Jan 2, 2018 709 comments

Why Bitcoin is Stupid

Well, shit. I’ve been watching this situation for a few years, and assuming it would just blow over so we wouldn’t have to talk about it here in this place where we are supposed to be busy improving our lives.

But a collective insanity has sprouted around the new field of ‘cryptocurrencies’, causing a totally irrational worldwide gold rush. It has reached the point that a big percentage of stories in the financial news and questions in Mr. Money Mustache’s email inbox are about whether or not we should all ‘invest’ in BitCoin.

We’ll start with the answer: No, you should not invest in Bitcoin. The reason is that it’s not an investment. Just like gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any hope of a product plan, “pre-construction pricing” Toronto condominiums you have no intent to occupy or rent out, and rare baseball cards are not investments.

Update, six years later: Since I wrote this, the imaginary price of Bitcoin has continued to be all over the map – it initially dropped over 70%, then it went back up many hundreds of percent, over and over. This instability just further proves that it would make a terrible currency – and a recent study reveals that about 95% of even the trading volume is fraudulent. People get excited about Bitcoin when the price goes up, but that’s because they like making money – not because the underlying object has any actual value or usefulness.

These are all things that people have bought in the past, and driven to completely irrational prices, not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.

When you make this kind of purchase, which you should never do, you are speculating, which is not a useful activity. You’re playing a psychological, win-lose battle against other humans with money as the only objective. Even if you win some money through dumb luck, you have lost some time and life energy, which means you have lost.

Noticed this ad on the corner of a website recently … because we ALL need daily updates on an obscure piece of niche software technology!

Investing means buying an asset that actually creates products and services and cashflow for an extended period of time. Like a piece of a profitable business or a rentable piece of real estate. An investment is something that has intrinsic value – that is, it would be worth owning from a financial perspective, even if you could never sell it.

Now, with that moral sermon out of the way, we might as well talk about why Bitcoin has become such a big thing, so we can separate the usefulness of the underlying technology called “Blockchain”, from the mania about how people have turned Bitcoin it into a big dumb lottery.

This separation is important because the usefulness of Blockchain is the primary justification people use for the big dumb Bitcoin lottery.

Once you make this separation in your mind, you can see that Blockchain is a simply a nifty new software invention (which is open-source and free for anyone to use), whereas Bitcoin is just one well-known way to use it.

Blockchain is just a computer protocol, which allows two people (or machines) to do transactions even if they don’t trust each other or the network between them. It can have applications in the monetary system, contracts, and even as a component in higher level protocols like sharing files. But it’s not some spectacular Instant Trillionaire piece of magic.

As a real world comparison, I quote this nifty piece from a reader named The Unassuming Banker:

… imagine that someone had found a cure for cancer and posted the step-by-step instructions on how to make it on-line, freely available for anyone to use.

Now imagine that the same person also created a product called Cancer-Pill using their own instructions, trade marked it, and started selling it to the highest bidders.

I think we can all agree a cure for cancer is immensely valuable to society (blockchain may or may not be, we still have to see), however, how much is a Cancer-Pill worth?

Our Banker friend goes on to explain that the first Cancer-Pill might initially see some great sales. Prices would rise, especially if the supply of these pills was limited (just as an artificial supply limit is built right into the Bitcoin algorithm.)

But since the formula is open and free, other companies would quickly come out with their own cancer pills. Cancer-Away, CancerBgone, CancEthereum, and any other number of competitors would spring up. Anybody can make a pill, and it costs only a few cents per dose.

And yet imagine everybody started bidding up Cancer-Pills, to the point that they cost $17,000 each and fluctuate widely in price, seemingly for no reason. Because of this, newspapers start reporting on prices daily, triggering so many tales of instant riches that you notice even your barber and your massage therapist are offering tips on how to invest in this new “asset class”.

But instead of seeing how ridiculous this is, even more people start piling in and bidding up every new variety of pills (cryptocurrency), over and over and on and on, until they are some of the most “valuable” things on the planet.

NO, right?

And yet this is exactly what’s happening with Bitcoin. And if you haven’t been digging into the cryptocurrency world much, it gets way weirder than this. Take a look at this shot from the website coinmarketcap.com, and observe the preposterous herd behavior in real life:

Fig.1: Various cryptocurrencies, ranked by how many people have been fooled.

“Holy Shit!” is the only reasonable reaction. You’ve got Bitcoin with a market value of $234 Billion Dollars, then Ripple at $92 billion with Ethereum right behind at $85,792,800,592.

These are preposterous numbers. The imaginary value of these valueless bits of computer data represents enough money to change the course of the entire human race, for example eliminating all poverty or replacing the entire world’s 800 gigawatts of coal power plants with solar generation. Why? WHY???

An Aside: Why should we listen to you, Mustache?

I’m only a mediocre computer scientist. But coincidentally, after I got my computer engineering degree I ended up specializing in security and encryption technologies for most of my career. So I did learn a bit about locking and unlocking information, hacking, and ensuring that independent brains (whether they are two adjacent CPUs on a circuit board or two companies negotiating across the Pacific) can trust each other and coordinate their actions in lockstep. I even read about these things for fun, with Simon Singh’s The Code Book and the Neil Stephenson novel Cryptonomicon being particularly fun shortcuts to pick up some of the workings and the context of cryptography.

But that’s just the software side (Blockchain). Bitcoin (aka CancerPills) has become an investment bubble, with the complementary forces of Human herd behavior, greed, fear of missing out, and a lack of understanding of past financial bubbles amplifying it.

Mustachianism – the mental training that gets you to very early financial freedom – requires you to evaluate inefficiencies in our culture and call bullshit upon them. Even if you are the only one in the room willing to do it.

In the field of personal wealth, this means walking your children past the idling lineup of your neighbors’ Mercedes SUVs, over the snowy grass and up to the door of the school – and being confident that you are doing the right thing. Even if you’re the only one doing it.

When evaluating investment bubbles, it means looking at where everyone is throwing their money – no matter how many billions – and being willing to say “Bull. Shit. Guys. Not going to do this with you.”

So I also read a lot about investment bubbles and fundamentals and how to tell those apart. One book that I found very useful in understanding the greed-fear cycle (and Central Banking and the Federal Reserve system to boot) is the 2001 classic Towards Rational Exuberance by Mark Smith. For a shortcut to understanding good investing, you can also simply look up Warren Buffet’s thinking on almost any topic – he’s careful enough about offering opinions that by the time he makes a statement on something, you can be pretty sure it will be among the best answers out there.

And of course, the purpose of this whole aside is that I want to establish credibility with you, so you will give this article some consideration. I believe the current Cryptocurrency “investment” mania is a huge waste of human energy, and our rate of waste has been growing exponentially.

The sooner we debunk the myth and come to our senses, the richer our world will be. So we need more credible people to speak out against it. If you’re one of these credible people, please do so in the comments or in a blog post on Medium that we can all read.

Why was Bitcoin Even Invented?

Understanding the motivation is a big part of understanding Bitcoin. As the legend goes, an anonymous developer published this whitepaper in 2008 under the fake name Satoshi Nakamoto. It’s well written and pretty obviously by a real software and math person. But it also has some ideology built in – the assumption that giving national governments the ability to monitor flows of money in the financial system and use it as a form of law enforcement is wrong.

