been people calling Bitcoin a bubble since it first hit $1,000 – and every single bubble caller has been dead wrong so far.
Bob Moriarty: If Bitcoin is $50,000 in a month then i’m obviously wrong. I’m either right or i’m wrong, it’s really simple. But i’ve never seen a clearer bubble than Bitcoin, this makes the Florida land boom and even the dot com bubble look tame by comparison.
Rick Rule has a great saying “you’re either a contrarian or you’re a victim” and this is a great time to be a contrarian!
Did you know that the government of Bulgaria recently seized more than 200,000 Bitcoins in an organized crime raid? This Bitcoin is now worth more than US$3.6 billion, Bulgaria would be insane to not sell this Bitcoin today considering that this amounts to more than 6% of the country’s GDP!! Bulgaria has roughly US$14 billion in national debt so the government could reduce the national debt by ~25% by selling its newly found Bitcoin stockpile and paying down debt.
Blockchain has utility value, whereas, I see no utility value for Bitcoin. Blockchain is a distributed accounting ledger that has potentially infinite applications, whereas, Bitcoin is now one of more than 1,300 cryptocurrencies and in fact has many deficiencies compared to some of the newer cryptos.
CEO Technician: Have you heard of John McAfee?
Bob Moriarty: Of course, he’s a genius.
CEO Technician: Last week McAfee made the following comments… “Bubbles are mathematically impossible in this new paradigm” and then he tried to top that with the following vanquishing of gold… “Gold is laughable compared to cryptocurrencies. How do you fractionalize gold? How do you ship it? It’s physical so how do you safely store it. It was good for people 3,000 years ago. Today it is inherently worthless. Soon it will drop in value as crypto currencies climb.”
Bob Moriarty: What he’s basically saying in those comments is “This time is different.” He’s wrong, it’s NEVER different this time. You can’t change human behavior. Period. End of story.
CEO Technician: Could his comments on gold be any more well timed given that Bitcoin is at an all-time high and gold has dropped 4-5% in a straight line over the last few weeks? As an investor/trader who has a contrarian mindset McAfee’s comments really stand out.
Bob Moriarty: When a guy with that level of intellect says something as ridiculous as he said last week that’s the sort of stuff that marks a top.
Have you ever heard of the Carrington Event?
CEO Technician: No.
Bob Moriarty: It was a major solar storm in 1859. If a similar act of nature occurred today it would wipe out all cryptocurrencies without a trace. It would knock out all computers, satellites, etc. You would literally wake up the next day and have nothing if your net worth was completely tied up in cryptos.
Readers should look up EMPs (electromagnetic pulses – man made) and the Carrington Event (made by nature) because these would wipe out the banking system, cell phones, and the entire internet.
CEO Technician: I want to tell you a quick story about a friend of mine who has a lot of Bitcoin. He got involved in 2013 when Bitcoin was trading around $100, he bought 100 Bitcoins for $10,000 and has held ever since. With Bitcoin soaring above $10,000 in the last few weeks he now has over $1,000,000 in his Bitcoin wallet. He has decided that he can build the house of his dreams for $1.5 million so he is waiting for Bitcoin to hit $20,000 before he sells so that he has enough to pay the tax man and still build his dream house. He’s almost there.
Bob Moriarty: If that’s not the definition of a bubble I don’t know what is. Everybody does the same thing, they overstay the party.
I’ll give you an analogy; in 1984 I became a commodities broker. The firm gave me a box with hundreds of documents with the account records of customers they had during 1978, 1979, and 1980. Every single one of these accounts had large gains during the 1978-1980 time period including some accounts which had reached values into the millions. 100% of these accounts also overstayed the party and ended up losing it all back when the market turned down after peaking in January 1980.
CEO Technician: It’s human nature to overstay the party. We saw the same thing during the dot com bubble in 2000 and 2001 and the U.S. housing bubble in 2005-2007; many of the people who made millions during the good times were too greedy to keep their profits and often times ended up getting wiped out in the crashes.
