A Fool and His Bitcoin

“A fool and his money are soon parted.”  Wise wisdom, right?  It seems like it’s making a comeback in the digital age with the newly extreme enthusiasm for cryptocurrencies.

Yes, in theory a currency that is immune from monetary supply manipulation would be a great equalizer between citizens and centralized banker elites that can flood a market with currency and crush the value of savings and income through inflation (whether explicit in the CPI, etc. or implicit, often showing up in untracked prices like food prices).

And there’s no denying inflation is occurring.  A quick look at food prices, the stock market, housing prices, etc. all prove the market has been flooded with currency:

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What does that mean for you and me?  Those dollars we made and saved in the 1990’s and early 2000’s, and earlier, are worth less today.  To truly preserve wealth, it is imperative to invest in ever appreciating assets like the stock market and real estate.  But where is the true baseline of value?  Nothing seems to be constant or immune from manipulation.

So here Bitcoin comes in, based on the new blockchain currency, in a method of spreading transactions in a decentralized manner and locking in a finite number of “coins.”  In theory, the value of these coins should lock in a store of value outside the influence of inflation, monetary supplies, and other external forces.

Sounds great!  So why isn’t it?

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1.  Bitcoin is in classic asset bubble valuation territory.

There is no denying the irrational exuberance around Bitcoin and other cryptocurrencies today.  Any item that appreciates in value thousands of percent in a single year is suspect of bubble characteristics.  What had inherently changed about cryptocurrencies between Jan 1, 2016 and Jan 1, 2018?  Certainly not enough to make the coins thousands of dollars more valuable.

2.  Bitcoin is not an investment.

Stocks are shares of ownership in an organization that produces a profit.  This is then distributed either through dividends or share price appreciation to shareholders.  This is an investment.  Bitcoin does not produce any income.  It is a digital symbol used for transactions and exchange of value.  It alone would just sit as code in some hard drive otherwise.  There are no people producing value, no products, no customers.

3.  Purchasing Bitcoin is participating in speculation.

Purchasing cryptocurrencies in the assumption its price will appreciate is pure speculation, and nothing else.  If it is understood to be essentially gambling, then by all means buy some bitcoin.  But it is just as likely to move down as it is up in any given day, and entirely likely that the bottom could fall out leaving new buyers holding the bag.  Yes, blockchain is a novel technology.  But when the arguments for a currency’s value hinge on accessibility (e.g. Proponent view) and therefore the price will go up as more people learn about it and want to own it, we are in a situation no different from the Dutch Tulips.

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Tulip infatuation drove prices into the stratosphere, worth an estimated $15M in today’s dollars. At the end they were back to being near $0.

4.  Cryptocurrencies are not real.

Can you put one in your pocket or wallet?  Not some digital wallet, but that real leather wallet you hold in the real world.  No?  Then it’s not real.  There are “debit/credit cards” that allow bitcoin owners to transact and buy real things, but not without using the current exchange rates to do so.  Until physical products in stores have prices posted in Bitcoin, and you can 3D print a physical Bitcoin with a serial number, it is nothing more than an ephemeral code somewhere in some server.  What happens if that hard drive fries?  If there’s an EMP? If you can’t hold something, or go somewhere to withdraw it physically, would you really tie up your wealth in it?

5.  It’s talked about being banned.

Just the rumor that South Korea is considering banning cryptocurrencies was enough to ignite a global 20-30% selloff in all currencies.  If an “asset” loses value simply by the stroke of a regulatory pen, it is not a worthwhile investment.

So where is there to go from here?  First off, avoid cryptocurrencies at all costs.  It simply is not worth the risk unless you’re fully expecting to lose all monetary value.  Think it’s worth the risk?  Think about all those people who dumped huge amounts of money into Bitcoin at $20,000 and is now sitting on a 50% loss.  In a bubble environment where market valuations far outstrip any inherent true value, someone is left holding the bag when the bottom drops out.

Don’t be a bag holder.

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