This financial libertarian streak is at the core of Bitcoin, and you’ll hear echoes of that sentiment in all the pro-crypto blogs and podcasts. The sensible-sounding ones will say, “Sure the G20 nations all have stable financial systems, but Bitcoin is a lifesaver in places like Venezuela where the government can vaporize your wealth when you sleep.”

The harder-core pundits say “Even the US Federal Reserve is a bunch ‘a’ CROOKS, stealing your money via INFLATION, and that nasty Fiat Currency they issue is nothing but TOILET PAPER!!”

It’s all the same stuff that people say about Gold, which is also a totally irrational waste of human investment energy.

Government-issued currencies have value because they represent human trust and cooperation. There is no wealth and no trade without these two things, so you might as well go all-in and trust people. There are no financial instruments that will protect you from a world where we no longer trust each other.

So, Bitcoin is a protocol invented to solve a money problem that simply does not exist in the rich countries, which is where most of the money is. Sure, an anonymous way to exchange money and escape the eyes of a corrupt government is a good thing for human rights. But at least 98% of MMM readers do not live in countries where this is an issue.

So just relax, lean into it, and grow rich with me.

OK, But What if Bitcoin Becomes the World Currency?

The other argument for Bitcoin’s “value” is that there will only ever be 21 million of them, and they will eventually replace all other world currencies, or at least become the “new gold”, so the fundamental value is either the entire world’s GDP or at least the total value of all gold, divided by 21 million.

People then go on to say, “If there’s even a ONE PERCENT CHANCE that this happens, Bitcoins are severely undervalued and they should really be worth, like, at least a quadrillion dollars each!!”

This is not going to happen. After all, you could make the same argument about Mr. Money Mustache’s fingernail clippings: they may have no intrinsic value, but at least they are in limited supply so let’s use them as the new world currency!

Why not somebody else’s fingernail clippings? Why not one of the other 1500 cryptocurrencies? Shut up, just send me $100 via PayPal and I’ll send you a bag of my fingernail clippings.

Let’s get this straight: in order for Bitcoin to be a real currency, it needs several things:

easy and frictionless trading between people
to be widely accepted as legal tender for all debts, public and private
a stable value that does not fluctuate (otherwise it’s impossible to set prices)

Bitcoin has none of these things, and even safely storing it is difficult (see Mt. Gox, Bitfinex, and the various wallets and exchanges that have been hacked)

The second point is also critical: Bitcoin is only valuable if it truly becomes a critical world currency. In other words, if you truly need it to buy stuff, and thus you need to buy coins from some other person in order to conduct important bits of world commerce that you can’t do any other way. Right now, the only people driving up the price are other speculators. The bitcoin price isn’t rising because people are buying the coins to conduct real business. It’s rising because people are buying it up, hoping someone else will buy it at an even higher price later. It’s only valuable when you cash it out to a real currency again, like the US dollar, and use it to buy something useful like a nice house or a business. When the supply of foolish speculators dries up, the value evaporates – often very quickly.

Also, a currency should not be artificially sparse. It needs to expand with the supply of goods and services in the world, otherwise we end up with deflation and hoarding. It also helps to have wise, centralized humans (the Federal Reserve system and other central banks) guiding the system. In a world of human trust, putting the wisest and most respected people in a position of Adult Supervision is a useful tactic.

Finally, nothing becomes a good investment just because “it’s been going up in price lately.”

If you disagree with me on that point, the price of my fingernails has just increased by 70,000% and they are now $70,000 per bag. Quick, get me that money on PayPal before you miss out on any more of this incredible “performance!”

Figure 2: Random people on Twitter doing some deep, useful Investment Analysis on Bitcoin. (Update from late 2018 – Mike ended up being wayyyy wrong.)

The world’s governments are not going to let everyone start trading money anonymously and evading taxes using Bitcoin. If cryptocurrency does take off, it will be in a government-backed form, like a new “Fedcoin” or “G20coin.” Full anonymity and government evasion will not be one of its features.

And you don’t want it for this purpose anyway – after all, do you currently hide your money in offshore tax havens and transact your business on black markets? Do you practice illegal tax evasion as your primary wealth strategy? Probably not, because life is better and wealthier when you aren’t living a life of crime.

The Cryptocurrency bubble is really a replay of the past: A good percentage of Humans are prone to mass delusions which lead to irrational behavior. This is a known bug in our operating system, and we have designed some parts of our society to protect us against it.

These days, stocks are regulated by the SEC, precisely because in the olden days, there were many, many stocks issued that were much like Bitcoin. Marketed to unsophisticated investors as a get-rich-quick scheme. The very definition of an unsophisticated investor is “Being more willing to buy something, the more its price goes up.”

Don’t be one of these fools.

Further Notes

About the Comments Section: Normally, I try not to publish comments that are just emotional reactions or totally uninformed. For this article, I have set the bar much lower to show you the religious conviction that crypto speculators have.

People are genuinely mad at me for calling out this speculative aspect (note that I did not criticize blockchain at all, just the idea of uninformed people betting on future price increases for the arbitrary “coins”).

The general trend seems to be accusing me of “not doing enough research”, even after I dug into this stuff pretty deeply for a long, long time. I remain open to more information on the uses of Blockchain, but I’ve never seen a valid fundamental reason for betting on future increases in the prices of these things.

And just as a warning, I am always going to tell you that price speculation is a bad way to spend your life. This part of it is ideological to me: You Must Earn Your Money By Creating Value for Everyone.

Here’s a great description of the whole scene by Chain CEO Adam Ludwin. You’ll note that without prejudice and emotion, he describes the actual uses of the technology, without getting into how we should all place uninformed bets on its future value.

The real test of if you should be a cryptocurrency supporter: would you be exactly as passionate and spend the same amount of time thinking about it, if Bitcoin were still an obscure piece of code, worth less than one cent, and offered no chance of ever earning you any money? Because if you’re going to be an evangelist for anything, it needs to be purely based on the underlying merits, not what you hope it will do for your personal fortune.

This YouTube Video is one of the best shortcuts I found for explaining how Blockchain (and Bitcoin) works.

This Vice article explains yet another ridiculous aspect of Cryptocurrency: running the transaction network (called “Mining”) involves a deliberate computer-intensive crypto challenge syetem called “proof of work”. This inefficient design is now wasting more electricity than many entire countries. Doing one transaction burns 215 kilowatt-hours of electricity, enough to run the entire MMM household for more than a full month, or to power an electric car for more than 800 miles of driving.

Another interesting side-effect of bitcoin mining: big sales of computer graphics cards, and theft of electricity and cloud computer services. One of my coworkers at MMM-HQ works for nVidia, and part of his job is hunting down mining thieves who comandeer virtual servers (cloud computing) to mine coins on their behalf. Some of my conversations with him inspired the research in this article.

I enjoyed this analysis by Aswath Damodaran, a thoughtful investor and Professor at NYU school of business

Another intelligent case by highly experienced crypto business lawyer Preston Byrne. Favorite quote:

“Bitcoin’s growth is not based on its technology alone (which, while powerful, is open-source and therefore easily replicable) but rather on the strength of virality, encouraged by the vested interests who held early and invested in marketing it; with no genuine business underlying it, it acquires its (very substantial) memetic potency only from the evangelism of those who hodl and preach.”

David Webb’s great explanation: Bitcoin: the World’s First Decentralized Ponzi Scheme

Preston Byrne again (brilliant guy!): the Problem with calling Bitcoin a Ponzi Scheme

Previous Post: How to Give Money (and Get Happiness) More Easily Next Post: An Interview with Matt Cutts: Can the Government grow a Money Mustache?

