“Just because you can doesn’t mean you should.”
-Author Sherrilyn Kenyon
We have discussed Bitcoin and other cryptocurrencies in these pieces several times over the past few years. Recent activity seems to confirm some of our long-held beliefs about these products. Bitcoin is now over decade old, but in the past few years still has not fulfilled its promise of becoming a “currency”. A currency must have (at least) three important properties: (1) be a convenient means of exchange, (2) be a reliable store of value, and (3) be an accepted unit of account for valuing other things (like a bagel or a business). Bitcoin doesn’t come close on any of the three. Gold, for example, is a reasonably reliable store of value, but does poorly meeting the other two criteria and hence, is not “money”. This reality has not stopped growth in cryptocurrencies. An article on page B1 of the February 28 Wall Street Journal entitled “Wall Street Takes Lead in Crypto Trading” chronicles the institutionalization of the business.
We made our view of Bitcoin and its ilk clear five years ago:
“Criminal organizations move hundreds of billions of dollars (maybe more) around the globe every year. [In fact, a report by Global Financial Integrity puts the annual figure at around $2 trillion!] 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!”
As we said, recent events confirm this belief. In the first week of the Russian invasion of Ukraine, Bitcoin surged 30% from approximately $34,000 to $44,000. There is no fundamental accounting for this move. What it demonstrates is that with the sanctions being placed on the Russian economy and specifically its banking system, Russia and its oligarchs are very likely to resort to Bitcoin to move assets out of the country and conduct business. It is unconscionable to support this behavior and the aforementioned laundry list of illegal activities. At some point, hopefully legitimate governments step in to curb this illegal finance, as they have to counter money laundering through the banking system. In the meantime, ethical investors and “Wall Street” should resist; there are plenty of “honest” ways to make money, just because you can buy Bitcoin doesn’t mean you should!
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