Two weeks ago, I noticed a “flash news” showing the Bitcoin price and I thought “OMG! This thing is going down now!” To be honest, I wrote one piece on Bitcoin back in September 2017. I’m not an expert in blockchain technology and I don’t pretend I know everything. However, when pro-Bitcoin investors get my favorite quote as their main argument, this is where I start to get very cautious. What’s the quote?
“The thing is, we have never experienced anything like this before”
Or if you prefer the shorter version:
“This time, it’s different”
Back in September 2017, the Bitcoin was surging out and was about to reach the sky.
Source: Ychart
The magical coin was the most interesting investment ever and then… a few months later, interest for the currency faded as new competitors arose and other kinds of technical problems arose…
Source: Ycharts
Now, before you want to hit me with your “you don’t understand what a blockchain is”, I want to make things clear: I’m not discussing the coin as the technology here; I’m discussing the coin as a potential investment. In that regard; a coin is just like a US dollar or an ounce of gold; something that has value only if someone else agrees with its value and with the owner.
This Time is Different, Flashback From 1999
Do you remember what happened before the tech bubble? Yes, people were saying “this time, it’s different”. They were also saying: “it doesn’t matter if there are no sales, it’s the internet, you just don’t get it”.
And then, many tech apostles were telling the world how the internet would change everything.
They were complaining that most people didn’t understand the impact of this new technology.
They were saying that everybody will use internet in the future for things that we can’t even imagine (in 1999).
They were right on all three points… but many techs crashed and never bounced back; why? What happened back then is happening again with cryptocurrencies. Back in 1999, what was different is the internet coming into our life. The “new economy” didn’t mean that pages views and clicks would replace profit. It meant that consumers would make transactions in a different manner. 20 years later, we can get a full grasp of what internet changes (and keep changing) in our daily lives. But the core of the investment proposition wasn’t different; all companies that were showing a “dot com” name with millions of pages views with no sales didn’t live long. All crypto currency showing “coins” names with millions of miners still show no sales or profit… guess what? They will end-up pretty much like the dot coms…
Then again, I’m going to write it again to make sure you get it; I’m not talking about the blockchain technology. This technology will be used by many companies in various sectors for the greater good. The problem in 1999 wasn’t the Internet, it was the fake companies that surfed on the trend.
Mike, will you write again when the Bitcoin hits $50,000 in value?
Some will just wait until, maybe one day, the Bitcoin bounce back to a ridiculous number again to call me out. That would be fair and I’ll definitely write again if the Bitcoin even just goes back to its highs of $14K’s USD. It would still be pure speculation.
For those who dream that the Bitcoin (or any other cryptocurrency) becomes the new “gold standard”, I see a few problems I would like you to solve for me.
We all know that there is a finite number of coins that can be “mined”. Therefore, the total amount of money is known and is not controlled by any government. That makes many people wanting to “free the world from government” and use the Bitcoin as a main payment standard.
First, the coin is divisible, therefore, it’s like printing new money. If you can divide a coin to 0,0000001 Bitcoin and this is enough to pay for a bus ticket, it’s pretty much like printing new money. The solution is easy; just increase the bitcoin value and your 0,0000001 Bitcoin now worth enough to pay for a pizza instead of a bus ticket. So how do we solve this problem?
Second, imagine that a company like BlackRock (BLK) with over 6 trillion USD in assets under management decide to control the Bitcoin by buying a bunch of those. How would you stop that? Instead of having the US Government controlling the US dollar, you would have BlackRock, Apple or Microsoft controlling 20% of the currency. This would be enough to create market swings form one side to another. Welcome hyperinflation!
Then again, the blockchain technology might change our life the way internet did 20 years ago, but that doesn’t mean that all coins are worth something! Always invest in something making money, not growing in value based on pure speculation.
Dividend Diplomats
DG –
Love it. Further, I Tend to stay out of any blockchain technology investment discussions, simply because it doesn’t fit my strategy and I am not sure that everyone knows what they are purchasing into. I don’t think they are buying to use or promote the technology.
Nice post, though!
-Lanny
Michal Haltuf
Hi, I like to read your posts, but this time I have to write an OpEd (Disclaimer: Yes, I’m bullish on bitcoin). I am not debating your opinions, but the merit of your 2 objections, as I believe the arguments do not stem from deep knowledge of bitcoin and/or economics.