Want More?

Brendan Karanasios January 4, 2018, 11:35 am

Living as a mustachian in Vegas, I make it a habit to watch people lose money at the casinos; roulette and craps are particularly spectator friendly. I just imagine a single number on the roulette wheel (or 6:6 at the craps table) is labeled “bitcoin”. At the same time, the booze and cocktail mixers flow freely in those same casinos, so routinely buy shares of Brown Forman, Diageo, Coca Cola, and Pepsi.

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Thaddeus January 4, 2018, 11:36 am

While I agree that Bitcoin and other similar coins are incredibly wasteful and are in the very definition of a bubble, I feel its irresponsible to post that all crypto is bad. There are some of the most exciting things I’ve ever come across happening now in this field. If the coins that run on the ether network structure open their blocks up to MUCH needed research data (for example cancer and genomics research) then everyone using the system helps further science by transacting. Also, The greatest achievement IMO, is a DAG (https://en.wikipedia.org/wiki/Directed_acyclic_graph). A new form of secure blockchain type mesh that uses a tiny percentage of the energy of bitcoin and the like. IOTA is my personal favorite- http://iota.org

Please do your own research. I am a long time supporter of MMM and ‘stache like the most of you, but its hypocritical to invest in index funds and the like and dismiss this new market entirely.

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Austin W January 4, 2018, 11:46 am

I usually like your articles, but this… This reads like a grandfather complaining about ‘that newfangled technology’. The same complaints were made when “we”- collectively- stopped carrying gold coins around and switched to gold-backed paper money, then again when the gold-backing was removed. Yet here we are.

You claim that to have value as an investment, the vehicle should have intrinsic value, yet the dollars in your wallet have next to no intrinsic value, and even less when stored in online as… ones and zeros. This isn’t a thing, like “Cancer-Pill”, it’s not a generic version of another thing. The technology is freely available so as to be freely auditable by any capable person in the world so as to convey trust.

Additionally, it’s not as if “normal money” is unhackable and safe when “putting the wisest and most respected people in a position of Adult Supervision.” … every year there are reports of massive hacks. My mother had a check to a utility company stolen out of her mailbox and forged and used at several other stores. In the past I have been informed that I might be at risk of credit card fraud if I used a kiosk at any of several hundred Target stores. Equifax just mis-managed HALF THE COUNTRY’S most sensitive personal information and no one even had a chance to opt out of providing it to them. The government allowed sub-prime mortgages to be approved for a song and it resulted in a global economic crash, wiping out trillions of dollars.

It’s been proven time after time that the government and major financial institutions can’t be trusted to secure the value of your wealth. Bitcoin (the technology) is in it’s infancy and only just now beginning to gain traction. As the technology develops it will adapt to all the downsides you listed or it will be replaced by another (others use different technology). People will assign it the value they see fit. Maybe it’s currently overhyped, but so is the iPhoneX. At least this provides an opportunity to improve the world.

Finally, my favorite, you compare this to the dot-coms. I do too, this is my favorite comparison to draw on my personal analyses. If you follow through with that line of thinking, you would be the guy who never sees people needing home computers, never buys a single dot com stock and tells his friends and family it’s a waste of time. Yes, you avoid the crash, but you miss every opportunity on the later upswing as well. Ultra, ultra safe strategy, but the world is taken over by the internet today, pets-dot-com failed and Amazon dominates. Smart research could have seen that. I had hopes that you would be an advocate for smart analysis, not simply writing off the entire future paradigm shift in global finance.

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Jwheeland January 4, 2018, 11:55 am

1 – Isn’t this just currency speculation ?http://www.investorguide.com/article/11846/understanding-the-risks-of-currency-speculation-igu/.

2 – A lot going on from with Bitcoin. Is there a way to profit from it? Sure! Buy low, sell high. Is that prudent way to maximize your savings and financial security. IMO, no.

I think this article could take a slightly different tack and reinforce a few fundamentals of investing and financial independence.

Maybe a title of – So you’ve made shit ton of money on bitcoin – now what? And then MMM could give you some face punches about asset allocation, investing in index funds, not speculating, and saying fuck yeah to getting rich from bitcoin.

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Jason Shockley January 4, 2018, 12:21 pm

This won’t be your last article about Bitcoin.

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Cathy January 4, 2018, 1:00 pm

I have zero interest in Bitcoin and largely agree with MM’s analysis, but I own gold as a fixed percentage of my portfolio. It’s not there because it’s a shiny metal or store of value. It’s the world’s default reserve currency and has been for thousands of years. It’s where the money goes when people start selling out of the market, so it evens out the fluctuations. If bitcoin ever steps into that role then I’d switch to that, but i don’t see that happening in the near future. If ever.

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- Justin C January 5, 2018, 6:31 am
  
  Wise!
  
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Peter January 4, 2018, 1:21 pm

When this bubble inevitably bursts, will it be enough to send the US economy into a recession?

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Justin January 4, 2018, 1:30 pm

This guy is pretty Mustachian except for his belief in Bitcoin: http://www.businessinsider.com/didi-taihuttu-sold-everything-for-bitcoin-fans-2017-12

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TomTrottier January 4, 2018, 1:44 pm

All that energy does not have to be “wasted”. It produces heat. Bitcoin mining machines should be used instead of radiators or space heaters. Move them to the arctic/antarctic and use them to heat greenhouses.

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BitBoy January 4, 2018, 2:19 pm

I think cryptocurrencies are here to stay. People are continuing to lose faith in government and US reputation is all the dollar is based on since the removal of the gold standard. Just because the dollar has been safe since great great grandpa was alive doesn’t mean it will always be safe (see tax cuts amid record budget deficits). Nothing wrong with “investing” 10% of your portfolio in risky assets. It’s no different than investing in companies like Amazon that have a P/E ratio over 300. Don’t be a Warren Buffet homer, he didn’t even think Google was worth investing in

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Alexei Bayle January 4, 2018, 2:22 pm

While most cryptocurrencies out there are not backed by anything there are some very interesting developments in this regard. WePower, for example, is a way to invest in green energy – a kind of crowdfunding for major infrastructure whereby the token you buy is worth 1KWh of energy – ie. it is a cryptocurrency backed by energy. A different idea is Power Ledger – this is a way to use blockchain technology to buy and sell energy directly without an intermediary, even across borders. I can sell my surplus solar energy directly to someone who needs it without going through the government or big (often monopolised) energy companies.

Both these are examples of real-world problems being solved by blockchain technology. Power Ledger is actually operating right now, WePower will go online this year. Would you rather your currency was backed by “trust in the government” and controlled by “trustworthy people in the World Bank” or “1KWh of energy” controlled by “everyone, because that’s how blockchain works”?

