Guest Post by Simon Black
There are famous stories that come out of the Great Depression in which very astute financiers sold all of their stocks just before the big crash of 1929.
Joseph Kennedy famously dumped his portfolio after receiving stock tips from a shoeshine boy. And Bernard Baruch, one of the wealthiest financiers on Wall Street, said after the crash,
“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me [stock] tips. . .”
Now, these comments make it seem like taxi drivers and shoeshine boys don’t have financial sense. And that’s wrong.
Someone’s profession and their level of financial sophistication don’t necessarily go hand in hand; there are plenty of astute janitors, and plenty of idiot fund managers.
But I did think about Baruch’s remarks recently when an Uber driver started talking to me about cryptocurrency.
Again, his opinions are just as valid as anyone else’s. But what I found remarkable is that the only thing he knew about his portfolio was how much he’s ‘up’.
He told me about how he’d invested in a few small tokens, and that’s he’s up 3x on this, and 5x on that, and 2x on another.
There was zero discussion about the technological merits of any particular coin. He didn’t talk to me about what made their software better, or the unique proposition that any of them offers to the financial system.
He didn’t even know the basics of what he had purchased. All he knew was how much he was ‘up’, and that his portfolio was going to keep going up.
And that’s the thing about crypto: there’s a level of fanaticism that we’ve not seen before in modern history with regards to a single asset class.
There are pro-crypto people who are self-avowed “HODLers”, which is crypto-speak for “I will never sell ever… regardless of technological competition or radical changes to the marketplace.”
This is a completely emotional position to take.
But the fanaticism is on both sides. Equally, there are anti-crypto people who still claim that it’s a scam, or ‘worthless’.
Just this morning in the Wall Street Journal, in fact, some reporter wrote that Bitcoin’s “fundamental value is zero.”
This just screams ignorance. Bitcoin is software. Software is technology. And any technology that (a) serves a real purpose, and (b) has a large number of users, is by definition NOT worthless.
Bitcoin has tens of millions of users and provides actual utility, i.e. transferring value from one user to another.
Bitcoin is no more ‘worthless’ than SWIFT– the organization whose completely outdated technology facilitates international wire transfers.
Yet with Bitcoin at $50,000+, the fanaticism has reached epic levels, and people on all sides are screaming about it. One group insists that it’s going to zero. The other insists that it’s only going up.
It’s hard to make sense of the market with so much noise, so I wanted to make a few rational comments.
As a caveat, I have been pro-crypto for a long time and initially introduced our members to it back in 2013. But I’m not fanatical about anything and do my best to focus on facts.
For example, a common refrain from the pro-Bitcoin crowd these days is that “Bitcoin is gold”.
This is totally ludicrous. Bitcoin is a ‘surveillance coin,’ in that the Blockchain records every single transaction that’s ever been made, and every owner of every Bitcoin that’s ever been mined.
Physical gold has certain limitations. But there is no bar of gold that contains a record of everyone who’s ever owned it. Equating gold and Bitcoin is silly.
It’s also silly to criticize Bitcoin because its ‘throughput’ is slow. Naysayers point out that Visa can process up to 76,000 transactions per second, while Bitcoin can only process around 15 per second.
That’s true. But it’s an apples/oranges comparison. Bitcoin’s best use at this point isn’t to pay for coffee at Starbucks. It’s a great way to transfer large sums outside of the banking system.
And in that regard, Bitcoin’s throughput is more than adequate. Plus there are other coins and decentralized ledger technologies that are even better.
It’s for this reason (among many others) that very prominent investors and large financial companies, including Visa, Mastercard, Stripe, PayPal, etc. have integrated Bitcoin into their services.
And there are so many banks and funds investing in Crypto now that there may be a natural floor in the marketplace.
In other words, just like big funds tend to “buy the dip” when the stock market falls, there are enough financial players in the crypto market that they may ‘buy the dip’ if there’s a price decline in Bitcoin.
The wild gyrations in crypto prices are definitely a bit concerning; it’s hard to take an asset too seriously that can be up or down 20% in a single day. And it’s definitely hard to take something seriously when a single Tweet from Elon Musk can send its price soaring.
But that doesn’t take anything away from the technological value of what cryptocurrency presents.
Again, most people miss the point: buying cryptocurrency is ultimately a speculation in the long-term utility of its technology.
And just like Microsoft’s or Google’s technology can be worth $1+ trillion, there’s no reason that cryptocurrency can’t be worth that much.
But it makes a lot of sense to tone down the fanaticism. There are so many coins and tokens, each with different technology.
And it’s important for someone to understand the advantages and disadvantages of whatever technology they’re buying, rather than blindly buying into Bitcoin without the slightest idea of its drawbacks and benefits.
