Things That Go Bump in the Night.
Shio Kaze Revisits Bitcoin
It has been several years since I wrote my original analysis of Bitcoin, entitled “Ayn Rand’s Dollar,” for the Financial Seminary. Obviously I was too optimistic about Mt. Gox, but I will stand by nearly all the rest of what I wrote, including the conclusion that the Somali shilling has more intrinsic value than Bitcoin, or for that matter any other cryptocurrency. Further I did predict that we might see an explosion of Bitcoin clones, and that has indeed happened with today some 800 to 1000 cryptocurrencies competing with the original. Most of these do not have to be taken seriously, but a few such as Bitcoin cash, Ethereum, Ripple, and Litecoin do.
Although I am certain the true believers will dispute it, this would seem to make claims that Bitcoin is inflation proof rather nonsensical. While the supply of Bitcoins is permanently fixed, that for all cryptocurrencies would appear to be limited only by the ability of nerds to create them and the electricity needed to “mine” them. Actually at some point electricity may put some kind of halt to this game, at least as we know it. Currently Bitcoin mining in a single day uses more electric power than the entire country of Denmark. Given the nature of Bitcoin and the needed mining techniques, that amount can only increase in the future.
However, what I find most disturbing about Bitcoin today is that what started out as possibly some sort of novelty to give techies and libertarians great dreams for the future may now have developed into something far more sinister and without most people actually becoming aware of it.
The majority of the population of America still has little or no perception of Bitcoin. This is especially true of the elderly, where a recent survey indicated only 15 percent of those age 65 or older knew anything about it. The situation among millennials, those 18 through 34, is quite different. In that cohort over 40 percent knew something about Bitcoin, and most claimed that if they had $1,000 to invest they would prefer to invest it in Bitcoin rather than stocks or bonds. Even more disturbing is that while the group is still rather small, the number of people who are funding their retirement accounts with Bitcoin is growing rapidly.
Should there be a total collapse of Bitcoin, it is likely to take down the other cryptocurrencies with it, and one has to wonder what happens to the financial situation of this country if a large number of people wake up one morning and discover that their financial accounts are now worth zero or close to it. There is also the possibility that the herd mentality could spill over and severely impact the price of more traditional investments, at least temporarily. Stories are now circulating of people purchasing Bitcoin with credit cards, not for convenience but because they do not have the cash to do otherwise. There is a fear of missing out and probably at the same time the feeling that there will always be a greater fool to buy my Bitcoin at a higher price than I paid. When the music stops, and it will, there will not be enough chairs for everyone to sit down. A few fortunes will be made. There will be far more bankruptcies. Tulip bulbs will go back to being tulip bulbs.
Of course some may say cryptocurrencies may crash but blockchain technology will not. I tend to agree with that. However, the current practice of changing names of companies with little or no revenue, and which never had anything to do with technology, to include the term “blockchain” is yet more evidence that there is some sort of mania going on, as people pay outrageous prices for these near worthless stocks.
Another factor I find disturbing is the ethics, or more correctly the lack of ethics, operating among some bitcoin users. Nowhere is this more apparent that with the so called Bitcoin faucets. A bitcoin faucet is supposed to give you a small amount of Satoshi (100 million Satoshi equal one Bitcoin) for performing a simple task, such as watching an advertisement. Go to the Google Play Store and you can find plenty of them you can download for free. They often advertise themselves as Bitcoin miners, but you are not mining anything. These are really not much more than ad farms.
The vast majority of Bitcoin and other crypto faucets are completely fraudulent. Although with the few legitimate ones it can take weeks, more likely months, just to earn the equivalent of a couple of dollars, the fraudulent ones pay nothing. You appear to be earning Satoshi, but in fact you will not be able to transfer them to your Bitcoin wallet. You have wasted time and power. Sadly many of the victims are from India and other developing countries, where numerous people are desperate to make even an extra dollar or two.
If we need any evidence of the excess in cryptocurrencies, Dashcoin can provide it. Created as a parody, its inventor supposedly was in dismay that it at one time it had reached a total value of one billion dollars. There is of course nothing backing or regulating this token.
Still other questions are raised by Bitcoin. It was supposedly created to avoid outside regulation. However, Ripple brags that it will be useful for banks. Bit coin was to be the currency of the future. In fact because of its extreme volatility and other factors it is increasingly difficult to buy anything with it. One pizza place in New York City that does accept it has to charge over $34.00 for a piece of pizza that cash or an ordinary credit card can purchase for less than $10. The nature of Bitcoin requires the transaction fees to rise as the market value of it rises. Today the number of retail outlets that take it is shrinking, except possibly on the dark web. Some places that supposedly did accept it such as Overstock.com in fact never did. They simply made it easy for you to convert your bitcoin into cash when you made a purchase. They got paid in currency and the buyer took all the risk of bitcoin price fluctuation, which could be considerable, as it might take several days in some instances for a transaction to clear.
Should you think I am too negative about Bitcoin, then you can watch James Altucher. He is all over the Internet these days and makes occasional television appearances. I have been following Altucher before he ever got into cryptocurrencies. He has made and lost several fortunes. He is a very intelligent if somewhat unorthodox thinker. And I think he is totally wrong on Bitcoin. But you can make up your own mind. In the meantime, “Know when to hold them, know when to fold them, know when to walk away, and know when to run.” And by all means, “Don’t count your money till the dealing is done.”
