- Baron Lamarre
THE NAKED TRUTH ABOUT BITCOIN & WHY IT'S A FAD
Bitcoin is all the rage at the moment. But there are 5 Reasons You Should Stay Away From It. Before I go into that, I'd like to share WHY I'm so passionate about this topic as you read on. If you want to jump straight to the 5 Reasons, click here.
When Tech Billionaire Elon Musk announced that his company bought a large chunk of Bitcoins worth $1.5 billion and that TESLA would start accepting Bitcoin as a payment method for its products, the market went into frenzy. Countless of fence-sitting investors jumped into the Bitcoin’s bandwagon without asking too many questions. A retail stock trader I talked to said this: “Well, the dude is a high-profile tech-billionaire, he surely has access to some privileged info and must know something we don’t; let’s just follow him”. It’s this herd mentality that is probably the biggest enemy of most amateur investors venturing into cryptocurrency game.
As an increasing number of regular people, traders and investors are falling for The Greater Fool Syndrome and succumbing to FOMO (Fear of Missing Out), let me lay out the naked truth about Bitcoin.
By the way, it wasn't Elon Musk who forked out $1.5B from his own pocket to buy Bitcoins, it’s TESLA (the company) that purchased the coins.
Making that distinction between Elon Musk & TESLA is critical to appreciate what I am about to share with you. His investment in Bitcoin is not a vote of confidence for this digital asset but a calculated gamble derived from TESLA’s internal corporate pressure and peculiar considerations that led them to place a $1.5B bet on this digital asset.
TESLA has never made a single dollar selling cars since its founding on July 1st 2003. It is a carmaker that cannot make money selling cars.
After failing to turn profit in 18 years from the sales of Electric vehicles, the company needed to show some profit in order to admitted into the S&P500. For corporations, being admitted to the S&P500 is like qualifying for the Soccer World Cup or entering the European Champion League.
The gamble seemed to work at first. On Feb 21st 2021, Tesla posted a paper profit of about $1 Billion according to CNBC. After an early market rally to a peak of $58,000 per coin, Bitcoin fell few days later on market correction thereby dragging TESLA market value by $200 billion and making Elon Musk $15 Billion poorer in just 1 Day.
I don’t know how many people are able to lose $15B in a day and not commit suicide? Elon Musk took the gamble because HE CAN. Unfortunately, many of his followers and Bitcoin converts CAN’T afford a fraction of his losses. Bitcoin is the “New Drug” that provides instant “High” and Long-term “Low” for its addicts.
Here are 5 reasons why I will not invest in Bitcoin:
1. BITCOIN IS NOT A CURRENCY
It’s an abuse of language to call BITCOIN, ETHEREUM, LITECOIN, MONERO and many other digital assets as Crypto-currency. A currency is first and foremost a medium of exchange; an intermediary instrument or system used to facilitate the sale, purchase, or trade of goods between parties. It’s also a store of value: essentially an asset, commodity, or currency that can be saved, retrieved, and exchanged in the future without deteriorating in value. The key word here is WITHOUT DETERIORATING IN VALUE.
Selling goods and getting paid in Bitcoin doesn’t mean that Bitcoin is a medium of exchange. It only means that Bitcoin is a settlement method.
Suppose you owned a Stock of Apple Inc (when it’s worth $125.86) and then you walked into a store to buy a pair of Nike Shoes that costs $250. You don’t have cash but you tell the Store : “Hey, I will transfer 2 shares of Apple Inc worth $251.72 to the store in exchange for a pair of Nikes”. If they agree (A Big IF), then the exchange will take place. It doesn’t make Apple Stock a currency or medium of exchange rather a settlement method. Just as in a barter economy, one can exchange anything for anything as long as both parties agree. That doesn’t turn “everything” into a “medium of exchange”. The store keeper who agrees to receive 2 Apple Inc Stocks instead of cash is speculating that Apple Inc Stock is likely to rise, therefore in the near future, $250 today could become $300 or $500 within days or weeks. That’s the calculus of many people who accept Bitcoin for payment. They are speculating.
Bitcoin is a highly volatile asset and doesn’t store value. If you were to price a Beef Burger on Bitcoin, the price of a Burger in the morning would jump dramatically in the evening. Normal currencies like Dollar, Renminbi, Euro are purposefully managed and controlled by governments to remain stable and store value. Bitcoin by virtue of being left entirely to market forces is uncontrollable therefore highly volatile. High volatility might be the friend of speculators but it’s the enemy of value stability.