That would be like deciding it’s time to enter the stock market, and automatically buying Tesla stock without doing any research on Tesla, or any other company in the market.
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I remember when I first heard the term bitcoin/blockchain, it was during the 2008/9 crisis. It was supposed to provide anonymity and stability. I’m not seeing any of that. And the grid goes down (that’s the populace’s grid/not the overlord’s grid) you can take your bitcoin/blockchain and put it between your Dutch Tulips and Beanie Babies.
Other than the trumpeted ‘software technology ‘ , would someone remind me what the ‘real’ underlying backing asset of a crypto currency actually is ? And with no ‘true intrinsic’ underlying asset, aside from all the hype and market frenzy, someone remind me again what determines it’s value ? I was never able to establish a clear investment case or protection of wealth reason for these crypto’s . Early on ,I bought a couple of them for their novelty appeal, certainly not for their long term investment potential or their wealth protection qualities. Their vulnerabilities to the whims of government dictates , remains a very real threat .
Sorry, you asked, so I am going to answer…and not in a stupid tweet format.
First, let’s define the difference between currency and money.
In a nutshell, money is “work completed” – a gold coin for example. Or a superman doll. The fact that one is more demanded in trade doesn’t take away from the fact that the superman doll is a form of money (not a good one, but a form because it’s work completed).
Currency, on the other hand, is “work promised” (in a world full of liars!) – any note is work promised, whether a personal IOU for superman doll or a government “dollar”, both are currency because they promise some amount of completed work in the future.
So, is there an underlying asset that backs Bitcoin? YES. It is the electricity utilized to solve the algo that equated to the creation of one Bitcoin. In that respect, it represents “work completed” and is far closer to “money” than “currency”. The fact that you might not see any value there is irrelevant – the resources were spent and the Bitcoin is, indeed, work completed and in a form that can be traded (again and importantly, it might be a beanie baby or cabbage patch doll to you, but you are not the sole arbiter of monetary valuation). The fact that it is digital and therefore, somehow subject to destruction or unavailability is also irrelevant. All currency or money is subject to destruction or unavailability.
The “value” is subjective – just like with gold coins or a superman doll. Determination of value in a real market is made by those participating in the market and those valuations are subject to change at any given time in any given amounts due to the fact that resources are (still) scarce and prone to reallocation at any time depending on the immediate and perceived future needs of those participating in the market. In the case of Bitcoin, a lot of value comes from just two qualities: 1.) Fixed Total Issuance – unlike a .gov currency or .gov future crypto 2.) Ease of Trade – like he said, no banks involved to move large sums.
I think the first one alone establishes a potential for investment and wealth protection. As with any investment, the potential is, potentially, a “wasting option”. Most investments have a life-cycle curve and although some may be very long, it’s still there. At some point in the future, cryptos will be eclipsed by something still waiting to be dreamed up. Until then, they represent a tradeable non-tangible asset. A patent or copyright is also tradeable and non-tangible (and might be completely digital at this poin) but represents work completed even if there is no “product” sitting in front of you – it IS a form of money that has a value and, possibly, an increasing value.
I agree cryptos are subject to government dictates, but look around! EVERYTHING is now subject to government dictates 24/7/365. How much do “government dictates” apply to the dollar when 100B a month is being monetized by the PPP? What about your housing if you live in a certain area where “government dictates” prevent the protection of property rights and grant favor to thugs? I could go on, but .gov can take away or bestow a golden goose of any size, on anyone, at this point in time. In that respect, cryptos have no more potential to be slammed by .gov than any other investment and may be far mor easy to protect than other assets.
Read this piece by Alisdair Mcleod , someone who understands ‘money’ better than most.
https://www.goldmoney.com/research/goldmoney-insights/the-future-of-money-is-gold
I have been a PM holder for 25+ years.
I have also held crypto for almost 5 years.
In relation to devaluation of the dollar and other currencies, the price of those alternatives (cryptos and gold) has risen. For gold it pretty much matches dollar devaluation. For crypto, an entirely new “asset”, price has far outpaced dollar devaluation alone.
Crypto, technically, meets Rothbards qualifications of money (although, exactly what “durable” and “high value per weight” means can be debated – is a world-wide computer grid “durable” and does something digital have the highest “value per weight” because it weighs nothing? Or, does one take these at face value and discount all crypto as having monetary potential?):
When I read the article you cite (and I am familiar with the author – I think he was getting articles published 10+ years ago on the Daily Reckoning and other sites when I first read his stuff), I have to point out that there are a HUGE number of assumptions made with respect to cryptos NOT becoming a medium of exchange utilized by the general popoulation.
Some of them are kind of optimistic beyond reality, like this from just the 3rd paragraph in:
“Hand back to individuals the responsibility for their own actions…”?!
