Almost everyone at Gold Alliance that speaks with callers hears the following question : “So, what do you think about bitcoin?”
Here are a few of our thoughts.
First, we admire the concept of the bitcoin blockchain. It is a type of accounting general ledger that records all bitcoin transactions ever done, and it is constantly verified by all the computers that downloaded the bitcoin software worldwide. It is a true innovation that is frankly very hard to get your mind around—unless you seriously research it—because it’s different than anything we are used to.
In this article, we are not going to attempt to explain bitcoin “under the hood.” There is no need because we can now safely rely on experts, who unanimously concluded that the bitcoin blockchain is a completely hackproof system. No one can forge a counterfeit bitcoin like they can forge a paper dollar. However, you can have your bitcoins stolen from you or from your dealer’s storage. This is somewhat similar to gold. It’s very difficult to forge gold, but the gold you own can be stolen if you don’t protect it.
The second mind-numbing fact about bitcoin is that the entire bitcoin network is operating without a regulating central authority to “police” it. There is no bitcoin federal reserve—heck, even Bitcoin’s inventor is still unknown. The “printing” or mining of new coins is created by a known mathematical formula, so everyone knows how many bitcoins there are or will be at any time. This is also very similar to gold, which is not printed by any government body, and its quantity is relatively known due to the known capacity of gold mines.
Regulators manipulate, create, and distort the paper currency market or the stock market, which leads to a series of booms and busts just because of manipulation. The bitcoin network is free of that type of manipulation, so it operates in a similar way to rare gold and silver coins: strictly on the basis of supply and demand.
While we appreciate the bitcoin system, there is a big difference between the benefits of the system and of bitcoin itself as a currency. Democracies are a better form of financial system than autocracies, but it does not mean we will want to buy any currency printed by a democratic government. The same goes for bitcoin, which—when judged as a currency—is a very risky proposition.
If you like speculation and are dazzled by technology, bitcoin is a great bet. Just this year, bitcoin grew 10 times, a feat no other asset class in recent history was able to accomplish.
So, if you missed the boat, is now the right time to buy bitcoin? The simple answer is no! Please, no! Bitcoin has become a clear asset bubble, like many before it, as this image illustrates well.
In order to justify the current price and trajectory of Bitcoin, its proponents will say it’s inevitable that bitcoin will become a worldwide respected currency like the Japanese yen or the French franc, and we should look at their market cap to understand that bitcoin has a lot more growth under its wings. However, in history, nothing is ever inevitable, and the issues facing bitcoin are daunting.
Here’s why our analysts are suggesting you do not touch bitcoin at this time.
- Bitcoin is a young technology, and many variations of the coin exist.
The Internet changed humanity, and bitcoin’s blockchain technology will be just as influential. But, when the Internet emerged, the first big player was Netscape, which does not exist today. It is my opinion that bitcoin will not be the winning digital coin—the winner will be one of the thousands of similar coins in existence or a new type of digital coin. As a new technology, bitcoin developers are not sure which way they should go. As a result, various types of bitcoin exist. Not everyone can win, so where should we place our bet?
Given bitcoin’s checkered history as the means to purchase illicit materials, a vehicle for capital flight, and a victim of theft, it’s no surprise that regulators around the world have cast a watchful eye over the asset class. As such, the specter of a complete crackdown on cryptocurrencies remains an ever-present risk. UBS Group AG Chief Investment Officer Mark Haefele said the wealth manager wouldn’t dedicate funds to bitcoin because “all it would take would be one terrorist incident in the U.S. funded by bitcoin for the U.S. regulators to seriously step in and take action.”
The prospect is very real that bitcoin could become a casualty of its own success should cryptocurrencies gain sufficient mainstream adoption and pose a threat to the government’s ability to collect taxes or to the efficacy of monetary policy. It is my opinion that the “man with the gun” will dictate which currency shall be used, and it will not be bitcoin.
The practical applications for cryptocurrencies to facilitate legal commerce appear hampered by relatively expensive transaction fees and the high energy costs associated with mining. The energy it takes to mine a single bitcoin could power your home for one week, and a single transaction can cost $20 to process. This means that a $3 Ice cream cone purchased with bitcoin would cost $23. Obviously, the technology is not ready for global scale.
Here’s a simple comparison of the costs of mining (creating) a new bitcoin, compared to the costs of mining (creating) a new 1 oz bar of gold.
- Poor liquidity
The failure of major cryptocurrency exchanges to handle traffic on the day bitcoin breached $11,000 throws into focus the scalability problems that cryptocurrencies face as speculative vehicles. If the world’s largest exchanges collapse when bitcoin’s total trading activity is a fraction of its more established assets’, profit-taking opportunities when the cryptocurrency passes significant milestones could foster steep declines and waves of selling pressure due to poor liquidity. Bitcoin, by setting itself up as a sort of decentralized bank, was also creating an unreasonable expectation that its “depositors” would always be able to redeem their assets at par.
This expectation is dangerous as it means, in the event of a liquidity crunch, people will behave differently than when there’s a sharp sell-off in a stock: they will behave more like when their bank’s solvency is questioned. Remember bank runs?
On this note, Nobel Prize–winning economist Joseph Stiglitz said that bitcoin “ought to be outlawed [because] it doesn’t serve any socially useful function.”
Former Fed Chairman Alan Greenspan has said that “you have to really stretch your imagination to infer what the intrinsic value of bitcoin is,” calling the cryptocurrency a “bubble.”
Just Say No
As stated initially, we love blockchain technology, like we love a beautiful sculpture. It does not mean that the value of either was clear when they were first created. When students discuss bitcoin purchases over Thanksgiving dinner, any astute investor that does not treat his investments as casino bets should stay clear at this time from bitcoin. It went up due to a mania and will soon get crushed when the crowds reverse the direction in which they are running.