Is GP Bullhound Right About Its Dire Cryptocurrency Prediction?

In this segment of the MarketFoolery podcast, host Mac Greer is joined by Motley Fool analysts Andy Cross and Aaron Bush to consider a highly bearish analysis of the cryptocurrency business. Boutique investment bank GP Bullhound foresees a "mass-market wipeout" of the whole game. Given that he's our in-house crypto specialist, we had to hear what Bush had to say in response. Spoiler alert: If you've put money into any of these coins, you may not like it. They discuss the degree of overvaluation in crypto and how investors who really want to have a stake in what may yet be a broadly useful technology should approach picking a coin or a company to put their cash into.

A full transcript follows the video.

This video was recorded on May 2, 2018.

Mac Greer: Investment bank GP Bullhound -- what a great name! GP Bullhound. I'm not making that up. It's a boutique investment firm. They're warning that crypto is headed for a 90% correction, leading to a "mass-market wipe out." OK, Aaron, you are our resident crypto expert. Is crypto headed for a 90% correction?

Aaron Bush: Possibly. Just to frame up where the market is right now, it's worth about $420 billion. That's up significantly over the past couple of years, but it's actually down about 50% or so from the crazy highs of December, January. Still, $420 billion, to me, that seems far larger than the value that's actually been created so far. From that perspective, things still seem pretty hyped. When I look out at the market, I see a small handful of promising ideas, a giant sea of garbage, and a lot of infrastructural problems that still need to be solved. And that takes time.

Cross: I was going to say the same thing, Aaron. That's exactly right. There are hundreds of different tokens out there created. The market opportunity for the business seems to be just vast. But, you can't deal with a few transactions per second and operate in the space that you want to for a currency and for a transaction business. They have operational challenges the crypto world has to get over first.

Greer: I want to go back to something that you just said, Aaron, about this giant sea of garbage and this small handful of companies that could be successful. How do I invest? If I'm interested in this space, how should I invest in crypto?

Bush: First of all, I think it's important to understand that there still are a few very powerful crypto-native ideas. So, the very first thing I would do is look for a big idea. Don't look for things that just plug in somewhere or already exist and can just be made with a token, for example. Think of things that are native to crypto that could actually become multi-billion, if not trillion, dollar markets. So, I think that's a good place to start. There are very few markets like that.

When it comes to investing tenets that I think are useful in narrowing down what's garbage and what might have value, first, don't invest in white papers. Invest in teams who quickly ship code for tech that people actually want and use. Which sounds so obvious, invest in things people use and that actually exist to some degree, but actually, a ton of white papers where nothing fully exists that works yet are being traded at billion-dollar valuations, which is crazy, and I don't think that's sustainable. So, I would just say, raise the bar for what you look for in terms of the technical merit of things.

Second, I would look for passionate communities. Even if prices fall, passionate, open-sourced teams don't. Market weakness in an open-source world counter-intuitively pushes these teams to work harder, and that's really important. These are open-sourced projects. Then, third, I would just say, controversy is actually interesting when those first two points are met, because that shows that there's something worth fighting for, and there's inherently value in that.