Ummm, did you read the piece Jim just posted? You know, the part about the man, horse and wolf? You can’t really be serious about those in power “handing back to individuals” a single damn liberty once usurped…
That kind of weak “story” or “narrative”, at least in my mind, is a signal that shows the case for cryptos in the future to be stronger than PM’s. I certainly admit that could be wrong, but I read the piece and I thought it was the same thing I have seen since cryptos began. Namely, a lot of sizzle and no steak.
There were several other assumptions that also MIGHT make an ass out of him OR me….
Honestly, as we move forward, I see PM’s and cryptos replacing current, dominant currencies. What the prices are? My best prediction, ala Yogi Berra: Higher.
Here is another good article on this subject – It’s title – ‘The death of logic’ for me encapsulates the madness of the crowds we are witnessing in these markets –
https://goldswitzerland.com/the-death-of-logic/
Cryptocurrencies do have value. And I can give one specific example.
Lets say that you want to transfer 1000 dollars to a company overseas. You have to go to the bank and only during banker hours. You can’t transfer at night, weekends, or holidays. Then when you do transfer money, it takes at least a few days.
I have a friend that bought a computer from China with the Bitcoin Cash cryptocurrency. The transaction took 7 minutes. And it can be done 24/7.
As a payment system, cryptocurrencies have huge advantages over banks.
Not to be snarky about it but I don’t have $1000 laying around and also why would I be sending that much money to an overseas company?
Otherwise, it’s a valid point for business types I guess.
General, you are absolutely right. Cryptos are a great way to do financial transactions across borders because you don’t have to deal with banks, you don’t have to pay bank fees at each end, and you don’t have Uncle Sam checking on why you are moving money out of the country.
But this utility of cryptos has been completely overshadowed by people treating it like a speculative investment, thinking that like the current stock market and the housing market in 2006, it is only going up and up and up.
Two things can crash cryptos faster than a Boeing-built plane:
1) The Feds declare it is illegal. In that case people will still use it but will become more of a black-market good.
2) A solar flare.
I don’t like the probability of either of those events, so I’ll restrict my Bitcoin use to transferring money.
“Value” ≠ Convenience
Value is imputed, not instrinsic IMO.
Today gold is “valued” for stable, long-term storage of wealth because people across many centuries and cultures considered it so. Admittedly, they did so because of certain intrinsic properties, such as fungibility, durability, beauty, nearly universal recognition, relative laboriousness in mining ( hence limiting its quantity and insuring a degree of rarity ), and imperviousness to being counterfeited.
But the act of ascribing to it a certain worth or utility for any reason is subjective IMO. I have read of certain ancient civilizaions in which gold was present and possibly used for artistic purposes, but not “valued” as a medium of exchange, unit of account, or store of wealth.
My 2 bits.
Software is old after two years and worthless after ten.
BTC is the only software going higher in price I know of.
And the shoeshineboys I find many under every precious metals vid on youtube. “Silver is shit – buy BTC!” etc etc etc. There are shoeshineboys in the thousands, but a higher power wants it going higher. Elon says “I buy a billion!” BEFORE he buys….. or after he had bought?
I am flabbergasted by the stupidity, but being stupid makes one rich these days.
I can’t tell the difference between cryptos and weed stocks so I avoid investing in both.
Weed is going higher. But, if it does not, it will get you higher.
From when 10,000 BTC bought two Papa John pizzas 11 or so years ago to where those same BTC are currently “worth” $500,000,000 (at $50k per BTC). That certainly allows pulling of money from somewhere (the greater fools??) but does not represent true value or so it seems to me.
That said, I’m sure we all wish we bought a few thousand or more bitcoin when we could have done so for $100 or less TOTAL for thousands of BTC and then magically cash in now. Anyone who is in that position and is not cashing in and then promptly converting that fiat into tangible productive assets is not thinking straight, IMO.
Tulips. Bitcoin. Beanie Babies. Air Jordan sneakers in their original box, unworn. All sorts of thing people have found to be worth quite a lot at one time, not so much at another, with little objective reason for either place on the scale.
They probably said the same thing when people first started picking up gold nuggets.
“Why you bothering carrying that heavy rock around, you can’t do anything with it.”
I have some BitCoin jewelry to sell you, but first I’ll need a way to dig up the bits and bytes to melt and forge into something real.
Soo..can we presume btc is a near perfect cash laundromat?
The fed will probably implode everything just in time for the Chinese troops in Canada to come and “save” us.
I would guess that Tesla buying 1.5BN in Bitcoin will, more or less, establish the short term high. How low will it fall is the short term question? Where will it end up (0 to millions are reasonable answers) is the only meaningful long-term one?