Howard Marks Trashes Bitcoin: ‘An Unfounded Fad’
Howard Marks, co-chairman and co-founder at Oaktree Capital PHOTO: BLOOMBERG NEWS
By
Paul Vigna
WSJ Jul 27, 2017 11:58 am ET
Howard Marks is not going to get invited to this weekend’s Ethereum anniversary party, that’s for sure.
Mr. Marks, the billionaire investor and co-founder of Oaktree Capital Management, takes a scythe to digital currencies in his latest investment letter. To be fair, he swings the same scythe across basically the entire investment landscape, seeing warped valuations everywhere and nothing but lousy returns to come. Uncertainties abound, from economic growth to central-bank impacts, inflation and political dysfunction, yet investors are still embracing risk and pushing up prices. “In general, the best we can do is look for things that are less over-priced than others.”
Mr. Marks is a long-time Wall Street denizen who founded Oaktree in 1995 and made his name investing in high-yield bonds and distressed debt – especially during the financial crisis, when he raised $11 billion to buy bonds (and cleaned up on the bet). He is also known for his well-written, plainspoken investment letters, which tend to cast a critical eye on the markets. No less than Warren Buffett urged Mr. Marks to collect some of his past writing into a book.
The most recent letter is mainly about bubbles and investment cycles, and the tendency of new investment fads to be dubbed “the most important thing,” which is why he eventually gets around to bitcoin, upon which he heaps special scorn. The fact that anybody is willing to accept bitcoin and ether as a payment, he says, is evidence – just one more piece of evidence – “of financial naivete, willing risk-taking and wishful thinking.” He allows as that he may in fact just be a “dinosaur,” unable to process new technologies. But, he says…
“But they’re not real !!!!!”
The boldface is his. The exclamation points are his. “Nobody has been able to make sense to me of these currencies.” It’s not entirely unreasonable for somebody to offer payment in bitcoin, or for somebody to accept it, he says, but that doesn’t make it currency. Moreover, the extreme price swings – bitcoin tripled in price and ether was up 5,000% at one point this year – are also signs that these are not currencies, but speculative assets.
“Can something that does that seriously be considered a medium of exchange or store of value, rather than the subject of a speculative mania?”
Ultimately, he says, bitcoin is really no more than “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.” Then, for good measure, he brings up the d0t-com boom, the South Sea Bubble of 1720, and the Tulip Mania of 1637.
Of course, none of this is new to bitcoiners, who have been deflecting Tulip criticisms since their beloved cryptocurrency was launched in 2009. Most of the replies we saw weren’t outraged so much as resigned. Bitcoiners have heard the same arguments too many times to get fired up about them, as exemplified by this comment from Chris Burniske, who manages blockchain investments at Ark Investment Management:
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The FAANGs Current valuations of Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. generally represent at least 30 years of their current earnings, and Marks wondered if that’s sustainable. He acknowledged the group are “truly great companies, growing rapidly and trouncing the competition (where it exists),” but also noted some are doing so with profit growing slower than revenue or with little profit at all.
“The super-stocks that lead a bull market inevitably become priced for perfection,” Marks wrote. “And in many cases the companies’ perfection turns out eventually to be either illusory or ephemeral.”
SoftBank Vision FundMasayoshi Son’s ambitions for a $100 billion technology fund, 93 percent of which has already been gathered by his SoftBank Group Corp., raise four red flags for Marks:
The Japanese company’s investing record heavily relies on its stake in Alibaba Group Holding Ltd., which has grown in value to more than $50 billion from $20 million in 2000. “Skill or luck?” Marks asked. “And extrapolatable?”The venture capital industry hit a wall in 2000 because investment funds got bigger and bigger, he said. “The Vision Fund isn’t for startups, but still, can you wisely invest $100 billion in technology?” Marks mulled.SoftBank hasn’t managed outside investors’ money before, and now it has the biggest fund in history to do it. That, to Marks, shows investors are highly enthusiastic with a low level of skepticism.The structure of the fund is “questionable” to him because it plans to pile debt on tech companies and because investors have to buy some preferred units, paying a 7 percent annual coupon, when they invest in the fund’s equity. “Lending money to a tech fund at that modest rate apparently is part of the price demanded of the LPs for an opportunity to invest in the fund’s equity,” Marks said. “I can imagine the sales pitch about how lucky the LPs are to get a chance to provide leverage for their own investment, but I doubt I’d be convinced.”A representative of SoftBank didn’t immediately respond to a request for comment. |
