Bitcoin’s Declaration of Independence, endorsed by numerous celebrities, states that
We consider these truths self-evident. We have been periodically betrayed, lied to, stolen from, extorted from, taxed, monopolized, spied on, audited, evaluated, empowered, registered, cheated, and reformed. We are economically disarmed, disabled, held hostage, impoverished, frustrated, exhausted and enslaved. And then there was bitcoin.
Bitcoin and other cryptocurrencies are not, in reality, a useful alternative to cash, checking accounts, debit cards, credit cards, and other components of the financial system that power the economies of developed countries. Blockchain technology is slow, expensive and environmentally unfriendly. In 2021, Cambridge University researchers estimated that bitcoin blockchains consumed as much electricity as the entire country of Argentina, with only 29 countries using more electricity than bitcoin. Bitcoin is essentially destroying the climate.
In June 2022, a letter to the leaders of the US Congress signed by 1,700 computer scientists stated that blockchain technology
It is poorly suited for almost every purpose currently presented as a source of existing or potential public benefit. We strongly disagree with the narrative of those with a financial stake in the crypto-asset industry that these technologies are a positive financial innovation in any field. a viable way to solve the financial problems facing ordinary Americans.
However, as a speculative investment, bitcoin has been spectacularly speculative. I’ve written many times (including here , here , and here ) that bitcoin is a bubble fueled by bullshit. True believers did not appreciate my skepticism. Nobel laureate in economics Paul Krugman and New York Times The columnist wrote that bitcoin is “a cult fueled by paranoid fantasies about evil governments stealing all their money.”
Here are some of the many responses (corrected for spelling mistakes) from angry readers of my articles:
Rich people fear Bitcoin because it means their wealth could go to the “peasants” and they fear becoming irrelevant.
Bitcoin makes cross-border payments possible and provides an easy way for people to avoid failing government monetary policies.
No one believes this organized FUD paid by American Express and other banking institutions.
FUD is a popular acronym for “fear, uncertainty, and doubt.” Another HODL. An enthusiast once misspelled the word HOLD as HODL (bitcoin forums have a lot of mistakes), which was misinterpreted as short for “hold on for dear life.” Bitcoin fanatics ignore FUD and just HODL.
In the long and humiliating history of bubbles, bitcoin is no match for the Dutch Tulip Bubble, the British South Sea Bubble, or the US DotCom Bubble. But all bubbles share common characteristics.
At first, real innovation excites and excites. The tulip bubble began with the introduction of tulips to Western Europe. The South Sea Bubble began with the granting of exclusive trading rights in South America. The Dot-Com Bubble started with the Internet. The Bitcoin bubble started with blockchain technology.
As prices rise and some get rich, others rush to get rich. An influx of buyers pushes prices higher, lures more dreamers who don’t want to be left out, and attracts scoundrels who sell their dreams. At a certain point, prices stop going up and there is no reason to buy anymore. Dreams turn into nightmares in the exit crowd.
The intrinsic value of an asset is what you would pay to hold the asset forever and receive the income it generates in interest from bonds, dividends from stocks, rents from apartment complexes, businesses. What turns a bubble into a bubble is when the price of an asset rises well above its intrinsic value. People do not buy an asset for the cash it generates, but instead expect to be able to sell it quickly for a higher price.
This is the Big Stupid Theory: Pay a stupid price because you hope to sell to a bigger stupid. The intrinsic value of bitcoin (and other cryptocurrencies) is a big zero because bitcoin doesn’t generate any cash. The only reason investors buy bitcoin is because of the expectation that they can sell their bitcoins to bigger fools.
Now the FTX cryptocurrency (and dozens, maybe hundreds) of related companies have crashed and burned. We don’t know the details yet, but it appears that they used customer funds to buy and sell cryptocurrencies, creating highly leveraged bets on extremely volatile prices.
Over the past year, bitcoin prices have fallen from above $60,000 to $20,000 and now below $17,000 following the FTX collapse, which may lead some to believe that Big Fools will be harder to find in the future than in the past.
However, the future prices of bitcoin and other cryptocurrencies are highly uncertain due to extensive market manipulation by “whales” who control much of the market. In 2019, the Wall Street Journal reported that approximately 95 percent of bitcoin trades are fraudulent trades to manipulate prices. A 2020 study published in the Journal of Finance concluded that almost all of the rise in bitcoin prices in 2017 was due to one large, unknown trader trading using another digital currency called Tether to buy bitcoins. .
In a 2021 report, Research Affiliates, a widely respected investment management firm, concluded that
maybe [bitcoin] it’s just a bubble fueled by retail frenzy, and some institutional money is eager to get a piece of the action. Alternatively, and in my opinion, this “bubble” is more of a hoax than a craze.
On August 3, 2021, the head of the Securities and Exchange Commission said that cryptocurrency markets are “rife with fraud, fraud and abuse.” In June 2022, the US Department of Justice indicted six people for cryptocurrency fraud. As I write this, many people are waiting for more shoes to drop.
No one knows when it will end. But it will end badly. At some point, the supply of bigger fools will dry up, the manipulators will dump their bitcoins, and the bitcoin bubble will end the way all bubbles end. Today we laugh at the Dutch who pay the price of a house for a tulip bulb. Future generations will laugh at us for paying literally nothing for a luxury car.