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Bitcoin: Relentlessly pursuing $0


Bitcoin is “probably rat poison squared”  (as an investment)

– Warren Buffet

I wish I had been braver last year and shorted bitcoin as it hovered around $20K. But that old axiom, “the market can stay irrational longer than you can stay liquid”, kept ringing in my brain. Now, as bitcoin sits below $4K I can only calculate what I might have made. I will take as a shallow victory the fact that I DID advise friends who asked that they should stay far away from any bitcoin (or other cyber-currency) investment. While I didn’t make a fortune, I at least kept friends from losing money.

At $4K, is it now time to invest in bitcoin. No. Actually, make that NO!

We could discuss the problems with bitcoin:

  • like, how it may cost more money to “mine” a coin than the coin is worth would be an interesting starting point in a bitcoin value discussion,
  • or that bitcoins’ total potential value (21 million coins X current coin value of $4k = $84 billion) covers only a small, small percentage of the worlds’ annual $80 trillion GDP. In the absolute best case, therefore, bitcoin would be a proverbial drop-in-the-bucket in terms of the worlds’ total currency needs,
  • or how the claim of bitcoin decentralization is, as Nouriel Roubini has written, “a myth” as evidenced by bitcoin’s Gini coefficient of 0.88. [Note: the Gini coefficient is a measure of an entity’s wealth consolidation, with a score 1.0 representing that a single individual holds all the wealth; as an indication of how high 0.88 is (in a bad way), North Korea has a Gini coefficient of only 0.86.],
  • or how most coin “mining” is controlled by unregulated organizations operating out of places like Russia, and Georgia, and China, meaning that the potential for systemic abuse is rather high,

but it is likely better to focus on whether there is any need in the world for bitcoin. If there is a need, then bitcoin will have value; if there is no need, well…. the hunt for $0 will continue.

So as not to “bury the lead”, in short, bitcoin is a (lesser) solution (compared to other currencies) in search of a problem.

Bitcoin isn’t needed to provide the world with a digital currency.

All major world currencies are ALREADY digital currencies. Wire transfers, ACH, credit card transactions, Paypal, online banking, and every other means used daily by businesses and consumers have led to more than 99% of all transactions being made via some digital transaction with no physical money touching hands.

Bitcoin does not provide, nor improve, market liquidity which is critical to economic growth.

Fiat currencies, like the U.S. & Canadian dollars, Euros, Pounds, and every other major world currency, provide near instant liquidity. This is not true for bitcoin, where selling a coin can take time, and may require the seller to increase buyer incentive to complete a transaction. [For more information on fiat currency https://www.investopedia.com/terms/f/fiatmoney.asp]

The world doesn’t need bitcoin to support lending (and the economic growth supported by lending); in fact, bitcoin as a sole currency would provide no lending capability.

With an absolute, fixed number of coins available with a maximum value of $84B (@ $4K per coin * the theoretical maximum of 21M coins), bitcoin does not, by itself, fit into any lending models, other than potentially serving as loan collateral. U.S. banks are required to keep an on-hand reserve of about 10% of their deposits, meaning that 90% of the deposits are lent to others as home loans, business loans, car loans, etc. Bitcoin provides no means to support this type of lending model, as more bitcoins can not simply be created.

Well, it seems hard to find a compelling world “need” for bitcoin. Let’s explore other possible values.

Security? This is a topic that bitcoin supporters list as a benefit. But by many estimates, as much as 25% of the mined bitcoins have already been lost. That sounds insecure. And, there have been a number of spectacular failures (search “Mt. Gox”, as example) of organizations that hold er, “held” (more appropriate, since those organizations no longer “hold”) bitcoins.

Oh, and most consumer bank deposits are well covered by government-backed deposit insurance programs: in the U.S. there is the Federal Deposit Insurance Corp. (FDIC), which covers accounts up to $250K; in Canada there is the CDIC; France the FDG; …the list is extensive, demonstrating that around the world consumers are secured against most losses. Bitcoin losses have no such insurer, so if a consumer’s bitcoin is lost or stolen, the consumer suffers a 100% loss.

From a security view, bitcoin would again appear to provide no new value. The risk of loss is high, as evidenced by the 25% loss rate to date, and there is no insurer that covers those losses.

Transaction costs? This is another value that bitcoin supporters focus on, and I fully support the desire to reduce transaction costs, especially in relation to credit cards. But are bitcoin transactions REALLY cheaper? It would not appear to be the case when you factor in the mining costs, the blockchain validation costs, the cost to sell coins (which can be extremely high in percentage terms), and the lack of insurance. In fact, it would seem that the true transaction costs are significantly higher than the costs consumers experience today with their conventional transactions.

The promise of anonymity. This may be an area where bitcoin provides some value, at least for those that follow bitcoin trading best practices, though it would appear that this value, if it exists, is valued largely as a way to hide transactions from governments that may wish to tax, or even possibly confiscate, money related to these transactions. It would be hard, then, to put potential anonymity into the “value column”.

In summary then, bitcoin does not fill any economic “need”; it is not (much) more digital than U.S. dollars or other major currencies, it does not provide new means of liquidity, bitcoin is not more secure, and transaction costs are not lower, and may actually be much higher if you factor all costs.

With no “needs” filled, bitcoin should, and will, be value-less.