Bitcoin is therefore not a currency but a speculative digital asset. It should be viewed as any other equity or security in the stock market. The only difference is that while the supply of company equity is decided by a Board of Directors, Bitcoin’s supply is controlled by a computer algorithm.
2. BITCOIN HAS NO INTRINSIC VALUE
On social media, Youtube and several blogs, crypto-currency aficionados love to showcase Bitcoin as the Digital Gold. That’s another misleading statement. The difference between Bitcoin and Gold is like Day & Night. It’s not even close. Gold is a tangible asset with an intrinsic value. For illustration sake, suppose hypothetically that the world suddenly stopped Trading Gold, that precious metal would still have a wide range of real-life applications: The gold you owned could be melted into jewelry, used as a reliable electric component in motherboards, microchips and circuitry in common electronic devices such as handphones and computers. Furthermore, gold is useful in dentistry (for tooth fillings, Crown, bridges), in manufacturing medical equipments, in Aerospace Technology to shield Spacecraft and Satellites from radiation and in several more applications.
On the other hand, Bitcoin will simply become useless if it’s no longer tradable.
Bitcoin has no other use except being a virtual commodity with no intrinsic value that can be assessed by means of an objective calculation or financial modelling, rather than using a prevailing trading market price.
As a digital Asset, Bitcoin is solely backed by strong algorithm. As a speculative tool it relies on the Faith that market participants are willing to place on it. Bitcoin at its inception was supposed to correct the shortcomings of the Fiat currency (Like the US Dollars, EURO, YUAN etc.…) which are also backed by nothing tangible except Government’s PROMISE TO PAY.
In reality, Bitcoin has turned out to be just another digital Fiat with a gimmicky tweak: Don’t trust the government, trust algorithm.
Unlike Stocks which have proper financial valuation models to determine their intrinsic and fair value, Bitcoin has none of it. As a Trader, in order for me to take a position on any Asset, I first need to know if such Asset is OVERVALUED, UNDERVALUED or AT PAR with market. This intrinsic value can only be determined by applying a technical assessment and rigorous methodology independent of what the market says. After all Traders make the markets and not the other way round.
Bitcoin for its part has no reliable valuation model and displays no statistical correlation with any other traditionally tradable tangible assets such as gold, silver or copper. Its value is whatever the markets says it is. It is a purely speculative tool and a private Fiat.
Dr Nouriel Roubini, one of few economists who predicted the housing bubble crash which led to the financial crisis of 2007–2008 in America said this of Bitcoin:
“Bitcoin is also a socially wasteful speculative asset, because it is expensive to produce. The cost of “mining” an additional bitcoin—solving computational puzzles using energy-intensive digital equipment —increases at such a rate that the total stock of the cryptocurrency is capped at 21 million units …”
He further adds: "Since the fundamental value of bitcoin is zero and would be negative if a proper carbon tax was applied to its massive polluting energy-hogging production, I predict that the current bubble will eventually end in another bust”
Many other experts share the view that without any obvious fundamental value anchor, bitcoin is likely to remain a textbook example of excess volatility.
3. BITCOIN IS HIDING THINGS FROM YOU
Bitcoin prides itself for being transparent and dangles Blockchain technology and its open ledger as evidence of democratized financial accounting and transparency. Nothing could be further from the truth.
For a start who on Earth is SATOSHI NAKAMOTO? Is he a person? A group of persons? A Japanese? A secret organization such as the CIA, MI5? Nobody knows.
All we are allowed to know is that Satoshi Nakamoto is the Faceless creator of Bitcoin. His or her name(s) is most likely not Satoshi Nakamoto. In the aftermath of the financial crisis of 2008, a person who went by that name revealed a sophisticated computer programme that cryptographers say is a work of Genius.
Not knowing who created or owns Bitcoin organization is not a trivial matter. It’s very consequential in the welfare of investors’ pocketbook. For instance, what happens when you lose your Bitcoin account password? Who do you go to? Such questions can never be raised with traditional Banking or normal Stock. You can just walk into a Bank branch or call your broker, get yourself identified and voilà, your credential is restored. There is no such luck for Bitcoin investors.
People have lost roughly $140 billion in Bitcoin because they forgot their passwords or got locked out of accounts. These would-be millionaires are struggling to access their wallets. They are watching Bitcoin prices rise as some struggle to recover millions of the cryptocurrency, according to The New York Times.