Ad 1) Divisibility of the coin is not in any way comparable to “printing new money”. Printing money aka increasing money supply, monetary easing etc. leads to the devaluation of the currency (if you print double the dollars, the value of each dollar with be after some time half the previous value). In other terms, printing new money leads to an inflation + to the wealth redistribution, because the first users of the newly created money pay with it before the rest of the economic subjects fully realize the money was devalued. This is one way how banks (first users of newly printed money) extract value from the real economy.
Divisibility, on the other hand, is nothing like that. Not that it’s opposite. Divisibility is completely unrelated to the “printing money problem”.
If 0,0000001 BTC is enough to pay for bus tickets first, and then for pizza (do I get it right that in Canada, pizza is more expensive than bus ticket?), such situation can happen if the value of BTC increases (but let’s remember that printing new money leads to value decrease).
In fact, a gradual continous increase of BTC value is a feature, not a bug, but has nothing to do with divisibility. It results from the limited coin supply. And it’s by design. The bitcoin set by its creator to be deflationary, which is in contrast to the current money.
To put it in other words: now dollar is divisible into cents: 0.01$. You would not “print new money” by simply make it divisible to the 8 digits.
ad 2) You cannot control bitcoin by simply buying a great stake in it. It does not work like that. It does not work like that at all.
Bitcoin is not a share with voting power.
To really control a bitcoin, you would have to control 50+ % of the computing power of the whole bitcoin network (which is not a closed system, it would react on such an attempt etc.), which is a completely different and much harder task.
To learn more, see “51 % attack”.
Even when controlling the most of the computing power, the success is not guaranteed.
Buying most of the btc could only lead to “cornering the market”, which is a dubious hope in the fact that “when I buy, it goes up, when I sell, it doesn’t go down”. And there are more unsuccesfull attempts for cornering the market than successfull ones in the history. And even if succeeded, you would still not CONTROL the Bitcoin. You would just own a great part of it.
It’s same with dollar. Even if you would own huge amount of dollars, you still wouldn’t control it. FED (central bank in general) is in control, and it could theoretically make your bunch of dollars worthless, freeze them etc.
With bitcoin, by design, there is noone who controls it as the control is dispersed to the whole open network operating on p2p protocol.
If someone manages to “hack” or “abuse” this design, it would in fact be a total end of the bitcoin. So far, noone did it in 9 years, but it’s still a short time compared to tens of years of fiat money.
DivGuy
Hello Michal,
Thank you for taking the time to bring more information to this article. I do have a questions for you. If you can’t control the bitcoin as you mention; how do you explain it went up in value? The explanation is that there is a strong demand for it. Then, when it drop, there was less demand for it (like any other currency or commodity price).
Imagine I’m BlackRock and I decide to buy for $500 million of bitcoin today. what will happen to the bitcoin price? it will surge. Then, I have enough bitcoin that I can control a good part of its fluctuation. If I dump $200 million worth of bitcoin in a single day, the money will crash and transaction occurring on that day will be completely squeezed. I don’t need computer power, I just need lots of money to control its fluctuation. The real value of a bitcoin is the same thing as a dollar; it’s solely based on how much people agree its worth.
Michal Haltuf
Aah, this is some other form of “control” that is usually meant by the statement that no one controls the bitcoin (usually it means no one controls its rules, supply, transactions in blockchain, no one can freeze any wallet at will etc.).
So you meant just that player that is big enough can control its price. Well, that is basically true, I suppose, same as with any other asset. The only difference is the size of its market (btc is still quite small compared to gold, stocks, euro/dollar, or other well-established assets).
So yes, in theory, with enough money, you can control or at least influence its price. But what for? What would be your goal? Usually you don’t come to $500 million just by giving money away. The thing is I do not see a way to exploit this theoretical possibility to make some money. Influencing price itself will not give you any profit. (This is something that maybe central banks do, but usually not for profit goals.)
Ok, so you buy huge stake, price surges. You dump huge stake, price goes down. And by doing that, you will be happy if you end up with 0 and not a loss in the end.
(Not to mention that all rules regarding market manipulation, cornering etc. still apply. Transactions from fiat to BTC and back are not anonymous, there are in fact quite strict AML checks on every important btc marketplace.)
DivGuy
“So yes, in theory, with enough money, you can control or at least influence its price. But what for?”
Easy: if the bitcoin is used as a currency, you definitely want to influence its price when you are selling something in return of bitcoins. Silly example: You are selling oil barrels for 0.0001 bitcoin. One day, this worth $70 but in a week from now it worth $200…. If you have entered in contracts to sell 1,000,000 barrels, you definitely want the bitcoin to surge.
