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Bitcoin: Invest with Caution Thumbnail

Bitcoin: Invest with Caution

“The Emperor has no clothes!”

-Hans Christian Anderson

We first addressed Bitcoin in these pieces in December 2017.  We discussed the irrationality of its price moves that year and clearly laid out the case that Bitcoin is not a currency.  That hasn’t changed.  Then what is it?  Bitcoin is primarily a tool of international criminal cartels.

Criminal organizations move hundreds of billions of dollars (maybe more) around the globe every year.  These monies source from drugs, arms trafficking, human trafficking, illegal gambling, piracy, counterfeit and stolen goods, protection rackets, tax evasion, financial fraud, and a number of other things.  Starting right after the financial crisis in 2008, major western governments began a serious crackdown on money laundering through the legitimate banking system.  Banks around the world were fined billions of dollars for violations of disclosure laws and failure to enforce “Know Your Customer” requirements. (Note:  this author worked for Swiss banks for over 20 years, including through the financial crisis).

Then, like magic, Bitcoin appeared in early 2009, supposedly created by the mysterious and pseudonymous “Satoshi Nakamoto”.  It was “necessary” because some way was needed to move and launder money in lieu of the increasing difficulty of doing it via the ethical banking system.  Cash just doesn’t work for the large sums involved.  On June 21, 2019, authorities confiscated drugs in Philadelphia worth over $1.1 billion.  That’s 11 million $100 bills, which would make a stack well over a mile high – or fill approximately 350 large roller-bag suitcases.  That much cash is hard to hide and move around, and is easy to steal or skim from.  The solution:   Bitcoin!

Bitcoins are currently trading for over $10,000.   Why?  What is the source of that (or any) value?  When we buy a stock we own part of a business and have a claim on future cash flows.  Analysts and investors can argue whether a given stock is worth 15x or 30x earnings, but the source of value is clear.  Gold is a metal with unique and valuable properties (and even with gold we have argued in the past that intrinsically “too much” value is placed on it).  How can someone just create Bitcoin and almost instantly it has “value”?

Also, the Wall Street Journal reported in 2018 that over 20% of all Bitcoins are “missing”.  Some are abandoned because of lost passwords, but much has been stolen and lost to fraudulent trading schemes.  Can you imagine if a fraction even one-thousandth as much of a legitimate asset class was unaccounted for?

The idea of Bitcoin is certainly intriguing, and the block-chain technology supporting it is itself valuable and no doubt will find numerous other uses in the near future, but a decade in Bitcoin has not brought forth many of its promised benefits – because that’s not what it was really created to deliver.  The Federal Reserve Bank of the United States has held discussions on issuing a cryptocurrency, and many economists support the idea.  It will likely happen within a few years.  A central-bank-backed cryptocurrency (here in the U.S. or elsewhere) would have the legitimacy of a “real” currency and the backing of the government would be a source of real value. 

Until then, if you possess or trade Bitcoin (or any other cryptocurrency), be careful!  It might be a good idea to keep a robe handy, because one day everyone might notice you have no clothes!            

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