Monday, June 12, 2017

Why Bitcoin Will Eventually Fail

Bitcoin crashed today dropping from over $3,000 to about $2,500.
Wow, I so totally didn't see that coming.
The sarcasm light is on.

As I noted in an earlier posting, Bitcoin is a currency used to sell illegal drugs and children.   And while that may sound flippant, that pretty much sums it up.  It is not a "replacement" for local currencies, but rather a means of transferring money illegally across borders.  It really has no other use.

Some people have politicized Bitcoin.   A currency with no real founder or source or control system, is described as "the wave of the future" while ordinary currencies, such as the US Dollar are described by these self-declared "patriots" to be a "Fiat Currency" - the irony being utterly lost on them.  If anything, Bitcoin is the ultimate "Fiat Currency" being backed and based on nothing other than perceived value.

Still others view Bitcoin as an "investment" - you buy it and it goes up in value.  You hope.   Once again, we have the same patriotic people as before - folks who are true-blue all-Americans who are certain the country that they love and cherish is going down the toilet because, Democracy.   But like gold or currency investing, there is no income from Bitcoin, as I have explained before.  No wealth is being created, you are just rearranging money, and hoping that some greater chump pays more for it down the road.

And there always seems to be a chump shortage.

The long and short of Bitcoin is that it is unstable as history has shown.  As recent history - like last night has shown.   If you "invest" in it, it may shoot up in value - or shoot back down.  It is a risky investment, to say the least.  And really, it isn't investing, so much as it is gambling, as you cannot predict the ups and downs of the currency based on any apparent metrics.  It also seems ripe for manipulation and abuse.

While it may be useful for criminals to transfer money, only a fool would hold it as an investment.   In its short history it has shot up in value more than once, and collapsed more than once.   There have been multiple instances of corruption and scandal when "exchanges" steal bitcoins or just go out of business, taking everyone's real money with them.

And you have to exchange Bitcoin in order to use it as a local currency.   Yes, some trendy stores are claiming to "accept" Bitcoin, but I suspect that trend may change as people realize that Bitcoin is used for money laundering, illegal drug sales, and child sex-trafficking.   It is what you might call the "Hannity Effect" - no one wants their business associated with odious things, like Sean Hannity, for example.   So people distance themselves from such things.  I think you will see businesses peel those bitcoin logos off their front door, when they realize the sleazy things it is associated with.

So why is Bitcoin popular?  Well, say you are a Chinese businessman who wants to transfer huge sums of personal wealth offshore without the government finding out.  Or an American businessman for that matter.  The good old days of numbered Swiss Bank Accounts and Cayman Islands offshore accounts are no more.   You transfer money there by wire, you leave a paper trail, and your bank records may be discoverable by Johnny Law.  By law, you can only carry $10,000 in cash from the US in your luggage - and such cash transfers are at-risk for theft.

But with Bitcoin, you can anonymously transfer money across national boundaries, leaving no paper trail.   Sure, they may be able to subpoena your bank records in Switzerland or the Caribbean, but they have to figure out which bank to subpoena first.   Bitcoin provides a way to wipe your trail clean.  So it isn't surprising that "ransomware" people and other odious folks use Bitcoin to transfer money.  It was designed for illegal activities.

Now, of course, the question is, will governments allow this to go on for very long?   While Bitcoin itself may be hard to take down, due to its decentralized nature, the exchanges in local countries may be vulnerable.   And you need an exchange in order to convert your Dollars or Yen or Euros or Pounds into Bitcoins.   And without exchanges, Bitcoin is kind of, well, useless.

We've seen in the past how various pirate sites have been shut down and their founders jailed (and their Bitcoins confiscated!).  Megaupload, Silk Road, Pirate Bay (Yes, Pirate Bay still exists, sans Pirates) and so forth.   Yes, kiddies, the powers-that-be in this world don't sit idly by and let people steal their shit, at least without getting a taste.   So while Al Capone had quite a run, he was eventually gunned down.  That's how it works.  Very few mobsters actually "retire" in real life.

So I suspect that down the road, some clever government prosecutor will figure out a way to legally attack a Bitcoin exchange, arrest people and shut it down.   And this may happen in more than one place.   And when exchanges shut down, Bitcoin can no longer be practically used.  The people who actually run things are not going to allow this, unless it serves their interests.  That's just how the world works.

But what does this mean for you, the middle-class schmuck investor?   Well, not much.  Odds are you aren't into child-trafficking or illegal drug smuggling.   You don't have $10 million to send to an offshore bank.  You are not a Chinese businessman trying to take his gains with him to Canada or the US before the Chinese government cracks down.

Your only interaction with Bitcoin is perhaps to be one of these useful idiots who think it is an "investment".   And I say idiots and mean it.  Oh, right the Winkie-voss twins were big on it.  The guys who let Facebook slip through their fingers think it is an "investment".   I guess that is a case of reverse credentialism.

Idiot investing is buying something and thinking it will go up in value just because you think it will, or because someone told you it will.   It is akin to "investing" in commemorative Elvis plates.   I mean, after all, the Franklin Mint says they are rare collectibles.  Where else can they go but up?  It is the beanie-baby mentality of investing.   And sadly, a huge portion of the market believes in it.

At one time we all do.   And I have to say, when I was younger, in my 20's and 30's, I fell into this trap.  It ain't hard to do.   When you read about investments, all you hear about is share price, gains, and losses.   Where is the share price going?  Up or down?  Where is the market headed?   An expert on Tee-Vee says his "benchmark" for ACME stock is $50 a share, and it's only trading for $25!  I should buy it!

And of course, I lost my shirt, most of the time, investing that way.   Eventually, I started thinking about things like profits and losses, dividends paid, P/E ratios, dividend ratios, debt-to-equity, and other "metrics".   I also started thinking about the underlying companies and whether their business plans made sense or whether they were worth what the market was saying.   I realized, too late, that companies like Martha Stewart Omnimedia were not going to be worth Billions just because some guy on the television said so, or the fact the media hyped the IPO for weeks on end. And in retrospect, I should have seen this.  It was just a lady baking cookies, for chrissakes!

And people who bought Bitcoin a few days ago for $3000 a coin and then lost 1/6th of their investment overnight should think about where this is going.  Yes, Bitcoin may go back up in value.  But are you comfortable with something that changes value so unpredictably and rapidly in a matter of hours?   Even gold is more stable than this!   Extreme volatility is never the sign of a good investment.

Bitcoin is not an "investment" any more than trading in any currency is an "investment" - and that is the key right there.  Currency traders trade in currencies, they rarely hold them for long.   And to be an astute currency trader, like a commodities trader, you have to know what you are doing.   Amateurs in these fields get fleeced, such as rednecks who buy gold.   Bitcoin is just a means of transferring money - a very unstable and unregulated means, whose long-term prospects are, well, in my mind, uncertain or even bleak.

The fact that the media finds it great click-bait eye-candy doesn't change that.

1 comment:

  1. The real deal is, of course, that when people talk about BitCoin, how do they describe its value? In terms of US Dollars, of course! Which is the Fiat Currency? Or the Chrysler for that matter! ;)

    ReplyDelete

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