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anon_financier January 4, 2018, 3:26 pm

Hello from a big fan. Apologies for the anonymous tag, but it’s kind of required as I work in finance (the email works but I use it mostly for spam, so I may not see the responses, so flag it here if you do use it, I’m more likely to see a response here). I generally only read your site (and enjoy it a lot, even though I haven’t followed suit on everything – perhaps I should) but never felt the need to write a comment. This post is the first exception.
To the point: I agree with most of your observations, but mostly disagree with the conclusion.
In a nutshell: yes, fundamentally bitcoin is (almost*) worthless for the same reasons that gold is (as an investment). It doesn’t produce cash flows, and its only value is the expectation that other people will pay just as much or more in the future to own it thanks mainly to its scarcity and reputation as store of value. Gold has been in a bubble for centuries. Bitcoin has the same properties as gold (scarcity) and many significantly better (easier/cheaper to store/transport/send, completely censorship resistant, perfectly divisible, etc. etc.). It even has the same semi-religious following that gold enjoys, and arguably even better, as crypto-bugs are more vocal than gold-bugs and with better memes! What’s missing? the long history of reputation as a store of value. If and when that is achieved, it could eat a lot if not most of the value that is stored in gold at the moment (something like $5-6tr). While it remains an order of magnitude cheaper than that, the assymetry of the payoff makes it an attractive bet for a small part of one’s portfolio. A bet, yes, as in a speculative instrument. In a way though all investments are, and as long as it’s a small part of one’s portfolio, it is perfectly rational to proceed. And speaking of portfolio, do you know that gold has historically proven to be a profitable addition to a balanced portfolio of equities/bonds despite delivering worse returns than either of them? It has, thanks to being uncorrelated or even negatively correlated with them so frequent rebalancing makes one buy low and sell high and improving the bottom line. Another way to look at it is that it improves the Sharpe ratio (decreases the portfolio volatility for a given return) which allows more leverage or a higher equity allocation perhaps. Anyway, if bitcoin survives (I say if, because it may fail, there are no guarantees here), I expect to see similar studies with bitcoin instead of gold, and because of even less correlation and even higher volatility of bitcoin, I expect to see the same people that advise having 5% or whatever of one’s portfolio in gold to have 1-2% in bitcoin instead, and rebalance frequently. Now imagine what would happen to the price of bitcoin if a tiny percentage of investable assets gets parked there (which gets easier by the day with futures trading and soon ETFs). This will only accelerate the virtuous circle with more studies coming out showing the marvelous effect of having bitcoin in one’s portfolio etc.
This is just one scenario. It can go the other way, as I said. But IMHO for certain types of people this is worth speculating (I will agree with you that this is the better term, even though George Soros used the term invest for this sort of thing – he said “when I see a bubble I invest”). Again, for certain people not for everyone. Noone should mortgage their home or borrow money elsewhere to put it there. But if you are already financially independent and/or you actively manage your own money is it irrational/irresponsible to put 1% of your assets there for the x% probability that it replaces gold as the “sound money” for the millenial generation if you think x=10?

* I say almost worthless because there is value in the ability to transfer value outside of the control of anyone. This is a bit circular because it only works if there’s value in it in the first place but the critical first step has already happened. As long as there is some value in it, and it trades anywhere in the world, I am able to buy it and send it somewhere that my bank wouldn’t otherwise allow me to (I could also do it on a Saturday night that the bank is closed). There are other use cases. Consider the Saudi princes that had their whole wealth confiscated recently. A small portion in bitcoin would have been useful as insurance. In these use cases it’s much better than gold, and the more it stays alive the more obvious it should become.

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- Anon January 4, 2018, 10:22 pm
  
  Read CryptoAssets. The authors discuss the sharpe ratio for bitcoin and other cryptoassets and provide studies like you expect that decrease overall risk due to uncorrelated movements.
  
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Erik January 4, 2018, 4:36 pm

The other key thing that I didn’t see mentioned is that the IRS considers cryptocurrencies as assets, NOT currencies. Therefore, trading or exchanging cryptocurrencies is subject to capital gains taxes.

Yes, that includes exchanging Bitcoins for buying small stuff like a cup of coffee.

Yes, that means the IRS wants to keep record of everything and report everything you buy or exchange with cryptocurrencies.

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Nathan George January 4, 2018, 4:46 pm

Sorry mustache man, but you’re wrong. There are many services that are being built on the blockchain. Many of them involve record keeping, like identity verification, educational transcripts, and things of that nature. But there are a bunch of other. Ethereum, Lisk, and some other “platform” cryptocurrencies allow code to be run on their blockchain, which enables lots of interesting applications that weren’t really possible before. Of course cryptos are also useful as a payment medium. They are also backed by math and I’m pretty sure the computer network supporting BTC is much more powerful than any supercomputer in the world, measured in FLOPS. Perhaps cryptos are overvalued at this point. But perhaps not.

Personally I would wait for another 80-90% crash in BTC value before buying in again. It’s happened a few times in the past and will probably happen again. Best to target a 70% price reduction from ~20k (so 5-6K) as an entry point, or research smaller cryptos that are starting up.

A big part of the value created by BTC is the computer network backing it up. Millions, or maybe even billions at this point have been spent making ASIC machines and running them to power the BTC network. It’s best to at least put a small fraction of money into there, just to diversify. It’s even better to diversify within the crypto space: BTC, a platform crypo or two (like ethereum), ripple or stellar lumens, a privacy coin or two (like Monero), and some smaller startup coins.

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- Morten January 6, 2018, 5:35 pm
  
  >A big part of the value created by BTC is the computer network backing it up. Millions,
  >or maybe even billions at this point have been spent making ASIC machines and running
  >them to power the BTC network.
  
  Guess who is paying for this stuff? Yea, the same ppl that buys bitcoin (it could be the investors themselves, if they get paid in BTC and stash their coins) . The $ sum on their BTC account is a hoax. You only know the real value after it’s sold, and you better be one of the first.
  
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Dan January 4, 2018, 5:07 pm

0) I definitely agree that speculation is the current driver, but that’s because people are treating it like an asset and not like a currency. Your arguments are mostly addressing the former, yet you are trying to discount the latter. After all, most CCs are not attempting to be an asset, they are attempting to be a currency, hence the name.
1) Comparing it to fingernails is obviously a joke on your part, but it’s also inaccurate. *You* are the only one who can create your fingernails and though they both take resources (food/electricity) crypto currencies can be mined by *anyone*. This implies a distribution of trust, which is covered next…
2) You say that fiat currencies represent “human trust and cooperation”. Blockchain-based crypto-currencies take that very same principle and enforce it digitally. Can the code be broken? yes easily. Just like you can rip up a dollar. but can the system be broken? Nearly impossible. The system itself is no more at risk than the federal reserve is. So your trust argument is actually in favor of a technology like blockchain.
3) The argument that a currency should be inflationary is absolutely debatable. Regardless of what you think the “pros” are, the fact is that governments inadvertently inflate their currencies because they like to print money to spend. Justifying it after the fact is not a valid argument.
4) Your argument about resource usage is also largely moot. Fiat money may use less resources because most of it already exists, but it uses far more resources actually exchanging physical material, which is unnecessary in today’s world since the physical money itself is of no real value. The physical element of it is useless and wasteful.

If you’re astounded at the price increase, then you’re not alone, we all are. If you think it’s not an asset, you’re correct. But your arguments against the possibility of it being a currency dont hold water.

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Matt January 4, 2018, 6:02 pm

Since Bitcoin is basically Monopoly money or some sort of video game money like Simoleons with some cryptography tacked on, I wonder if we could start up a bubble with some of these other alternative currencies. I’ll sell $10000 Monopoly dollars for a mere $100USD to get things going. Any takers?

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- Adam Eivy January 4, 2018, 7:22 pm
  
  you absolutely could, which is why we are in an ICO bubble.
  
  Reply
- Mads January 5, 2018, 2:40 am
  
  I know you’re joking but your analogy doesn’t work. Why would your monopoly money work better than current fiat money?
  
