I’m really enjoying the vigorous debate about Bitcoin taking place across the liberty movement. It’s really interesting that many of us who are anti-central bank actually have sharp disagreements now on the Bitcoin situation. Yet we’re all pro-crypto-currency, and we all hope Bitcoin succeeds in the long run. (I’ve been mining Bitcoin for quite some time, and I fully understand the crypto-currency structure.)
As you may know, I’ve recently taken the position (in just the last couple of weeks or so) that Bitcoin is headed for a catastrophic collapse because it currently exists in an irrational, speculative bubble driven by clueless noobs who think Bitcoin generates wealth by magic. Others completely disagree, saying that Bitcoin has only just begun to grow and could reach $1 million per coin. This is an exciting disagreement for the simple reason that somebody is going to eventually be proven really, really WRONG. (Without this division, no market can function at all, by the way. All markets require two opposing sides who disagree on the value of a particular asset.)
I was correct about the dot-com crash in 2001, by the way, and was also correct about the sub prime mortgage collapse. In both cases, before those crashes took place, I was routinely ridiculed by people who insisted “the rules are different this time” and said I was being pessimistic, since “everybody is going to get rich” as long as they all buy in. Sound familiar? This is all the same stuff you’re hearing now about Bitcoin. What Bitcoin promoters don’t seem to realize is that they sound just like the dot com promoters in 1998… who eventually lost nearly everything when the crash happened in 2001.
In any case, I should state for the record that I don’t intend to imply any personal attacks against individuals who disagree with me in this space. We’re all pro-liberty and we actually share a lot of the same goals about making corrupt governments and central banks OBSOLETE, but I do disagree with their justifications for saying Bitcoin will keep going higher. So in the spirit of continuing this “vigorous debate,” I hereby present several questions that, once you answer them, should cause you to seriously rethink the future of Bitcoin.
Question #1) Apple produces iPhones. Amazon produces fulfillment services for millions of products. What does Bitcoin produce?
Answer: Nothing. That is, nothing other than increasingly irrational speculative expectations for the price of Bitcoin. Bitcoin isn’t a company and Bitcoin produces no products. As a non-entity, it has no revenues, no assets, no patents and no employees. 100% of its value is based on faith, and faith is a fickle thing.
Question #2) Bitcoin’s “value” has increased by 350% in the last 12 months. What has Bitcoin introduced in that time period that would justify a 350% increase in its value?
Answer: Nothing other than increasing expectations (i.e. “hype” and mania). Again, there is nothing any person can point to in the last 12 months that would cause Bitcoin to be suddenly worth 350% more, other than a 350% increase in the speculative “faith” in Bitcoin itself. There aren’t 350% more merchants accepting Bitcoin, for example, and there aren’t 350% more awesome uses for Bitcoin. If anything, Bitcoin is now slower and more expensive to use than it was 12 months ago, meaning the advantages of Bitcoin over other forms of money transactions are eroding. The only mathematical reason why Bitcoin is 350% higher now than it was 12 months ago is because 350% more money has been thrown at it, almost entirely by speculative investors whose only goal is to ride the wave of speculation higher and higher, then sell at whatever they think is the top. They see Bitcoin as a “get rich quick” vehicle and nothing more.
Question #3) Bitcoin is being promoted as a “store of value,” yet it frequently will correct by 30% – 50% in under 48 hours. What is YOUR definition of a “store of value” and how does Bitcoin fulfill your definition?
Possible answer: A store of value should have minimal volatility. It should neither gain value overnight, nor lose value overnight. It should be something with a long, multi-generational track record of preserving wealth. Very few things in our world meet these qualifications. Some of the things that do are gold, land and fine art (museum quality). Shares of stock in certain corporations have also stood the test of time (Lloyds of London), but crypto-currencies have existed for barely a single decade. There isn’t a single crypto-currency that has stood the test of time.
Question #4) If you are holding Bitcoin in the hopes of selling it at a higher price, how will you know when to sell it? (In other words, when has Bitcoin reached its peak, in your mind?)
Possible answer: No matter how high Bitcoin goes, lots of Bitcoin holders will continue to insist it will go much, much higher. With people now throwing around estimates of Bitcoin reaching $1 million per coin — without any real justification to back it up, by the way — you would obviously be a fool (according to this logic) to sell it at $10,000 or $100,000 or even $500,000 per coin. Ask yourself: What’s your selling point? How will you know when you reach it? What is your argument for why that selling point isn’t NOW?
In reality, you will sell Bitcoin when everybody else panics and starts selling Bitcoin, too. Like nearly everyone else, you will follow the herd and do what they do. That’s why all speculative bubbles rapidly lose value in a runaway panic once people come to their senses. It’s also why all the masses who think they are buying low and selling high actually end up buying high and selling low.
Question #5) What does Bitcoin offer to secure its dominant market position that no other crypto-currency offers?
Possible answer: Nothing other than name recognition, and that’s fading fast. With Litecoin, Ethereum, Zcash and other crypto-currencies rapidly gaining market share, Bitcoin has now dropped below 50% of the aggregate crypto-currency market capitalization for the first time. Visit CoinMarketCap.com to see a list of 100 more crypto-currencies, including Ripple, Dash, Stratis and Monero. Many of these crypto currencies are technically more advanced, more secure and more anonymous than Bitcoin. There is really nothing Bitcoin has that’s unique enough to prevent people from selling Bitcoin and moving into some other crypto-currency en masse. Thus, the argument that Bitcoin will be worth millions of dollars per coin because it will become the world’s dominant crypto-currency and eventually replace the U.S. dollar really has no rational basis.
