Your Bitcoin Warning

You’ve been writing me a lot lately, wondering about bitcoin. What is this technology? What is it used for? Should you get involved? 

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What is the right price for bitcoin? What are its uses?

But also, what is the right price for bitcoin? Is it a buy or a sell here? As of this writing, a bitcoin costs roughly $50,000, up from $10,000 a year ago. Could it go to $200,000? That’s only 200% up from now. It’s gone up 500% in the past year. So sure, why not? $200,000 sounds great.

That’s,,,not a prediction. 

What do I think is the fundamental right price for bitcoin? I’d say, roughly, zero? I truly think zero is the fundamental correct price. But it could take a while to get there.

Now, blockchain – the innovative technology of which bitcoin is the best known example – may have real uses. I’m open to that idea. Blockchain allows for anonymous, distributed transactions which can be verified between parties that neither know nor trust each other. Theoretically, blockchain obviates the need for government regulation or third-party verification. 

Applied to money, bitcoin – using blockchain technology – theoretically allows us to remove transactions from the purview or limitations of existing financial infrastructure.

Dollars, the theory goes, involve pesky government issuers, unreliable central banks, and the meddling institutions of the existing global finance system. To its proponents bitcoin – using blockchain technology – is like money unshackled by politics, regulators, and borders. 

To be clear. I totally disagree with the need for unshackling. I think dollars are awesome. I even buy stuff and services with them! I’ve honestly never felt limited by dollars, except obviously by the amount of them that I control at any given time. By contrast, I believe bitcoins are – at their essence – useless. A useless fiction, and therefore a fraud. I prefer my fictions to be useful.

What is the real-world use of bitcoin? Bitcoin is not a useful store of value in the way that dollars are. Anything that can soar 500 percent in the past year – as Bitcoin has – can also drop 80 percent the following year. Or the following month. That makes it entirely inappropriate for “storing value.” 

Could bitcoin be delightful as a pure gamble, like buying a lottery ticket? Sure. But no sensible person advocates lottery tickets as a store of value.

The South Sea Company was created by charter in 1711 with a mandate to engage in an implausible business, in a far off place, that none of its British investors had ever seen. It was just exotic and mysterious enough to capture the whiff and elan of possibly unlimited wealth. It enjoyed the imprimatur of the government of England, and for a time legitimately traded in English government bonds. Shares began at 100 British pounds, but reached 1,000 pounds a decade later. Fortunes were destroyed shortly thereafter, when the laws of financial gravity returned. We return to this cautionary financial story over and over because – while no two bubbles are alike – history does rhyme.

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South Sea Stock (log scale)

Bitcoin has all the makings of collective financial madness. Magical thinking! A difficult-to-grasp mysterious technology! Breathless media coverage of its ever-increasing price! Celebrities who might be buying it! 

Bitcoin’s only plausible real-world use cases – as a medium of exchange rather than a speculation – are tax evasion, foreign-exchange-control evasion, drug dealing, prostitution, child-pornography, assassinations, arms-dealing, illegal gambling, and ransomware for computer hackers. As I have yet to engage in any of these activities, I have yet to find an actual use for bitcoin in my own life. But your mileage may differ, no judgment.

Incidentally, bitcoin is probably not even anonymous. One of the features of the blockchain is that all transactions are infinitely traceable and reproducible. That’s the plausible key to blockchain technology’s usefulness in the future – that all transactions and counterparts create a permanent record, visible to all counterparts. 

But that feature of permanence undermines anonymity. A blockchain-sophisticated FBI should be able to see exactly who sold you bitcoin, and who in turn you sold bitcoin to. Your drug deal or tax evasion with bitcoin was not as anonymous as you thought it was after all! Haven’t you ever watched movies? This is neither business nor legal advice, but do you know what is anonymous, instead? A suitcase full of unmarked, non-sequential dollar bills.

Should you take my word for it on bitcoin? I can only warn you about my similar strong feelings in the past and how that worked out.

In the one and only market call I have ever made in this space in 7.5 years, I said Tesla was a terrible stock in 2015

It promptly quadrupled in value. So I reiterated my hatred for that stock’s price in early 2020.

