Another Cryptobubble?

Yet another cryptobubble has been inflating.  Are you tempted?  Don’t.  It’s a Rorschach test for gullibility.  Most people who buy bitcoin and it’s crypto brethren don’t really know what it is or how it works; all they really know it’s been going up.  The first part might ordinarily be a disincentive, but for the techno-bedazzled, the more obscure and opaque, the more irresistible.  Like I don’t understand how my iPhone works and smartphones are really big and important, so it must be with cryptocurrencies.  It’s an emotional thing.

So if you’re into it, logic may not appeal to you.  The lure of riches beyond the dreams of avarice is too compelling.  But I’ll give it a try anyway.

What are the arguments in favor of cryptocurrencies?  The best might be that they’re a form of money that can’t be inflated.  Only so many bitcoin can be created.  But that’s only true of a particular crypto.  Once there was only bitcoin, now there must be thousands.  There are no barriers to the creation of new cryptocurrencies … in reality the potential supply is infinite.  Meanwhile there are other assets that are in fixed supply that have no rivals.  Gold for instance can’t be created or destroyed outside of nuclear reactions and the amount in the earth is fixed.  There are less than a hundred theoretically possible competitors since there aren’t that many stable atomic nuclei.  Gold may have few industrial uses but nevertheless more than bitcoin.  And any effort to express your affection for your sweetheart with a beautiful bitcoin ring or necklace is doomed to fail.  

Long term investor?  Impressed by past performance?  An investment in gold at the beginning of this century has outperformed the stock market.  If that’s not good enough for you, you’re not looking for an investment, you’re looking for a lottery ticket.

Land is another commodity in fixed supply.  As they say, they ain’t making any more of it.  It has a certain undeniable utility to it as well.  You won’t be able to grow food on bitcoin, nor will you golf on it or sit on it next to the ocean enjoying a beautiful sunset.  

And we can be reasonably confident no one is going to come up with another version of “land” to compete with it.  So maybe land isn’t particularly convenient as a medium of exchange.  But something like bitcoin that so wildly fluctuates in value has limited use for that purpose as well.  It might be fine to hold it in waiting for your next cyber purchase as long as it’s going up, but not so fun when it’s plunging between the time you receive it and when you spend it.  Not to mention that in this age of environmental awareness, that the production of bitcoin alone consumes an amount of power comparable to some entire countries.  Not exactly what you want if you’re a sustainability type investor.  That’s an awful lot of carbon just for keeping tally.

Bitcoin has zero intrinsic value.  So why is it so heavily promoted?  People who have it want you to want it.  It will make theirs worth more when they hand you the bag.

But dollars also have zero intrinsic value, and don’t we use them for money?  Well, yes and no.  Dollars have value because so many people owe so many of them.  This gives them a strong incentive to acquire them.  In effect, dollars are backed by the labor and assets of billions of people.  It’s only due to their constant production in the banking system that they tend to depreciate in value.  Yet despite this, dollars remain far and away the most useful medium of exchange on the planet.

My humble suggestion?  If you want a form of money that’s unparalleled as a medium of exchange, you want dollars.  If you want a form of money that’s a reliable store of value, you want gold.  Maybe when bitcoin has a five thousand year track record, it too will be worthy of equal consideration.  

But don’t hold your breath.  Those of us who still remember things like COBOL and MS-DOS are keenly aware of the limited shelf life of everything digital so far created.  Wonderful as infotech has been, its track record is one of rapid obselescence.  How long will it be before your favorite crypto is the next victim of “creative destruction”?

10 thoughts on “Another Cryptobubble?

  1. Jk says:

    Hard forks have produced more bits of bitcoin than dollars created in recent years. Also CB’s hold gold, not bitcoin. Bitcoin doesn’t function well as a medium of exchange, and is too volatile to be a store of value. It’s a ponzi scheme

    1. Bill Terrell says:

      Thanks for mentioning the forking issue, JK. I’d considered raising it in my original post, but the sidebar would have distracted from the flow of my argument. More significantly, when I went to research the issue further, I ran into a mountain of techno-jabberwocky that would require a degree in software development and network administration to decipher.

      But here we have yet another reason to deploy the proverbial ten foot pole. Because they can profoundly affect the value of his crypto positions, a crypto speculator has to stay on top of these things. As discussed in the post, like all things infotech, things tend to change rapidly and unpredictably. Developers are constantly trying to innovate. This is a problem that investors in physical commodities don’t have to contend with. They were made by nature, not software developers.

