Please avoid the Bitcoin bubble, or treat it like the casino it is

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jared Licina, a friend of mine, posted the following to Facebook.  He has given permission for it to be shared with all of you, because I agree with his views, and couldn’t write nearly as well.

“Please avoid the Bitcoin bubble, or treat it like the casino it is. It is not a store of value like gold. Gold has a 10,000 year track record of being considered valuable. It can be used for industrial processes. And if someone doesn’t accept your gold for payment, you can use it to make a shiny sword, and MAKE them accept it. Cryptocurrencies have none of these benefits, for the moment.

Add to that:
1. Cryptos change value too much to be useful as a currency (the opposite ofhyperinflation)
2. Bitcoin transaction costs are through the roof, compared to say, Paypal
3. Rarity only matters if you have to have something, whereas there are many other options to pay
4. ALL cryptocurrencies have been going up, so if rarity matters, why can you just make more?
5. People trading are using leverage, so when it falls, they are forced to sell more quickly”

A friend of his then replied with the following:

“Hey Jared as an early adopter and a believer in the technology I’ll address your points one by one.

Store of value vs gold:
– Before Gold, worthless stones were used as currency e.g. https://en.wikipedia.org/wiki/Rai_stones. This was one of many examples and serves as a strong counter to the idea that “in order for something to be a store of value it has to have utility”
– Bitcoin as a store of value is superior in 4 ways: divisibility, ease of transfer, fungibility, immutability (weakest argument of the 4)
– The only disadvantage that I can agree on is Gold’s track record

Then as to your further points:
1. It’s not bitcoin core’s intention to become a currency. Either way volatility will drop as market cap increases and more regulated financial instruments become available to onboard institutional money
2. Yes they are, and we have two solutions. The first is the more long term solution which we’re working on through Bitcoin core involving segwit and lightening networks (plus sidechains.) The second is the quick fix of increasing the block size ala Bitcoin cash. Long story short you can use bitcoin cash to move around crypto if needed, and hopefully lightning networks and other sidechain/drivechain tech will reduce fees without increasing the blocksize in future.
3. Not sure if you’re referring to fixed supply here? When bitcoin maximalists bring up fixed supply it’s simply in the context of explaining why bitcoin’s design makes it a not so great currency, but a great store of value
4. They’re all going up because of the massive amount of fiat buying into cryptocurrency right now plus the fact that most sites that list the price of altcoins infer the USD value from the altcoins trading value in BTC.
5. Honestly, I don’t think leverage is as widespread as you may believe. And even if it is, we personally don’t care because the long term fundamental value of the technology means it’s probably underpriced right now anyway.”

To which Jared, who was a debating champion at school, replied:

“Thanks for your input; I’ll address your value store and gold comparison in a separate post because it seems to be the one that crypto defenders keep coming back to for justifying the sky high prices. But to hit the rest of the points:

1. Most investors expect Bitcoin to have currency applicability, and there’s no guarantee of volatility dropping with these exchanges, which are likely to lead to more money flowing in from less savvy sources.
2. Bitcoin transaction costs are high, and yes, while improvements might be made, the market isn’t responding to the fixing of the problems. It’s moving independently of transaction costs, insider trading, or exchange hacking.
3. Cryptos are not a fixed supply, so there is no first mover advantage to investing in them (outside of other investors being willing to overpay). Compare to fiat currencies; if I owe you R100, I can pay you with $10 in cash. If suddenly people decide that each cash dollar is worth $10, I would just pay you in a different currency, maybe even one that I print. I can always create another cryptocurrency and avoid having to pay you the massive amount of money I need for one Bitcoin in order to transfer it across borders
4. The price increases aren’t from fiat; very little fiat has changed hands to justify the gains, since holdings are concentrated among a few investors (1,000 people own 40% of bitcoin), and this still doesn’t explain a market so frothy that slapping the words ‘blockchain’ on a share price lead to hundred percent gains. The price increases have been driven by a bubble; this doesn’t take away from the importance of blockchain or even potentially cryptos, but when something goes up 11,000% based on very little new information or applicability, it’s a bubble.
5. Saying you don’t know how much leverage there is should be worrying. Retirees in Japan having been leveraging heavily to invest, and we’ve had outright laundering from criminals to the North Korean government. They’re not the only holders, but the lack of transparency that lets them get involved means you won’t know about the problems in leverage until it’s too late. And to your point about the long term fundamental value of the technology: if you want to invest in blockchain firms, that makes sense. It doesn’t make sense investing in the actual crypto, outside of expecting them to go up.”