My bold call clearly triggered the value of that stock to septuple over this past year. You’re welcome.

I just mention this to say, you should probably speculate in the opposite direction of whatever I advocate, including, especially, about things like bitcoin. Bitcoin is far, far, stupider than Tesla shares will ever be. Naturally, Tesla announced last month that it had speculated with its corporate cash by acquiring $1.5 billion in bitcoin. Because LOLs. And YOLO. And FOMO. 

Tesla CEO Elon Musk’s explanation for this speculation: “Bitcoin is almost as bs as fiat money. The key word is ‘almost’.”

[Ah, yes, such wisdom! What mysterious sagacity from 2021’s newest richest man in the world! Take all my money, please, you carnival-barking promoter of fictions!]

Bitcoin – Also not a very efficient use of power!

Never underestimate the power of greed and magical thinking to keep things irrational longer than you can stay solvent. Welcome to the monkey house.

Cryptocurrency enthusiasts like to point out that traditional “fiat” money like dollars, unmoored from a metallic base like silver or gold, is based on a collective fiction. In that sense, would-be sophisticates (and Musk) argue, the collective fiction of bitcoin is no worse than dollars. 

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Rai Stones. Better than gold?

Gold is also a collective fiction, albeit one a few thousand years old. Shells have made for a collective fiction in the past. The rai stones of Micronesia were a collective fiction. What even is money?

US dollars are also a collective fiction, except for the true fact that my government demands, and accepts, dollars for taxes. As far as I can tell, this is the basis for fundamental value in a currency. What my government accepts in taxes.

A convenient currency is more useful than barter. My local, state and federal governments do not currently accept extremely well-reasoned and delightfully funny finance writing as a means of discharging my tax obligations. I need to first convert finance columns to dollars, which my government then does accept.

When President Elon Musk declares in 2028 that we can and must make tax payments in bitcoin, then – and only then – will I agree that bitcoin has any fundamental value. It may well go to $200,000 (and beyond!) for all I know in the meantime. Unless and until Musk runs for President, I expect a zero value future for this particular collective fiction.

A version of this post ran in the San Antonio Express News.

Please see related posts:

Tesla is awful (January 2020 edition)

Tesla is not going to make it (2015 edition)

Hater’s Guide To Tesla (August 2020)

Never Buy Gold

Never Buy Timeshares

Never Buy A Variable Annuity

Bitcoin, Blockchain, and Bullocks

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Bitcoin Blockchain and Bullocks

BitcoinOne of my rules of writing is to ignore journalistic fads. I’ve considered Bitcoin since 2013 to be a complete red herring, a finance-journalism fad that has no bearing on real things, real life, and real people.

Technology people – FWIW I am not one of these – have long been excited about Bitcoin, and a couple of TedTalks from this past summer claimed that Bitcoin is “The Future of Money” and “Changing Money and Business.”

While I think that’s bananas, I try my best to be open to new ideas. I’m going to break my previously self-imposed ban on writing about Bitcoin and consider the idea that there’s something real there worth paying attention to.

Invented in 2008 by an anonymous programmer (or programmers) known by the pseudonym Satoshi Nakamoto, Bitcoin hit the mainstream financial and technology press in 2013. Bitcoins are a sort of nation-less currency created and “earned,” or “mined,” through a computer process of solving a series of increasingly complex cryptographic puzzles. As a store of value as well as a medium of exchange, Bitcoins could theoretically replace or compete with dollars, or gold, or any other widely accepted currency.

Technologists point to the advantage of the technology underlying Bitcoin – known as blockchain – which allows decentralized computers to recognize and verify transactions without having to go through a traditional bank.

Bitcoins – and other cryptocurrencies, of which there are many less well-known variants – appeal to people who like the idea of currencies free from government control, and free from the intermediation of financial institutions.

For example, whenever I pay for gas with my credit card, or withdraw money from an ATM, or automatically invest in index mutual funds, I leave an electronic record of the transactions with my financial institution, which both collects fees from my activity and collects data on my financial life. I live with those fees and that data collection because it’s super-convenient to me, and because I’m not personally paranoid about those institutions tracking my activity.