When you lose access to your Bitcoin account, you are given 10 guesses before the content of their digital wallet is frozen and encrypted for good. Around 20% of the existing 18.5 million Bitcoin are in stranded wallets, worth roughly $140 billion. If Satoshi Nakamoto or whoever he is can get his hands on the $140 Billion unclaimable money, then he’s probably the Richest person in the world by far.
To compound problems for Bitcoin investors, it’s not even clear who you can take to court (let alone which court) in the event of a dispute with Bitcoin. Nonetheless, the legal system is gradually penetrating the Bitcoin labyrinth. According to Forbes magazine, Court-ordered asset confiscation of cryptocurrency accounts has become fairly routine. They cite a case of a US court legal action against two accounts used in a bitcoin Ponzi scheme called Banana Fund. The aim was to return the roughly $6.5 million seized bitcoin to the scheme’s victims. There are also other cases where Bitcoins can be auctioned off by court marshals. The current value of all bitcoin auctioned off by US marshals now exceeds $2 billion, according to a tracker maintained by off-the-grid bitcoin engineer Jameson Lopp.
4. THE ECONOMIC THEORY BEHIND BITCOIN IS FLAWED
Finite supply of Bitcoins makes it impossible to be a unit for pricing infinite supply of goods. There are only 21 million bitcoins that can be mined in total. Once bitcoin miners have unlocked all the bitcoins, the planet's supply will essentially be tapped out. Currently, around 18.5 million bitcoins have been mined; this leaves less than three million that have yet to be introduced into circulation. In theory, the algorithm is designed to create scarcity, thereby perpetually pushing prices up. That principle is flawed as it makes it an unsustainable tool for pricing goods. Central Banks can generate inflation by printing money or trigger deflation by tightening money supply at will. Periodic swing between inflation and deflation is the natural behavior of markets and is designed to keep prices stable. Bitcoin in long term will create a massive deflation.
Some economists predict that the same fears of deflation, which were used as a rationale for the US to abandon the Gold standard in 1971, would embolden authorities to prevent Bitcoin from becoming a currency. The finite limit of Bitcoins has additional drawbacks. The majority of coins are expected to be “mined” in the next 20 years which, in the absence of a large-scale hardware revolution, will lower the individual incentive for “miners” to perform the computationally intensive settlement process.
Nobel Prize-winning economist Prof Paul Krugman says that cryptocurrency, despite its cutting-edge technology, has "set the monetary system back by 300 years"
In an article in The New York Times titled “Transaction Costs and Tethers: Why I’m a Crypto Skeptic”, Paul Krugman, has highlighted the transactional cost associated with Bitcoin. According to him, the basic nature of a bitcoin transaction, which involves furnishing the complete history of past transactions, goes against the long-running trend which has continually moved toward "frictionless" transactions.
“Set against this history, the enthusiasm for cryptocurrencies seems very odd, because it goes exactly in the opposite of the long-run trend. Instead of near-frictionless transactions, we have high costs of doing business, because transferring a Bitcoin or other cryptocurrency unit requires providing a complete history of past transactions. Instead of money created by the click of a mouse, we have money that must be mined — created through resource-intensive computations," he said.
"In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years,” he added.
Bitcoin supply model is worse than government’s money-printing addiction. The diminishing supply algorithm that caps the volume up to 21 million Units will make goods and services (if they were priced on Bitcoins) exponentially expensive and kill productivity and competitiveness. Bitcoin displays all the ingredients of a Pyramid Scheme fueled by Greater Fool Theory. The scheme needs to constantly find new people buying into it and push up the value or else it will collapse which is not the case with Central Banks’ issued currencies.
5. GOVERNMENTS WILL EVENTUALLY TAME IT
Let’s just go along with the view that Bitcoin is NOT a trial balloon floated by secret government agencies to test the market acceptance of the concept of a Digital Fiat currency backed by nothing.
Let’s then assume that Bitcoin is a truly private initiative totally free from government’s interference. If there was a War for control of the right to own the money-printing privilege and control our lives, who do you think would win?
I place my money on governments. One of the most powerful tools in the hand of the US government is the Eminent Domain Law.
Eminent domain is the power of the United States government, states, and municipalities to take private property for public use, following the payment of just compensation. Eminent domain is a right granted under the Fifth Amendment of the Constitution.
Similar powers are found in most common law nations. Called "expropriation" in Canada, "compulsory acquisition" in Australia, in the U.K., New Zealand, and Ireland eminent domain is known as "compulsory purchase”. Eminent domain can include leases, stocks, and investment funds.
