Bitcoin Madness Ebbs and Flows Around the Globe
I’ve been writing about – and debunking – cryptocurrencies since Bitcoin first wormed its way into our collective consciousness in 2009. To my everlasting regret, I took my own advice and stayed out of the Bitcoin madness while I watched people I knew make outrageous sums of money in the cryptocurrency markets ever since.
I MISSED THE BOAT…AND SO DID YOU
I forgot the first rule of investing: It doesn’t matter what a stock is worth. All that matters is how much someone else is willing to pay for it. If I had jumped on that bandwagon in 2009, I would be a multi-millionaire – as many of the early adopters now are – if I had stayed the course. That’s the problem with this kind of investment. Some people make fortunes on them but, as the number of people in the pond increases, the early adopters tap out, leaving the market under the control of organized groups of speculators who drive up the price to entice and snare the unwary, and then leave the latecomers holding the bag when the scheme crumbles.
During 2014 alone, I published four articles about the chaotic world of Bitcoin manufacturing and trading, and was roundly excoriated for being a 66 year-old man who had no idea what he was writing about. (My excoriators were not aware that I was working on early AI programs way back in the mid 1980s, which was probably before some of my critics were born. I am thinking of republishing those articles to exonerate myself from those charges but no one cares about old news…or do they?)
In February of 2014, for example, I wrote that Bitcoin might be the 21st century equivalent of “electronic snake oil.” That story detailed the demise of the Japan-based Mt. Gox Bitcoin Exchange, which went under after “losing” 744,408 Bitcoins, then “worth” between $367 and $450 million. (At the January, 2018, high water mark, the missing Bitcoins would have been worth $2,776,274,504 or $2.8 TRILLION.)
That particular article was actually cited in a footnote in an article published in The Houston Journal of International Law in 2015 by Steven Small who, apparently, didn’t think I was an idiot after all.
The World’s Most Unsafe “Safe” Investment
The salient point of that 2014 story is that it was supposed to be impossible to “lose” Bitcoins because the ownership of each Bitcoin is hardwired into the code, and that code is shared among millions of Bitcoin mining machines around the world in a public ledger. Two Mt. Gox heists were the first warning signs that public statements about the safety and security of Bitcoin were public relations hype. That became even more obvious when Mt. Gox admitted that they had been hacked. Bitcoin was supposed to be hack proof, but Mt. Gox apparently wasn’t. (Later reporting suggested that the Bitcoins were stolen by North Korean hackers, who have since been credited with other Bitcoin thefts.)
Repeated protestations from Bitcoin proponents that stolen Bitcoins cannot be used turns out to be total nonsense. Hackers don’t hack Bitcoin exchanges just for the fun of it. They are doing it to make money. There are in fact numerous ways to inject stolen Bitcoins back into the system, but I’m not going to explain any of them here for obvious reasons. (And, no, I am not going to tell you in a private conversation either. If you knew how, you wouldn’t be asking. If you don’t know how and you’re asking, you shouldn’t be told.)
Nevertheless, after years of predicting the imminent demise of cryptocurrencies – and watching them soar to astounding market values – I now find myself right back where I started from, reporting on the imminent demise of cryptocurrencies again.
Don’t Listen to Me – Listen to the Experts
I’m not alone. In a copyrighted article by AJ Dellinger published yesterday by the International Business Times, Dellinger reports that Bitcoin and other cryptocurrencies could crash right down to their actual value: nothing at all.
This prediction was made in report released on February 5 by Steve Strongin, who heads up the Global Investment Research Division at Goldman Sachs, where he is a member of the company’s Management Committee. In his report, Strongin warns “that Bitcoin and other cryptocurrencies could drop all the way down to zero.”
Strongin represents an investor’s viewpoint, which focuses on the long-term prospects for continued growth and stability in an investment portfolio, but the phenomenal growth and roller coaster behavior of the cryptocurrencies indicates that they are speculative opportunities rather than investment strategies. Coming from his long-term viewpoint, Strongin believes that the long term prospects for bitcoin investments are virtually non-existent, but he doesn’t know when the crash will come. He just thinks that it is coming.
He’s not alone, either. The famously pessimistic American economist Nouriel Roubini, who earned his “Dr. Doom” nickname when he accurately predicted the 2008 collapse of the housing bubble in 2006, is also predicting the collapse of the cryptocurrencies, calling the Bitcoin boom the biggest investment bubble in world history, outstripping both the Housing Bubble (which is starting to blow up again) and the dot.com bubble.
Roubini recently unleashed a series of Twitter comments in which he maintains that the cryptocurrency markets are being propped up by investors who are holding on for dear life on the presumption that Bitcoin will surge back to its previous highs and then keep on going.
That’s Not Going to Happen and Here’s Why
On January 7, Bitcoin was trading at $17,163. One month later, Bitcoin is selling at $8243, which represents a 52% loss of value over a 30 day period. On January 8, the Dow Jones industrial average stood at $25,283. Today, it stands at 24,425, which represents a 3.39% loss in value, or a net loss of $848 on the Dow as opposed to a net loss of $8,920 per Bitcoin.