Question #6) What is the profile of the typical “new buyer” to Bitcoin today vs. five years ago?
Possible answer: Five years ago, Bitcoin was being purchased by pro-liberty, high-IQ technical people who understood encryption, peer-to-peer structures and the distributed blockchain ledger. Today, Bitcoin is being purchased by Japanese housewives who think it’s a “get rich quick” discovery that generates wealth by magic. The radical change in the mindset of the people now ENTERING the Bitcoin marketplace should tell you something very important about where this is headed. People who have no specific loyalty to decentralization, peer-to-peer cryptology and borderless, bank-less currency also have no specific loyalty to Bitcoin or any crypto-currency at all. Once the “new thing” mania wears off on the noobs, they will flee Bitcoin and hop to the next popular investment craze that comes along.
Question #7) How will you sell Bitcoin if the power grid goes down?
Answer: You won’t. Without electricity, Bitcoin ceases to exist for the simple reason that it only exists as a computational hologram, requiring both a steady stream of computational power and a functioning internet to stay alive. Now, you might argue that the risk of the power grid going down is very slim. But NASA puts that risk at about 12% every decade due to the appearance of massive solar storms that would fry the current power grid structure and thrust much of our world back into the 1800s. A single EMP nuke attack from North Korea would also accomplish much the same thing.
For these reasons, Bitcoin is highly vulnerable to EMP, solar flares and nuclear war. Physical gold, however, outlasts all such disasters for the simple reason that gold is an element of matter and cannot be destroyed by any normal means, even if you try. (You can’t burn gold. All you can do is melt it into another shape of gold.)
Since I began warning about Bitcoin valuations a couple of weeks ago, I’ve been criticized by several Bitcoin advocates who nonetheless share my philosophy of liberty, self-reliance and decentralization of the money supply. I’ve read their arguments and attempts and logic, but none of them that I’ve seen have been rooted in anything resembling rational thinking.
What I really see right now is Bitcoin holders engaged in Bitcoin self-delusion, which is understandable because it’s a psychological phenomenon that’s well known in the world of speculative investments. Once people make a speculative investment decision in anything, they then begin to subconsciously find ways to rationalize that investment, convincing themselves more and more that their decision must have been a good one. These people, in other words, aren’t lying to you when they say they believe Bitcoin could go up to $1 million per coin: They truly believe it!
That’s why it’s dangerous to listen to Bitcoin analysis from people who own Bitcoin. It carries the same pitfalls as listening to stock buying advice from someone who’s trying to get you to buy the same stocks they already own: There’s an inherent conflict of interest at work. Only someone completely outside the system — who owns no substantial amount of the asset — can look at it with a clear head.
That’s where I’m coming from. I own almost no Bitcoin (about 0.35 Bitcoins at the moment), having recently traded Bitcoins for physical gold. If Bitcoin goes up, I profit virtually nothing, and if Bitcoin goes down, I lose virtually nothing. I’m approaching the Bitcoin issue with a clear head and an objective, rational mindset which just happens to be unpopular among Bitcoin holders for all the obvious reasons. They see my articles and commentary as a risk to their Bitcoin assets, which is proof that Bitcoin’s valuations are so fragile that the mere criticism of the Bitcoin bubble might cause a wipeout of Bitcoin value. (If Bitcoin were really a store of value, its holders would have nothing to fear from someone talking about Bitcoin being in a bubble, would they?)
Yet, they have a serious double standard in criticizing me for talking about this. Essentially, I’m being told that I should “stick to health topics” and stop talking about Bitcoin because only Bitcoin people know what they’re talking about. At the same time, they insist that everybody should own Bitcoin because the crypto-currency should be so widely adopted everybody has some. Do you see the obvious conflict? On one hand, they claim Bitcoin is so specialized and technical that only certain “Bitcoin elite” have the right to talk about Bitcoin. But at the same time, they claim everybody should buy Bitcoin, presumably even if they don’t understand how it works and have no right to talk about Bitcoin. This entire argument strikes me as borderline hucksterism. If everybody is supposed to own Bitcoin, why can’t everybody talk about Bitcoin? Are we all supposed to just buy Bitcoin, ask no questions and shut the hell up? Seriously? This is the argument of the “liberty-oriented” Bitcoin movement now?
BOTTOM LINE: Even though I have a long track record of promoting crypto-currencies like Bitcoin, the Bitcoin hype has now clearly turned into a “mania” craze. And what takes real courage and integrity is to state the obvious when everybody else is attacking you for doing so. Right now, I’m calling bulls##t on the current Bitcoin mania… at least until the speculative noobs are fleeced out of the system and Bitcoin values return to rational levels. Once that happens, I may very well advocate Bitcoin again. It’s not Bitcoin itself that’s the problem here, you see: It’s the bubble mania that’s going to hurt a lot of people who are buying into Bitcoin right now.
By the way, the only way new investors can “buy Bitcoin” is if someone is selling Bitcoin to them, which means by definition that plenty of Bitcoin holders agree with me because they are obviously selling Bitcoin to new buyers, trading digital ledger entries for cash and thereby transferring Bitcoin price risk to the noobs, most of whom will likely lose the vast majority of their investments once the Bitcoin bubble bursts.
Bitcoin will likely go down in history as the greatest financial fleecing of Asian investors in the history of the world.