      Another curious phenomenon is obsession with an imitation. What are these cryptocurrencies trying to emulate? The language is a dead giveaway. They’re created by “mining” operations.

      Mining. Why do you suppose that term was chosen?

      Maybe it would be easier to pass off fake diamonds for high prices if they called their manufacture “mining”?

      Crypto speculators would presumably prefer fake coffee or fake wine to the real thing. Call me old school, but the real thing has always tended to be more valuable than the imitation.

      I don’t mean to imply that there is no place at all for cryptos in a portfolio. You could make an argument based solely on a statistical low correlation with genuine investment assets for a small crypto allocation (money you can afford to lose). Even some very smart financial analysts whom I respect have made a case for cryptos. I’m not doing it mainly because they require specialized accounts; I might consider a small speculation in a crypto ETF in an IRA if I saw an attractive technical entry point; but with no fundamentals to pin a valuation on, couldn’t consider it an investment. On the other hand, it could mark the beginning of the end. The last buyers would be the last bag holders.

      What’s more, just because some smart people are falling for a pitch is hardly an assurance of results. One of the smartest men that ever lived, Isaac Newton, lost a fortune in the South Sea Bubble.

      Wouldn’t buying crypto be a fitting way to ‘celebrate’ the 300th anniversary of that event?

  2. Milton Kuo says:

    There are a lot of arguments against Bitcoin as an alternative currency but I believe one of the strongest arguments is that it infringes upon the government-controlled, central banks’ monopoly. Going further, I don’t believe it would be too difficult for governments to use draconian laws to shut down any network traffic used by the various cryptocurrencies. While cryptocurrency transactions can still occur without a network, the speed of transactions would be so slow that they would be essentially stopped. Any effort to use a cryptocurrency without an up-to-date ledger could re-introduce the problem of double-spending.

    I’m a little surprised that governments have not yet dropped the hammer on the cryptocurrencies and that may be because they are not much of a threat yet to sovereign major currencies. I think the past few years have shown that even without government actions, it is not too difficult to prevent people or organizations from having an Internet presence. If a large, heavily-resourced government got involved, cryptocurrency mining and transaction processing on a large scale would probably have to occur over something like Tor.

  3. jk says:

    i believe china has outlawed bitcoin. meanwhile cb’s have made clear they are developing their own digital versions of money- these will be presented as anti-money laundering and anti-corruption, and will allow the gov’t to follow every financial transaction you make, all the better to collect taxes and perhaps to manipulate in forceful ways. [say your digital account is debited by 0.5% every month- might be an incentive to spend and goose velocity, no?] if every citizen and resident has a digital wallet, it also allows for helicopter money to bypass the need for bank accounts [reaching the un-banked poor has been a problem]. i would say with assurance that cash has a limited life expectancy except i’m not sure about how entities such as the cia will manage to make their payoffs inconspicuous under such a regime.

    1. Milton Kuo says:

      Arends is wrong about Bitcoin being a Ponzi scheme. Bitcoin is *not* a Ponzi scheme. Instead, it is the ultimate Greater Fool Investment.

  4. cb says:

    Good article Bill,
    It’s good to know a smart guy like you shares my “lack of recognition” regarding the value of bitcoin and crypto. I know some very smart people who have made a small fortune with bitcoin and tried to explain to me the virtue of it. They almost become exasperated that I don’t get it.
    Max Keiser sure promotes it. Keith McCullough calls it a commodity and trades it. Both of these guys seem extremely smart to me. Major Hedgefund managers are starting to invest in it, one to the tune of hundreds of millions.

  5. Hairstyles says:

    Wonderful goods from you, man. I have understand your stuff previous to and you’re just extremely magnificent. I really like what you have acquired here, really like what you are stating and the way in which you say it. You make it enjoyable and you still take care of to keep it sensible. I cant wait to read far more from you. This is really a terrific site.

  6. Crave Freebies says:

    Fantastic site. Lots of helpful info here. I am sending it to several friends ans additionally sharing in delicious. And obviously, thanks in your effort!

  7. Medium Hair says:

    This is the correct blog for anybody who wants to seek out out about this topic. You notice so much its virtually onerous to argue with you (not that I actually would want匟aHa). You positively put a new spin on a subject thats been written about for years. Great stuff, just great!