If Bitcoin was being traded on the New York Stock Exchange, trading would have been suspended on January 16, when Bitcoin broke through the $12,000 trip wire after shedding 25 percent of its value in nine days, but there is no way for the government, or anyone else, to suspend trading in Bitcoin.
As a consequence of this unique circumstances, bargain hunters are propping up Bitcoin, buying in at the new lows with the expectation that prices will rise again. There is no solid reason why anyone should expect that to happen, which is why Bitcoin ranks as the biggest – and most vicious – Ponzi scheme of all time.
There’s half a worm in that Bitcoin apple
Bitcoins are currently trading at a 38.9 percent premium over the actual cost of producing a Bitcoin, according to one estimate…and there are a wide variety of estimates. Even the best case scenarios, however, indicate that it makes no sense to buy Bitcoins as though they were a stock or a commodity, because the cost of manufacturing Bitcoins is substantially lower than the cost of purchasing them as investments.
Credible estimates indicate that it costs approximately $5,041 in electricity costs alone to earn one Bitcoin, according to Quora comments from Brian Schuster, who markets himself as a Blockchain Advisor and Entrepreneur. Therefore, existing Bitcoins are being sold at a 38.9 percent premium over the actual cost of a newly-minted Bitcoin.
Other estimates vary wildly on the basis of the cost of electricity. If you go to Marketwatch.com you will find a chart that indicates the cost of producing ONE Bitcoin in each state according to the prevailing cost of electricity in that state, which ranges from a low of $3,224 in Louisiana to high of $9,483 in Hawaii. That gives us a median value of $6353 per Bitcoin. Even at that valuation, Bitcoin is currently selling at 23% premium over the cost of manufacturing the same Bitcoin.
The Bitcoin Miner’s Dilemma
Why not just start Bitcoin mining yourself? First of all, you don’t know how to do it. Secondly, the capital investment cost is prohibitive. With the most popular Bitcoin mining hardware – the Antminer S9 ASIC Bitcoin Miner – running at $4,200 per unit on Amazon and producing just .0025 BTC per day, a single S9 will generate .9125 BTC in the course of the year.
What that Bitcoin will be worth, however, depends entirely on the market value of Bitcoins at that time. At $17,000 per Bitcoin, that’s quite a profit. At $4200 per Bitcoin, you just lost money because you have to take into account the significant energy consumption of the Bitcoin miners. In order to make serious money Bitcoin mining, you are going to need a lot of hardware…and a lot of electricity.
Even with a lot of hardware and a lot of electricity, it’s still a hit or miss proposition because the Bitcoins that are awarded each time the algorithm is solved go to the FIRST Bitcoin miner to solve the equation, which means that you are competing against every other Bitcoin miner in the world to pick up those Bitcoins. Some of your competitors have Bitcoin server farms with thousands of S9s. Who do you think is more likely to win that race, the guy who has one Bitcoin Miner or the guy who has ten thousand of them?
People who are attempting to break into the Bitcoin mining business are struggling against escalating equipment costs and ever increasing electrical bills in an uncertain market to produce a product with no firm value at all.
The Investors Dilemma: The Forest is the Trees
People who are coming late to the party are climbing aboard a doomed investment vehicle, but numerous sources on and off the web continue to tout the Bitcoin as a sound hedge against inflation and government currency manipulation.
The meteoric rise in Bitcoin values were not fueled by scarcity or by the increasing cost of manufacturing Bitcoins. The driving force in the run-up in Bitcoin values has been rampant speculation, as early adopters of Bitcoin plowed their winnings back into the Bitcoin market to shore up the price of the coins and protect their investment, while the latecomers – following Warren Buffets advice – are buying into a down market in the hopes of catching the next peak in the roller coaster ride.
In point of fact, however, it is inflation and government monetary policies that enable Bitcoin to stay afloat. The recent run up in cryptocurrency values coincided with fears that the Trump Administration tax cuts, combined with some jittery economic indicators, have caused increasing debt and inflation anxieties among people with money.
Taxes and inflation are two of the driving forces behind the attractiveness of storing one’s wealth in a non-fiat pseudo-currency like Bitcoin. Without those fears goading the markets, there would be no logical investment strategy for buying Bitcoin at this point in its lifespan and those who continue to hold Bitcoin are merely waiting for the roof to cave in over their heads as they anxiously wait for Bitcoin prices to return to the point where they bought in.
In the final analysis, the Bitcoin phenomenon isn’t based on technology or economics. It’s based on greed, greed gratified by enticing newbies into the subculture and then fleecing the marks for whatever you can squeeze out of them because the only way that cryptocurrencies can survive is by pulling suckers into their webs and sucking them dry.
When a subject becomes so convoluted that investors don’t really understanding what they are investing in, that’s like the trees in the forest. If you can’t see the forest for the trees, that when it is time to admit that the forest is the trees and, if you can’t see the trees, it’s time to pick up and leave.