There’s also another phenomenon taking place right now which I haven’t heard many people talking about. There are a number of Bitcoin “related” Ponzi schemes. These companies are essentially using the guise of investing in Bitcoin through their “trading bots” to create massive pyramid investment structures. They offer enormous returns usually amounting to more than 100% annually in addition to referral bonuses for enrolling new investors. Many people who have been involved in these schemes for more than six months are boasting incredible gains (sometimes in the millions of dollars). The problem with these companies is that they don’t make any sense – why would a company with a highly profitable trading program need to pay 100%+ interest rates to raise investment capital? Moreover, considering that cryptocurrencies are essentially only a one way market (it is very difficult to sell short) I don’t even understand how a trading bot can generate large returns (the best trade has simply been to buy and hold).
My rough estimate is that there are billions of dollars (at least US$5 billion) tied up in highly suspect Bitcoin Ponzi/pyramid schemes worldwide. A significant correction in cryptocurrencies could cause some of these schemes to fall apart and create even more turmoil in the sector.
We’ve spent enough time on Bitcoin and cryptos, I want to turn to the stock market and Novo Resources in particular. You’ve called Novo very accurately and we’ve recently seen a significant correction, has anything changed in your view? Is this still Wits 2.0?
Bob Moriarty: The Wits 2.0 idea is both accurate and inaccurate. John Kaiser has been running around saying the Pilbara was connected to the Witwatersrand and it’s got twenty billion ounces. Those are all the kinds of things a guy says when he’s trying to hook subscribers. Kaiser wants to be the guy identified as inventing this whole thing, but heck he didn’t invent it, I did 5 years ago when I was writing about stuff that he’s only realizing now.
Every stock will correct, period. This is a good, healthy correction and it gives everybody the chance to get in cheap. I’ve been talking about the inability to measure the grade across this play since July. The only thing they can do is produce. I was hoping the large diameter drill would work but even if it did work it would be inaccurate.
CEO Technician: There have been some questions raised regarding the hardness of the rock in the Pilbara. If they have to use jackhammers to break up the rock to find individual nuggets how are they going to mine thousands of tonnes of ore?
Bob Moriarty: It’s easy. You go in and blast it. Is the rock hard? Yeah. But is that a concern at any mine in the world? No. You use ammonium nitrate and fuel oil. The iron mines in the Pilbara are very hard rock and they just blast it, it’s not a big deal.
You blast it and put it into a crushing circuit, then you run it across a sluice box. The gold is so high grade (based upon July trench sample of 67 grams/tonne) that even at 40 tonnes per hour you’re going to be producing nearly 100 ounces of gold per hour.
CEO Technician: What do you estimate the timing of the next market moving news for Novo will be?
Bob Moriarty: Let me be clear, I do not have any inside information. One of the things that had been talked about during the first half of 2017 was Quinton was going to get Sumitomo down to put Beaton’s Creek (600,000 ounce gold resource with the potential to upgrade to over a million ounces through additional drilling) into production but we haven’t heard anything about that since July; it would be a positive shock to the market to have them announce going into production at Beaton’s Creek.
In January we can expect the trench grades to be released and if we get 10 or 15 trenches with 60+ grams/tonne material then you’re not going to have any problem with the stock price.
CEO Technician: Precious metals have been weak for the last few weeks but it looks like we could be getting close to a capitulation low.
Bob Moriarty: I think we’re still waiting for a bottom although we’re getting close. There’s too much open interest in the futures and too much optimism that still needs to be squeezed out with a further decline. I’d like to see an absolute capitulation, panic is wonderful.
HUI Gold Bugs Index (Daily – Year-to-Date)
CEO Technician: Any names that have been hammered with tax loss selling that investors should be aware of here?
Bob Moriarty: I’m hesitant to name names. It’s easy enough for investors to go to Stockhouse or Stockwatch and go down lists of stocks to see which are at yearly lows. Resource stocks have a range of hundreds of percent a year. Pick some bouncing along the bottom. Since July investors have been facing a head wind. If we have a nice capitulation low in December we will probably have a triple digit advance next year. The cheapest and most disliked shares will move with the greatest percentage climb. Remember, when the wind is high enough, even turkeys fly.
This interview will make for a great conversation starting piece when we get together again in late January; Novo Resources is not only an intriguing story but its success or failure also has implications for the gold exploration sector as a whole. I also believe that precious metals mining share investors are in the process of getting a similar ‘fat-pitch’ buying opportunity to what we saw last December. We’d like to thank Bob for his time and insights, until next time.
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