Because contract rights, patents, copyrights, and intellectual property are all subject to eminent domain, the federal government could, theoretically, use eminent domain to seize Facebook and turn it into a public utility to protect people's privacy and data.
If the US government suspects that Bitcoin is being used to fund terrorist activities, they could seize Bitcoin, freeze account, force-purchase encrypted data just to name a few options.
Bitcoin is in a No-win situation when it comes to dealing with governments.
If Bitcoin gains popularity and get accepted by the masses as the Global currency & Investment assets then governments will want a piece of the action. They will want to take a cut from each Bitcoin transaction profit via taxation.
Taxing Bitcoin’s profit margin means controlling Bitcoin accounting, disclosing identity of people and their transaction purpose. Such disclosure will then defeat the purpose for cryptographing the coin in the first place. That should lead to the demise of digital asset. If on the other hands, Bitcoin remains on the fringe, Governments could either let die of its natural death, use illegal activities excuse to ban it, or at best tolerate it as a niche asset.
As long as Bitcoin stays on the speculative lane, along with the Ethereum and the LiteCoins of the world, some governments will leave them alone.
In India a Bill has been introduced in January of this year to ban all private cryptocurrencies. The proposed law would also include a system for the creation and regulation of an official cryptocurrency issued by the country’s central bank and the promotion of blockchain, the technology underlying digital currencies. The Reserve Bank of India’s “digital rupee” is aimed at being similar to China’s “digital yuan “.
In Nigeria (Amongst the Top 10 countries in the world) the Central Bank has simply banned all Cryptocurrencies transactions by commercial Banks.
CHINA KNOWS BETTER China is way ahead of the game. After studying cryptocurrencies and copying Bitcoin protocol they then began strangling it. The People’s Bank of China has recently taken the strictest approach to date, declaring ICOs (initial coin offerings) as illegal.
E-Yuan is now being pilot-tested across many cities in China (Shenzhen and others). The digital Yuan, officially dubbed Digital Currency Electronic Payment (DCEP) and backed by China’s central bank will not only squeeze out Bitcoin, it is aimed at challenging US-dollar dominance in the global financial system, plus helping authorities to keep greater control of cash flows.
Ray Dalio, the Billionaire founder and co-chairman of the world's biggest hedge fund, Bridgewater Associates recently told Forbes Magazine that:
“That governments will "outlaw" bitcoin if it continues to grow and starts to become "material…Governments will use whatever teeth they have to enforce that. They would say, OK, you can't transact the bitcoin, you can't have a bitcoin, …So then you have to sort of be almost, like, 'is it a felony,' and 'I'm going to have to be a felon in order to transact'"
A great number of regular folks, housewives, teachers, plumbers, hairdressers, corporate lawyers are flocking to The Bitcoin game with the hope of making a quick buck. Once in, they are driven by the Fear of Missing Out (FOMO): What if this thing is a real deal? If I hang in here, I could become a millionaire. It’s this psychology that sustains Bitcoin rather any strong economic fundamental.
There is no doubt that some early Bitcoin investors are millionaires today. They may not actually understand Blockchain technology and might never have read Bitcoin’s whitepaper. Nevertheless, they took the gamble and are laughing all the way to the Bank today, hence Bitcoin can make you rich.
However, just because people make money on something doesn’t mean that it isn’t a scam. Any good scam like Ponzi scheme attracts converts by showing good pay-off to early investors. For such scheme to survive as in a classic MLM system, they require a steady supply of Greater Fools (New entrants who will pump in new money with a hope of making profit when market rises). Bitcoin to me is essentially a type of Digital Ponzi scheme backed by a strong and legitimate technology (blockchain). Its survival rests primarily on the belief in its very survival by its devotees. Without an intrinsic value, Bitcoin has no particular use for the global economy except to speculate. It’s neither a store of value nor a currency that can keep price of goods and services stable.
The irony is that the best thing about Bitcoin might be what ends up killing it. Strong algorithm, robust protocols and blockchain technology are all exceptional elements that were brought to the world and popularized by Bitcoin. Now those great ideas and technological breakthroughs are been copied by governments. From China to Venezuela and many more, sovereign nations’ Central Banks have successfully imitated Bitcoin. They have already stolen the CRYPTO part and are not about to let Bitcoin (or Other crypto Assets Ethereum, Monero etc...) take the CURRENCY business from them. I suspect they will force Bitcoin out of the market or confine it to speculation lane. --------------------------
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