  Your monopoly money are printed on paper and you can’t put them in the bank or any other kind of digital media where they can be sent over large distances in no time. People could easily create money with a basic printer that would look like your monopoly money to create fakes of it. Anyone would have the ability to inflate your currency.
  
  Bitcoin has none of those problems. Its protocol ensures there’s a limited amount. It can be sent over digital media without the need for trust because it’s built into the protocol of the system.
  
  Reply
  - Erik January 5, 2018, 7:16 am
    
    There is a protocol for there to be a limit of Bitcoins, but there’s no protocol for how many different types of crytocurrencies that can be made, hence why there’s over a thousand different types. The “cryptocurrencies have value because they are programmed to be scarce” argument doesn’t make sense when there’s nothing stopping someone from making their own currency. On the flip side of things, people just can’t invent their own element like Gold.
    
    Reply
    - J.G. January 6, 2018, 12:24 am
      
      However there are quite a few other metals, such as silver, platinum, copper, etc. that are traded along side gold.
      
      Reply
Adam Eivy January 4, 2018, 6:42 pm

I totally agree with you that “investing” in bitcoin is a bad idea. Investing in mining hardware for cryptocurrencies, buying or building a mining company, etc, may or may not be a good idea–depending on your tolerance for investment risk.

But there are some things that don’t sit right with your arguments:

Bitcoin is not just a blockchain implementation–it’s a globally distributed protocol, more like Email than a brand of cancer pills. The power of Bitcoin is not the blockchain but the incredible distributed compute (and history) that ensures the security and stability of the platform. This is why Bitcoin Cash and other bitcoin clones are not worth as much–they are not as secure/trusted.

One reason someone might buy Bitcoin is not as an investment but as a savings wealth distribution platform. If you are holding all of your financial wealth in USD, you may not be getting the growth you expect from index funds. USD went down 10% last year. So if your USD grew 7% last year, you would actually have lost 3% in global wealth. By putting some amount of savings in Bitcoin, one can diversify their financial holdings into global currencies. Just like Gold, Silver, etc, it’s not an investment, it’s diversification.

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Robin January 4, 2018, 7:08 pm

I was just shared your site. Stimulating debate and very informative as we try collectively to tag this phenomenon know as Bitcoin and Blockchain technology. Strong feeling on both sides and I see logic in both arguments. I find the statement below best characterizes your classic “strawman” argument.

“Government-issued currencies have value because they represent human trust and cooperation. There is no wealth and no trade without these two things, so you might as well go all-in and trust people. There are no financial instruments that will protect you from a world where we no longer trust each other.”

My issue is our government (USA) does not issue currency. It delegated this Constitutional mandate to a private banking entity. The Federal Reserve as you know it is no more Federal than Federal Express in Memphis, TN. You state the USD has value because it represents human trust and cooperation. It doesn’t represent trust. It requires trust by the force of law and represents debt. It is a promissory note. We are taxed by law to pay the interest on this debt instrument. A debt instrument that devalues over time as the debt increases. The entire idea of Blockchain currency is it removes human trust, politics and religion and replaces it with science and math, the true language of god. Of course this is all theory at this juncture, nevertheless the theory deserves consideration as to implementation, considering the advancements that could be achieved by our species, if the requirement of ‘fiat’ human trust could be eliminated. What could be eliminated next? War, inquisitions, poverty, slavery? Some very smart people think it worth a hearing. Why don’t you?

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Robbie January 4, 2018, 8:31 pm

Thanks, Mr. Mustache! This article says exactly what I’ve been thinking about for months in relation to bitcoin, but expresses it far better than I could. Nice work.

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Justin C January 4, 2018, 9:14 pm

You can certainly adjust your investment strategy in the face of bubbles though. And very effectively.

This chart is indicative of one such strategy that works again and again, and is very simple to execute:

http://pricedingold.com/charts/SP500-1880.pdf

Other strategies can work too. Simply put, you just avoid buying the assets that are in bubble territory, and buy ones that are undervalued instead.

By any reasonable metric, US stocks are overvalued: Price to sales, price to book, cape, regular PE, price compared to gold or other commodities, price compared to international equities, price compared to GDP and so on.

If it were only CAPE that was showing US stocks to be overvalued you might have a point. But it’s not. It’s all of them.

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Jeff W January 4, 2018, 9:16 pm

David Webb from HK describes bitcoin as the world’s first distributed ponzi scheme: https://webb-site.com/articles/bitcoinponzi.asp

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J Scott January 4, 2018, 10:45 pm

The article above said:

“Blockchain is just a computer protocol, which allows two people (or machines) to do transactions even if they don’t trust each other or the network between them. It can have applications in the monetary system, contracts, and even as a component in higher level protocols like sharing files. But it’s not some spectacular Instant Trillionaire piece of magic.”

You know, TCP/IP is just a boring computer protocol that allows machines to transfer information. And that boring computer protocol is at the heart of one of the largest technology and business revolutions in history — the Internet.

Just because someone doesn’t understand the power of boring computer protocols doesn’t mean they can’t change the world.

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- Mr. Money Mustache January 5, 2018, 12:02 pm
  
  EXACTLY, SCOTT!
  
  Since I built most of my engineering career on various uses of the TCP/IP protocol, an earlier version of this article had a big example developed around that. The protocol is useful, and universal.
  
  But despite the useful protocol nobody developed special PacketCoins, and started trading them around at $17,000 apiece. If this had happened, I would have made fun of that activity as well.
  
  On the other hand, companies that built profitable businesses based on TCP/IP (like Cisco Systems where I worked), were indeed worth investing in, through their presence in the index funds.
  
  Reply
Jeff January 5, 2018, 1:34 am

Peter Thiel’s thoughts on Bitcoin:

https://youtu.be/kpxzLTJHU4c

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Brooke Rutherford January 5, 2018, 2:59 am

Now can you write about cannabis stocks?! I’m curious if you’re an investor in this space or if your same “don’t buy into bubbles” mentality applies here too. Thanks!

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- Mr. Money Mustache January 5, 2018, 11:56 am
  
  In general you won’t see me writing about any stocks in particular – because I strongly advocate just buying the entire world’s index funds through Vanguard’s VTI+VXUS, or Betterment’s portfolio (with minimal bonds).
  
  Reply
SM January 5, 2018, 3:42 am

Thanks for the article! After some reflection and study, I have concluded that I do not wish to “invest” in bitcoin, or other altcoin.

My reasoning is similar to why I do not wish to be part of any other “get-rich-quick” scheme that includes MLMs, penny stocks, private offerings – who all have their own marketing spin. Also, I don’t invest in some actual, real, companies that don’t comport with my value system (e.g. tobacco). Do not wish to fund things that, in my opinion, do societal harm – regardless of the personal ROI.

It is no “store of value” – and comparisons to gold are malafide. Someone sitting in their underwear at 3AM cannot create GoldX…that identical to Gold in every way. Has the same atomic structure, same chemical and physical properties. Just comes in a different color and has a different name. Yet – there are endless other things that are identical to Bitcoin. Nothing “special” about any coin except the mouth-foaming hype of their respective fan-base.

The coin offerings and exchanges are a ponzi-like scheme. Nothing more. I do not wish to try and be the “smart predator” and prey upon people putting their retirement money or even taking debt and being swept into the hype. I don’t think I would ever be happy making money like that. Fulfillment and happiness comes from having played a productive role in the betterment of society. This type of speculation just ain’t that.

