Tags: seth klarman | cryptocurrency | tulip | bitcoin

Seth Klarman: Cryptocurrencies Are Like Dutch Tulip Mania

Seth Klarman: Cryptocurrencies Are Like Dutch Tulip Mania
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Thursday, 25 January 2018 03:54 PM

Seth Klarman, the value investor who started the $30 billion Baupost Group hedge fund, said cryptocurrencies like bitcoin can be compared to asset bubbles of an earlier age.

"While we have long had our own concerns over the tendency of central bankers to debase paper currency by printing more and more of it, the proliferation of hundreds of virtual currencies seems far more likely to be a craze," he wrote in an investor letter obtained by CNBC. "Cryptocurrencies seem more like tulip bulbs for the digital age."

Tulip mania was a period in the Dutch Golden Age when prices for some bulbs of the recently introduced and fashionable tulip surged to as much as $300,000 in today’s money before collapsing in February 1637.

Bitcoin last year jumped in value, including a twentyfold increase to about $20,000 a coin before losing half that amount. It was quoted at $11,198 on Coinbase at 2:15 p.m. Thursday.

That kind of volatility prevents cryptocurrencies from being a "store of value or a medium of exchange," Klarman said.

Fintech startup Stripe this week said it will stop supporting bitcoin payments because the cryptocurrency is too volatile to be a medium of exchange, and transactions with the coin are too slow to process.

"Transaction confirmation times have risen substantially; this, in turn, has led to an increase in the failure rate of transactions denominated in fiat currencies," Stripe said in a blog post. "Fees have risen a great deal. For a regular Bitcoin transaction, a fee of tens of U.S. dollars is common, making Bitcoin transactions about as expensive as bank wires."

Klarman’s investor letter also said it's harder than ever to find good investment ideas. His fund rose less than 10 percent last year, compared with a 21 percent gain for the S&P 500 stock index. Baupost ended the year with about 36 percent in cash.

"For each idea, it seems like we have to dig deeper to figure outs something others have not, and there is growing competition for those insights," Klarman wrote. "In general, mispricings are less common and less stark, and expected returns are often at the low end of acceptability."

Klarman was optimistic about 2018, although he sees risks from President Donald Trump’s politics. Klarman in 2016 gave money to super PACs for Republican presidential candidates Chris Christie and Marco Rubio.

While Trump ran on a pro-business platform of cutting taxes and regulation, he also pledged to get tough with China and Mexico for luring jobs away from the United States. Protectionist measures could lead to destructive trade wars that disrupt the global economy.

"Although markets are increasingly expensive, diamonds in the rough are out there, and the only way to be successful in the markets when things get more interesting is to relentlessly comb the markets and fill the idea pipeline,” he said. “Years of increasing investor complacency inevitably sow the seeds of future dislocation and opportunity. But for now, we will have to work harder with less to show for it."

Baupost also held $911 million in Puerto Rico's controversial debt, CNBC reported, citing a public court filing.

The U.S. territory in May announced a restructuring of some of its $70 billion debt after negotiations with bondholders failed. The announcement marked a record-setting bankruptcy-type process for the U.S. municipal bond market.

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Seth Klarman, the value investor who started the $30 billion Baupost Group hedge fund, said cryptocurrencies like bitcoin can be compared to asset bubbles of an earlier age.
seth klarman, cryptocurrency, tulip, bitcoin
Thursday, 25 January 2018 03:54 PM
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