So, back to my example: BlackRock buys contracts on crude oil expiring in 6 months in exchange of a fix price in bitcoin. Then, its use its incredible large assets to buy as much bitcoin as possible. It creates a trend and the price surge. Then, BLK sells its crude oil and gets even more bitcoins. Then, it can sell slowly but probably made a ridiculous return on its crude oil trade. Rince and repeat…
This is why the bitcoin cannot be seen as a currency or an investment; its just pure speculation.
If it’s not, someone has to explain what happen in the past 12 months. I can do it for pretty much any stocks on the market, it’s impossible to explain rationally the price trajectory of a bitcoin over the past 12 months.
Michal Haltuf
Simply put “euro” instead of “bitcoin” everywhere in the example and the merit of your example stays. Does it still make sense?
The only difference is that, currently, the market with bitcoin is much more shallow than with eur to usd. And one reason for that is there are actually no oil to bitcoin contracts (while there are oil to eur contracts). When there will be, I would bet my money on that IF that ever happens, it will happen only after the total value of all bitcoins will be so damn high, that even BlackRock won’t be able to manipulate the price so easily as you described.
Also do not forget, that derivative market influences the currency market as well. If you would sell so many contracts in btc today (suppose there IS oil to btc market), it would influence not only the price of oil in btc, but also the price of btc in usd. For every buyer, there must be a seller and for every seller there must be a buyer.
To put simply: Your example is not a disproof of bitcoin as currency in the future, because you deduce bitcoin’s weakness from the current state (in which it is not generally accepted money) and not from the state in which it will (would) be, when (if) actually adopted as money.
Personally, I never fully understood that fine line between investment and speculation and the need to distinguish them. I do not know your definition, so I can only guess. But both investment and speculation have positive expected value (it’s not like gambling, right?), and I FEEL, that probably in speculation, there is higher risk involved, which is perfectly fine for me and very bad for other people. (we all have different risk apetite, which is ok)
Bitcoin, despite it’s 9 years old, is still very young and it goes through hype cycles periodically (actually, there were like 6 or 7 huge “crashes” since the inception). So yes, the short-term price cannot be explained rationally, but I am not a short-term investor (speculator, as you wish :-)).
Explaining the price movements ex-post, when you have the luxury of rear-mirror view, is quite easy, as any celebrity stock analyst would confirm (if (s)he would be perfectly honest). I would be able to do it with bitcoin as well, but it has nothing to do with a rationality.
DivGuy
The problem I see with the bitcoin is that you can’t use it as a currency unless you are making a deal now and trading now. If we agree that you will pay me 1 bitcoin for my old car today, but the transaction happens in two weeks; one of us will make a huge deal! This would not happen if we make the transaction in Euro, USD or CAD. The question is simple; would you accept to be paid in bitcoin tomorrow? I would definitely not. And I would not accept to be paid in Venezuelan Bolivar! It’s just not a stable currency.
You’re telling me it’s easy to explain bitcoin fluctuation? I’d definitely be interested in your explanation as to why and how the bitcoin went from $2,500USD a year ago to a peak of $19K and then back to $6K in 12 months. What drove all those swings?
For me there is a clear line between speculation and investment. You invest when you have a clear investment thesis (rationale reasons to believe what you buy will generate profits in the future) and you speculate when you hope there will be a hype about something (could be gold, oil barrel, bitcoins. etc). Many people think gold is an investment as 2,000 years of price history demonstrated it matches the inflation, no more, no less.
Paul N
This is a really good discussion. Usually when any negative comment is directed towards Bitcoin, it is met with a flurry of comments attacking the person who made it. The whole premise of bitcoin was to create a border-less form of currency that people could trade the value they created to another person for something they value from them. A store of your wealth on a platform that you can easily trade on.
One positive story I came across is that in some poor countries in the world where there are no banks and lawlessness makes it dangerous to have visible wealth, bitcoin in a secure “wallet” was a way of making storing your wealth safer and simpler. In doing that it could enrich and set a foundation for groups of people that had no way to do that previously. How do those people benefit when at any given moment your bitcoin value can fall 25% in a few days? How can you plan any purchase?
So now we made another new breakthrough technology into a speculative commodity. Mostly manipulated by early adopters (Bitcoin millionaires) who’s best interest lies in the value of it skyrocketing for personal gain vs a clever tool for all to benefit from. I really don’t believe that was its initial vision during it’s creation. Not to create a kind of FOREX market. The people that got in early are benefiting at the expense of who get in later. I think there is clear definition or term for that kind of environment, however I just cant put my finger on that right now…