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Nath January 5, 2018, 4:39 am

Tulip bulbs… if you haven’t heard of it just gooogle. It’s spookily similar to Bitcoin.

A couple of other risks to look out for I have heard about.

Now you can buy ‘pieces’ of a bitcoin in case you can’t afford a real one. what the…
I have heard people buy bitcoin from a certain supplier, and then you cannot sell it again in your country. The transactions become blocked somehow.

One move from a major player like the bank of London to ban bitcoin use in their country ( think of all the tax implications, fraud, black market dealings and so on) and the entire world market will collapse and all those suckers won’t get anything for their money.

No intrinsic value, no return apart from the potential for capital gains. Sounds like a suckers run

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Ellie January 5, 2018, 6:10 am

A bit condescending and hypocritical of you MMM – you yourself tried to make your fortune on building houses and flipping them for unrealistic prices. Even after renting for years you couldn’t sell them because they just weren’t worth what you wanted people to pay for them.

No need to insult those who have the same idea. You had no value for those houses except for when you sold/rented them. They were eating your cash but you considered them a great ‘investment’. Whilst I agree Bitcoin is a fad and definitely overpriced, I think you are downplaying the potential future of cryptocurrency, particularly because some of the emerging coins don’t even use blockchain technology.

And the whole ‘cancer pill’ analogy? It’s stupid. Let’s try it again with tables. I could make a table. Anyone could make a table. But somehow there is an entire furniture industry that sells tables from budget prices to small fortunes. And yet all of those tables accomplish the same thing! So why do people pay different amounts? The lesson here being: if someone considers the commodity valuable, then it is worth something. It doesn’t matter how stupid you say it is.

I feel your statements are coming from the rather privileged position of having benefited from both the dotcom bubble and the housing bubble. Enjoy your ivory tower, and feel free to smirk at my ‘overly emotional’ response.

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Silas January 5, 2018, 6:10 am

I’ve been following this blog for about a year and a half, and it really aligns with many of my values. I fell into the crypto-currency craze after my roommate kept talking about it. I bought about $800 in bitcoin just to see where it goes. I honestly agree with the opinion in this piece, its all speculation and it doesn’t carry any true value. The idea of a “get rich quick” opportunity is alluring. Sometimes you need a trusted voice to bring you back to reality…… whether you listen to it is up to you.

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Nick January 5, 2018, 6:38 am

You make some fair points and reading contrarian opinions is a great way to shake yourself out of the tribalism/groupthink that undoubtedly exists. A stance against speculation was greatly needed.

I guess the goal was to stir the pot but in my view, your derisive tone also detracts from the overall quality of the piece. This sounds less like an objective analysis in search of the truth and more like someone who made their mind up quite a while ago. It discredits the merit of your argument to some degree.

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- Jeff January 7, 2018, 3:33 pm
  
  I felt that he presented rational arguments backed by analogies that could potentially help people to understand his points. I feel he was communicating a rational viewpoint, nothing more, nothing less.
  
  Reply
Paul January 5, 2018, 8:39 am

While current valuations certainly do not justify the current utility, I really struggle with how people do not see at least *some* value in the Bitcoin network. A highly secure, border-less network of wealth, capable to transact anywhere in the world nearly instantly without intermediary. This is an enormous technological breakthrough, and I am 100% confident that in 20 years from now digital assets will be on par to tangible commodities in the investing universe.

Separating blockchain from Bitcoin is missing the mark. You can’t be pro-Blockchain and anti-Bitcoin. The currency aspect is crucial to the network to keep it secure. You need to reward miners, otherwise there is no incentive for people to run the software and keep the network going. Blockchain without a currency is a centralized database, something we’ve had forever.

My take: valuations are crazy right now, driven by greed and speculation, and Bitcoin itself may wind up being the Myspace of digital assets in the future, but there is real future utility in the underlying technology here. Eventually, there won’t be money to be made in cryptocurrencies, and they will act like a commodity. It’s highly likely the crypto market is going to correct significantly. However, eventually, a few of them will change the world.

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Jessica Ryan January 5, 2018, 9:02 am

I don’t know about all of you, but it (crypto) has immensely lowered my transaction fees and losses on fiat exchange rates. I live in the UK, my husband is working in the US. Sometimes we need quick transfers. My brother is a dev and hates Bitcoin as well, but what’s to say the market is so bad and people should overlook redistribution platforms that take ownership away from the big 4, energy use (grid+), social networking not controlled by ads? There are enterprise ethereum shops right now rebuilding government systems in the USA, UK, and Dubai. The ‘bubble’ isn’t that ‘big’ if it is one at all. The growth rate is what’s affecting sentiment the most, but we live in an era of mobile (first), payments, the first open 24 hour market of it’s kind for trading, easy participation etc. Separating the price from the tech is important-
most dApps will fail, but several will change the underlining pinnings of industries. The Dapps and protocols with the ‘most’ promise are the ones getting the most funding in the market. Everyone has to do their research, but to pretend it’s a sideshow is incorrect.

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- Morten January 6, 2018, 5:51 pm
  
  When your husband buys bitcoins in the USA, he pays with real fiat money (USD). When you receive the bitcoins and sell the BTC, you get GBP. Now this means the exchanges has a fiat money flow from USD to GPB. The governments wants control over this foreign money flow. Since everything needs to go through these exchanges, how long do you think the governments will allow this undocumented transfer of fiat, which the exchanges have to do? What would a bitcoin be worth without a working exchange?
  
  Reply
Craig January 5, 2018, 9:24 am

Hahaha what do you know Mr. Moustache? You’re just a “personal finance guru” aka you probably have a remedial knowledge of markets and investing in general. Stick to your index funds, mutual funds, 401K. clipping coupons and avoiding starbucks. I have 7.5x my crypto investment in the last 6 weeks with many more gains to come. I guess that “fake money” is really working out for me! You should give it a try.

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- Jeff January 7, 2018, 3:28 pm
  
  Did you put your money into crypto as an investment, or as a speculative momentum trade. I’m betting it is the latter.
  
  Reply
Andy January 5, 2018, 10:04 am

To all the haters of “corrupt” banks, financial institutions and the Federal Reserve – you appear to know nothing of the complexity of our current financial system and how it makes our modern world possible. Without these institutions the economy would NOT work. Even if consumers and businesses conduct millions (or billions) of transactions using bitcoin, no one has addressed lending and capital markets which bitcoin has nothing to do with and cannot be involved in without the large institutions. How will the corporations that we all depend upon for power, heat and innumerable goods and services obtain the capital they need to operate, grow and invest in new technology? Who will lend them the capital (whether in USD, CAD or bitcoin)? How will millions of people borrow to purchase their first home? Not to mention that the Finance sector is a huge provider of well paying jobs, another reason why the industry and the government wouldn’t easily facilitate bitcoin (or any other digital currency) becoming mainstream without the help and involvement of financial institutions (either current institutions or new ones replacing the old).

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- Jorge January 12, 2018, 10:01 am
  
  You don’t fully understand the implications and complexity of cryptocurrencies. If business (small or big) want to obtain financing they can jus issue their own cryptocurrency to obtain capital. The sucess of it will depend on what the currency will offer to their owners (dividends, appreciation, discounts, etc). That is what ICO (the equivalent to IPOs) is all about.l, but without the big banks stealing from the small investors.
  
