TWO SIDES OF THE BITCOIN: Tails

Many people are asking whether bitcoin is a legitimate proxy for gold as a hedge against fiat currencies and geopolitical risk. Bitcoin is competing with gold as an investment to offset the risk of currency devaluation and geopolitical risk, but for the stupidest of reasons. It shouldn’t be.

If there is a bubble in the world today it is in the world of cryptocurrency trading. It is nonsense behind belief. That said the plumbing behind it, the blockchain, is genius and is going to change trading. But bitcoin itself, Ethereum the other dozens upon dozens of cryptocurrencies are utter nonsense. The volatility of the cryptocurrencies, where you can move 25% to 40% in a week, might be a punter’s paradise but ostensibly, bitcoin, Ethereum and all the other crypotcurrencies were supposed to be used as a monetary phenomenon. Using cryptocurrencies to buy a house, to buy clothes and to buy food is utterly ridiculous. How can anybody use a currency whose value goes up or down by 30% or 40% in a mere matter of hours?  How can that be used as a purchasing mechanism? It makes no sense.  God bless the people who trade it, but as all bubbles end they will end in tears.

The whole notion behind bitcoin is that there will be an absolute finite number of them to go around. It didn’t have to be backed by anything; just the fact that there was a finite amount gave some value to bitcoin, but then comes Ethereum, and dozens of other cryptocurrencies. So there is not a finite supply of the cryptocurrency, there is an infinite supply.

This looks too much like the Tulip Bulb mania, this looks too much like the South Sea Bubble and this looks too much like the dotcom craze in the early part of this century.

Bitcoin, Ethereum, et al. look like a punter’s paradise, but do they compare at all to the legitimate valuation of gold? Not even slightly.  Originally there was only going to be 21 million bitcoin mined. If there had just been bitcoin with its finite nature, I would have said good that makes sense. Bitcoin has already nearly run out of its mining capabilities, but now you have dozens upon dozens of other cryptocurrencies. How can you invest in an asset class with an infinite supply?

A currency that can move 25% to 30% makes it impossible to use it as a pricing mechanism. Say you agree to buy some exotic automobile that costs $100,000 with bitcoin and bitcoin is valued at $4,000. You say I’ll pay you 25 bitcoin for that $100,000 automobile and take delivery of it next week. What happens if bitcoin falls from $4,000 to $3,000, which would not be unusual. Is the dealer going to stand by his agreement? Probably not. Because now he is getting 1/3 less. Are you going to stand by your agreement if you agree to spend 25 bitcoin to buy a $100,000 car and the next week bitcoin goes to $5,000? You are probably going to say ‘I am not going to give you 25 bitcoin, I am only going to give you 20 or 15 bitcoin.’ How can you accommodate trade in that environment? You can’t it’s nonsense.
Shame on Cboe Global Markets for even considering listing bitcoin futures. It is a punter’s paradise, I wish everybody who trades it well, I hope they all make tons and tons of money, but it will not end well.

The amount of electricity being used for the miners is an astonishing number; it is something like 1% or 2% of total world electricity generation that is going into the mining of the cryptocurrencies. It is incredible.