Followed by:

“Adding a piece here to give people a deep dive on cryptos being used as a ‘store of value’, since even pro-crypto people seem to agree it’s not a great currency (given their volatility), and that the sky-high prices must reflect wealth-storage rather than transfer-ability; and not enough people are counter-arguing. It might be OK to gamble on cryptos, and blockchain has amazing applications, but people are leveraging with little understanding. So while stones and tokens might have been used in limited cases, we’ll compare to gold, the equivalent non-productive store of value that cryptos are looking to displace. And this is not to be pro-gold, it’s just to compare:

History? Gold has 5,000 years; cryptos have 8 years
Non-financial application: Gold is used in industry, jewels and computer; cryptos have none
Nice to look at? Gold is shiny; cryptos are a long string of numbers and letters 
Survivability? Gold is indestructible and recyclable, cryptos are stored on magnetic harddrives or paper
On inflation, cryptos have been incredibly deflationary (and so disincentivize spending), and on security, they’re equivalent given the amount of hacking (but we can debate this)

The only category cryptos obviously win on is hands down transfer-ability (easier to move funds via an email than lugging gold around), and this is a huge positive. But this is a problem because of an argument no one is making: Non-productive assets, like gold, are mostly stabilized by nation-state investors. Individuals hold gold, but countries hold massive amounts, and these stabilize the price and provide a floor. And nation states will never move their holdings of gold or industrial metals into cryptos, for easy reasons:
(1) They won’t invest national reserves in something that allows people to commit crime or avoid taxes
(2) They don’t WANT something that can be transferred easily. If someone (say Switzerland) decides to buck gold because it’s non-productive, it can’t just dump it overnight; the market isn’t that liquid, and is transparent. This is why gold, despite being non-productive, is a good store of value; it’s liquid enough for someone to carry a coin, but not liquid enough that the biggest holders who could actually move the market, could put their gold out on dump trucks and liquidate it overnight
(3) Market manipulation is happening. Crypto markets aren’t regulated, and attempts to do so will be almost impossible (and don’t seem to be wanted by crypto investors). People have tried to corner the gold and silver markets before. Cryptos present a unique opportunity for people to trade with themselves (called ‘painting the tape’) and drive up prices artificially; they’re the asset of choice for criminals and dodgy governments; we’ve already had insider trading cases; and cryptos can be hacked. Again, the entire market might not be bad; but if people tried to fix something as regulated as Libor, they are absolutely fixing this market.
And if individuals are the only holders of cryptos, price volatility will continue. And that wrecks ‘store of value’.

This bubble is unique, because cryptos value is in the transfer to settle a transaction prices at that moment; the actual asset value is completely meaningless. In the dotcom bubble, when you bought Amazon, you at least owned a share in a company with talented engineers and ideas; and even when you bought pets.com, while you lost all your money, you at least had a catchy website name. When you owned a Dutch tulip, you owned the ability to make more flowers. When you own US dollars, you own a share of economic output of a country, and even when you own Zimbabwe dollars, you own a piece of paper that is likely to be enforced by the military and police to be accepted by merchants.
When you own a crypto, you own a hashtag that is easy to transfer, but its value is clearly only what someone else is willing to pay you. That is worryingly close to a Ponzi scheme.

We can be pro-blockchain, and cryptos have a place to drive down transaction costs of transfers. And given the amount of people throwing money in, cryptos could continue to rocket upwards. But investing in them is gambling; there is no value that people can predict they will settle on (apart from ‘up’), and there’s inherent volatility.”

I find the whole thread a treat to read – hope you have enjoyed it as well!

Paul Maughan

One Comment

  1. Let’s analyze this. What does Bitcoin have to offer? It offers a way to launder money without governments knowing about the transaction. Other than that, nothing. Therefore it’s high value is of extreme benefit to anyone doing black market or otherwise shady transactions. Therefore, it does have value, but do you have ethics to put morality before money? This is what you have to ask yourself before investing.

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