  The whole centralised financial system can be replaced by a decentralised cryptographic finantial system. Without the crooks that the big banks, the stock exchanges and the goverments are.
  
  Reply
  - Darren January 12, 2018, 11:43 am
    
    Jorge,
    
    That is an interesting idea, I didn’t realize that was the way the winds of change were blowing. However, one wonders, what currency will the dividends be issued in? How are these redeemed for eggs at a grocery store and in what quantity?
    
    Darren
    
    Reply
Disappointed Long Time Reader January 5, 2018, 10:09 am

Man,

Bitcoin is a new asset class with no precedence. There isn’t an event in past history that we can draw similarities to.

Read about the history of currency please.

The reason we created currency was to facilitate banter. Or simply ease of transaction. There were no governments at that time. Therefore, gold coins were created. The social construct that gold is valueBle.

Governments came in to just créate consistency , standardize and unify a territory under the same currency. At that time, there wasn’t social media or eay to communicate and standardize. Now, this is no longer a challenge.

All the crytography removes the need for a trusted third party. The third party is the algorithm.

Regarding your nail clippings, I want you to try:
– sending them over the wire within 20 min to anyone in the world for exchange of a service.
– store them and use them in the future without any decay.
– we dont know how much supply of nail clippings you can produce in your lifetime and whether these are legitimaly your nail clippings.

Everything is psychological. It is a social construct.

Even more, awkward, check this one out.
https://steemit.com/steemit/@fiserman/venezuelans-turn-to-playing-runescape-in-order-to-survive

I am venezuelan and I grew up in a hyper inflationary economy.

US is exhibiting all the symptoms, except that it is a little different, because almost all trade happens in dollars.
Basically, US pumps in inflation to all countries in the world by printing money.

Here in US we see, stagnant wages and raising cost of living… your salary affords you less everytime.

The de-flationary effects of bitcoin and other crypto currencies will make everyone in the world a mustachian.

What’s coming will free us all! Including you, believe it or not.

There hasn’t been a deflationary currency in history.

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- Morten January 6, 2018, 6:00 pm
  
  Oh man.. Someone sold you a pink fluffy unicorn..
  Where do I start..
  First, as long as every crypto needs to go via fiat, it’s doomed. If you can go to the neighbour farm and buy fruits using crypto without even mentioning how many USD it is worth, you’re getting closer, but imagine you got there, who will provide the infrastructure to connect to the blockchain? And the legal system to prevent your neighbour from ripping you off?
  I fear that the lesser functional part of the world, like the Venezuelan is going to end up as the loosers in this bigger fool’s game, because they bought, and are not capable of seeing, the hype.
  
  Reply
  - Disappointed Long Time Reader January 8, 2018, 11:47 am
    
    There are few elements here:
    I know it’s a very fluffy unicorn hehe, but I really wish it can come thru.
    
    1. There has to be a way to improve the current system. This system we live in right now, is very limiting, because the pace of earning and spending power of people is limited. It is sort of remaining constant in time and limiting human evolution. A deflationary currency would enable a lot of new businesses and economies that currently don’t exist due to high cost.
    2. No one is saying that this would replace the legal system. Legal system will continue to exist.
    3. Infrastructure would continue to be descentralized as initially designed in the bitcoin network.
    
    Reply
Jessica Ryan January 5, 2018, 10:28 am

And actually, MMM, you should sign up to BAT and start receiving BAT payments for the attention on your site via Brave. This is now fully implemented tech. Good luck. Keep us posted if you participate.

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Richard January 5, 2018, 10:31 am

It’s good to read something that’s not entirely positive about crypto currencies to add a little balance. Still there are a few things that aren’t addressed.

1) it’s obviously a ridiculous idea that crypto currencies will be the only ones we use in the future. However you’re not addressing the utility they may have in certain situations. PayPal is useful, even though it’s not going to take over the world. Fast, low-overhead international transactions with low fees would also be useful in some cases.

2) no, it’s not all about government avoidance. I’m happy for the government to see when I send $50 to a friend, to the same extent they currently do (I’ve never been interrogated over it). But I’d like it to happen in 3 seconds instead of 3 days.

3) you’re saying that’s limited supplies of a currency lead to deflation. That’s why it can’t be the dominant world currency. That’s a good point however deflation also means the value of the currency is going up. That would justify current behaviour to some extent. The biggest argument against a currency would be hyperinflation.

4) a lot of these things haven’t happened at this point. However we now have a lot of people who own crypto currencies and have the ability to buy and sell them quickly. The friction got a lot lower in the last year which makes it a lot more likely that practical applications will emerge. Remember that the best technology doesn’t win. The one that everyone is using is the one that wins. That can be very hard to change after it’s established – just look at the countries they got telecommunications much later than the US and now have better technology.

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Mark January 5, 2018, 1:56 pm

Hi MMM – You might find this commentary article by Jeremy Grantham interesting (published a couple days ago):

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/viewpoints—bracing-yourself-for-a-possible-near-term-melt-up.pdf

It discusses bubbles and whether the US stock market is currently in bubble territory. It briefly mentions bitcoin – there is a chart on pg. 11 showing that the run-up of bitcoin dwarfs the biggest bubble of all time – the South Sea Company bubble of 1719-1720.

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Nathanael January 5, 2018, 7:32 pm

Hi,

Interesting read! I just had a question about the following:

“…they thought they would be able to sell them to someone else for more in the future.

When you make this kind of purchase, which you should never do, you are speculating, which is not a useful activity.”

Does this damning assertion apply to capital gains-based strategies (and therefore many if not most stocks) generally? I mean, there are many high quality stocks that do not pay dividends, for example. I guess I’m just curious how far you extend this thinking, MMM.

Cheers,

Nathanael

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savetheday January 6, 2018, 5:57 pm

PLEASE MMM you MUST PROMISE to do a follow-up on this article in 2, 5, and 10 years time, no matter the state of the USD and BTC.

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Jeremy Collins January 7, 2018, 7:37 am

Blockchain was invented because of Bitcoin. Saying blockchain is valuable but Bitcoin is dumb is like saying Tesla sucks but direct to consumer marketing of electric cars is a good idea.

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FIRECracker January 7, 2018, 9:15 am

Ahh bitcoin idiots.

This video says it all “https://www.youtube.com/watch?v=g-zIbVEjVpQ’

“Because the good hearted anonymous people behind bitcoin only release a limited amount of this NOTHING, it’s worth SOMETHING.” Bwahahaha.

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Doug January 7, 2018, 10:55 am

I don’t know much about this Bitcoin, but judging by how much it’s gone up it looks like a bubble. I’m 57 years old and remember when gold went up to $800 an ounce about this time of year in 1980 and there were people lining up to buy it. To this day I wonder why the buyer lineups weren’t 3 times as long in 1999 when gold went down to about $240 an ounce, but that’s another story. In all my years of living I’ve seen bubbles inflate and burst and still don’t understand it all.

Myself I prefer to investments that are on sale. For example in the last 3 months I’ve increased my exposure to T-NY, GE-NY, and ENB-T. All 3 have gone up slightly and, unlike Bitcoin, will probably hold value at worst. Meanwhile they also pay dividends and I sleep better at night not worrying about their volatility.

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ZJ Thorne January 7, 2018, 11:36 am

I have a coworker who won’t be quiet about bitcoin, and I asked him to tell me what type of commodity or stock this was. He gave me a blank stare. It’s speculation and exists for its own sake. The blockchain is interesting, for this non-programmer, but the coins are like gold to me, too. If something has no intrinsic value, but we like it because it is shiny, then I’m just not going to be interested.