But if you hate the idea of government control of things or your activity, then Bitcoins – or related crypto-currencies – become potentially more attractive.

Early Adopters

Some of the earliest adopters of Bitcoin were people who needed to purchase things online without using trackable currency, like consumers of child pornography, assassination-services, or drugs. I wasn’t an early adopter.

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A convenient Bitcoin exchange for assassinations, drugs, and child pornography

Since 2015 until now, Bitcoin exchanges have reported up to 80% of activity driven by Chinese nationals, presumably as a way to escape currency and capital controls in their country. The Wall Street Journal recently reported that three Chinese exchanges account for 98% of Bitcoin transactions in the past month. That makes sense for people trying to squirrel their money away from the eyes of Chinese authorities, but again, is not my scene.

Bret Piatt, the CEO of San Antonio-based Jungle Disk, which offers small-business data security, notes that many people’s first encounter with Bitcoin these days happens when hackers – often based in another country – remotely seize a company’s data and hold it ransom until paid in Bitcoin. Piatt says his company can’t advise clients with how to deal with ransomware hackers, but he does point out that purchasing Bitcoin to pay the ransom is just a few Google clicks away.

The beauty of Bitcoin for these hackers, again, is its unlinking from governments and banks.

All of these adaptive uses for this cool new “future of money” tend to leave me feeling confirmed that Bitcoin is worthy of ignoring, as I have up until now.

Reasons to care

So what’s the positive case for paying attention?

From what I can tell, Bitcoin offers three main advantages:

  1. A reminder of what money is, and isn’t
  2. A vehicle for blockchain-technology adoption in transactions
  3. A tool for creative people to control and benefit from their creation

So remind me – What is money again? Bitcoin and other crypto-currencies – by their nature newly invented virtual, digital creations – show us that “money” is a completely illusory, socially-constructed idea.

There’s nothing inherently valuable about coins (or historically, stones or shells or gold) or the digital stores of value we depend on every day – they only have value because we all engage in a collective fiction that they have value.

Bitcoin – a clever creation of computer code – is just as theoretically legitimate as a US dollar. Today I find Bitcoin inconvenient and dollars convenient, but that doesn’t always have to be true in the future? As a side note and (maybe?) interesting fact, I personally pay for most stuff in $1 coins and $2 bills, which nobody else finds convenient, but that’s probably just because I like the attention it brings at the coffee shop.

dollar_coinsWhat do I mean by the adoption of blockchain technology? I hardly know myself, but I’ll take a stab at it. Decentralized computers that can simultaneously recognize and confirm identities and payment might make financial intermediation simpler, or even unnecessary.

One prosaic example could be the elimination of notaries. Notaries are meant to verify, via signature and identification check, that I am who I say I am, for the comfort of someone on the other side of a transaction, so the other side won’t be defrauded. More ambitiously, Don Tapscott claims in his TedTalk that blockchain could be used to create a more trustworthy global land title system, especially useful for the estimated 70 percent of the world with uncertain systems for proving who owns what properties. Tapscott also sees blockchain disrupting the $600 billion per year cross-border payments industry, which takes high fees and multiple days to do something that blockchain can do for nearly free, immediately. Neha Narula, in her TedTalk on the future of money, says the blockchain will allow each of us to control our own personal, financial, or health data, which we could then sell to the highest bidder.

Sigh. That makes me regret I’ve been giving all that personal data away for free, to Facebook, since 2007.

dilbert_blockchainFinally, Tapscott claims that the decentralized nature of blockchain technology will mean that creative people like artists and musicians can own and sell their work without giving up control to financial intermediaries. The computers that form the blockchain can allow a creator complete control of her work in exchange for direct payment. Silly me, I thought that’s kind of what PayPal was for, but you can see how stuck in 2002 I really am.

Will somebody please show me how to put this post on the blockchain to make it rain Bitcoins? I’m so excited.

 

A version of this post ran in the San Antonio Express News.

 

 

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