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Jeff January 7, 2018, 3:11 pm

MMM, You are brave indeed for producing rational arguments for a topic that is ruled by emotion.

Three points I would like to comment on:

(1) Saying there can only ever be 21 million Bitcoins is a fallacious argument. Since Bitcoin is just computer numbers, there is nothing stopping extensions to the protocol for fractional shares, if that is not already available. The fraction size might be represented by a 256 bit number, which for all intents and purposes might as well be infinity.

(2) Apparently, a given Blockchain distributed system can only support thousands of transactions per second as a theoretical limit due to the decentralization of servers and limitations on the speed of light. A true global transaction system would need to support hundreds of millions or billions of transactions per second to be practical.

(3) People who want to illicitly trade money across borders have to have a means to do it. Blockchain is a good mechanism for this. Don’t discount the value of Blockchain, because those actors have to exchange there money somehow, and in desperation they will funnel their illicit money through any channel available. In other words, Blockchain could be worth more than you would rationally expect for longer than you expect, because there is a rational market for it among illicit money exchangers.

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- Disappointed Long Time Reader January 8, 2018, 11:59 am
  
  1. While it’s true that the number can be represented by 256 bits, the mining processes can’t be subverted. And there is an interest in keeping it the way it is, because it preserve’s people’s wealth. There won’t be more than 21 M coins and while there can be fractionals of a coin, these would still be hierarchical.
  
  Meaning, 1 BTC continues to be 1 BTC, 0.001 or 1 mBTC and 0.000001 or 1 micro-BTC and 0.000000000001 or 1 pico-BTC. All these fractionals are part of the unit. (Currently up to 8 decimals are supported). But 1 BTC continues to be 1 BTC and the price of it continues to grow due to scarcity. Just like any other scarse commodity. The additional fractionals can’t be equal to 1 BTC simply because BTC is only created through the mining process.
  
  Let’s say the total coin limit were to be increased, it would be a different coin and you can see different coins in the market that even have like a trillion coins. Since no one can force miners to upgrade their mining software, every change has to be through consensus. Miners are interested in higher rewards and dilution of the currency by issuing more coins wouldn’t be benefitial to them.
  
  2. I agree with you on this, but it will just take time to reach this scale. I can imagine a $300 Billion market is a huge opportunity and people will find ways to capitalize on this by offering services. Slowly, it’ll catch up, the rewards are huge.
  
  Reply
  - Jeff January 8, 2018, 9:48 pm
    
    1. Right, so in practical terms, there are already a maximum sanctioned 2.1 quadrillion tradable Bitcoin units, (2,100,000,000,000,000) but for some reason only 21 million of them are advertised. Furthermore, payment channels appear to operate in a unit called the millisatoshi, which adds another factor of a thousand tradable units to that already large number. In light of this, the fact that the advertising focuses on the 21 million number seems suspect.
    
    2. I don’t think it will still strictly be by definition Blockchain if they come up with a scheme that is parallel, anonymous, decentralized, and can handle hundreds of millions of transactions per second securely. I think that speed of light limitation is going to make it a heavy lift.
    
    Reply
King Cashbags January 10, 2018, 1:27 pm

I think it is the cryptocurrency sellers rather than the cryptocurrencies that I am wary about. Seems to me too easy for scammers to claim they can sell you crytocurrencies. How can the man or woman in the street be sure when buying crypto for cash in the first place?

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Ubik January 11, 2018, 7:25 am

When you drill down into it, almost everything about Bitcoin is concerning. Off the top of my head, barely scratching the surface, you have:

– Transaction delays
– Fees
– Electricity consumption
– Data consumption
– Pseudonymity
– Replicability
– Technical obsolescence
– Scalability is bullshit (lightning network doubly so)
– Devteam politics
– Concentration of miners
– Tethers
– Fraudulent trading – openly promoted by exchanges
– Generally immoral criminality of almost all associated businesses
– Collapse in retailer acceptance
– Concentration of ownership
– ‘Store of value’ delusions
– Use for ransomware, and worse
– Total vulnerability of network to government intervention at point of intersection with the broader economy
– Collapse of dark net market use
– Absence of any utility
– Mania

Etc etc etc…

Almost all of the above applies to every ’altcoin’ at scale.

It’s utterly mad, you’d have to have rocks in your head to put any money you can’t burn into this.

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Tim January 11, 2018, 8:25 am

Couldn’t agree more with this article. Bitcoin is a classic pump and dump, consumes significant amount of energy, and worse it greases the wheels of money transfers for illicit activities. The fact that the creator(s) is/are anonymous is even more alarming. He/she/they have undoubtedly made a fortune. What’s even more disturbing is reputable exchanges such as the CME listing futures on Bitcoin. Well now we can all easily short Bitcoin!!

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BigTasty1212 January 11, 2018, 10:02 pm

http://www.telegraph.co.uk/technology/2018/01/11/bitcoin-price-plummets-south-koreas-plan-ban-cryptocurrency/

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Jorge January 12, 2018, 9:43 am

You did not understand what cryptocurrencies are about. Specially if you think that everything is well with money printed endless by all central goverments. The current financial system is the cancer and cryptocurrencies will be the cancer pill, whatever is called bitcoin, Ethereum o Monero.

With the amount of debt accumulated worldwide, with the amount of bills printed (or issued digitally) the bubble in FIAT is so big that it is going to explode sooner than later. Yes, the stock market is at highs, that is the real bubble, because it is inflated by the quantitative easing – the federal reserve buying asseta with money that they just created from no where, and companies buying their own stocks with ridiculous cheap debt because of the QA. What is happening in Venezuela now will happen worldwide soon.

Cryptocurrencies come to solve that. Some are deflationary (bitcoin and siblings) which I think is the way to go, and some are inflationary (Ethereum and others), and most are decentralised meaning that there is no central bank to manipulate the currency to favour their friends and make poor the rest (if they buy assets with money that appeared from thin air, making prices to rise (inglation) and you have to work hard to earn it, that is called robbery).

You are right about the block chain technology. Crypto money is only the first application of it, but there will be many more. We can compare it to the creation of Internet and email. The block chain is like intenet and crypto money is like the email, we still have to invent many new applications like what happened with the Internet.

Is it bubble? Yes the stock market due to QA. No cryptocurrencies, at least yet, what we are seeing is the typical S adoption curve. Would there be a bubble in cryptocurrencies? probably, like it happened with the .com bubble, but then it recovered and now we have the google, Facebook, amazona, etc… The same will probably happen with the block chain technology… and… We stillegar have email, the first internet application.

Think about it…

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- Jorge January 12, 2018, 10:11 am
  
  sorry for the misspellings, writting in a phone connected to the Internet from the .com bubble ;)
  
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Joe January 14, 2018, 8:13 am

I know it’s not a “technical” opinion, but Bitcoin just doesn’t pass the smell test. So, if this thing is ever going to be any utility to the world, the burden of proof lies on it, not vice versa.

I currently go to work, I get paid. Does the status quo have warts? I’m sure of it. But crypto needs to prove to me it’s useful. End of story. And it hasn’t.

Why won’t I put a dime in it? Bitcoin will either fail spectacularly at its purpose and be worthless or it will be wildly successful and fulfill its promise. If its the latter it’s no more attractive an investment than a checking account. Zzzzzz…..

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