Curmudgeon on Cryptocurrency
Investment manager Vitaly Katsenelson, author of the Contrarian Edge, has a four-part series on cryptocurrencies.
Part three Curmudgeon on Cryptocurrency caught my eye. Here are some key excerpts.
In mid-April I picked my 15-year-old daughter Hannah and her friend Sarah up from school and took them to Barnes & Noble. Sarah found out that I “do stocks” for a living and immediately asked me about crypto. She wondered what cryptocurrency she should buy and if she should open a Robinhood account.
I’ll tell you about the advice I gave her in a bit. But a few days later I got three calls in one day from my wife’s side of the family – from my sister-in-law (a pharmacist) and my wife’s cousins (both are barbers). They were all asking me about crypto. I told them, you don’t ask my advice on which number to put your chips on when you play roulette in Vegas; cryptocurrencies fall into the same category.
I feel like an old curmudgeon writing this. I know “I don’t get it.” Crypto lovers look at me as if I am defending silent movies and treating “talkies” as unwelcome, short-term imposters. Curmudgeon I am.
When we discuss crypto, we need to separate blockchain technology from the so-called currencies. Though I have yet to see a mainstream application of blockchain, I get a feeling they are coming. However, just because a technology is useful, has a lot of applications, and is widely accepted doesn’t automatically mean that you can use it to create a genuine currency.
Arguably, Bitcoin is worse for the environment than internal combustion engine cars if you adjust for CO2 production in relation to societal utility (at least cars get you places). For the energy cost of processing one bitcoin, VISA can process 810,000 transactions, about 370 times faster.
Cryptocurrencies are a clear and present danger to the US dollar. There is a very high probability that the US government will outlaw the use of cryptos as currencies. Sounds far-fetched? The US government did this in 1933 with gold. That was less than 100 years ago. India is threatening to ban Bitcoin. South Korea already did.
I am sympathetic to some cryptocurrency investors, especially after seeing what we are doing with our fiat currency. However, for most people they are just speculative vehicles. My wife’s relatives pay little attention to the US Government’s or Fed’s balance sheets. They are interested in bitcoin for one reason only – it is going up. Cryptos present these “unique” opportunities for people to pour their life savings into bits and bytes on servers far far away with a hope that they’ll magically turn their lives into paradise on the beach.
Now to the advice I gave to Sarah (my daughter’s 15-year-old friend). I told her, first of all, don’t open an account on Robinhood. This platform has merged the worst that social media and the casino have to offer into one interface. You are too young to gamble. If you’d like to invest, then you have to accept that it’s not a get-rich-fast but rather a get-rich-slow activity. Once Sarah heard “get rich slow,” I think she lost interest in whatever advice I had to offer. Luckily we arrived at Barnes & Noble, so she did not have to go on listening to this curmudgeon.
I’ll leave this discussion with a quote by one of my favorite thinkers, Nassim Taleb: “[Investing/speculating in cryptocurrencies is] the idea that a collection of people would get rich at the expense of society for the sole privilege that the world is adopting their currency and not another.”
Today, I got into a Tweet firestorm with Bitcoin supporters on Twitter. I mentioned transaction costs and storage costs.
I was informed that I am way behind the time on transaction costs and need to be using Lightning Network. Someone even offered to send me a few pennies to prove fast, cheap transaction speed.
OK someone sends me a few pennies via Lightning Network. Make that a few thousand dollars, or better yet enough to buy a car. What about a merchant who does not want to hold Bitcoin, but wants to sell it?
How long does it take that take? At what cost? At what risk in a fast moving market?
Can merchants can instantaneously convert Bitcoin to dollars or euros with no risk or slippage? If not, the Lightning Network idea fails because merchants will not hop on board.
By the way, not many merchants have hopped on board, have they?
Investopedia comments: "Although the Lightning Network has experienced growth and development since its inception, challenges remain. Bitcoin's price fluctuations have prevented the crypto from becoming a widespread method of payment for consumer and business transactions. Also, there are costs involved in using Lightning Network since transactions still need to be done on the blockchain."
By storage costs, I thought it was obvious that I was referring to data storage but some thought I was referring to the cost of storing Bitcoin.
I am still trying to get a handle what would happen if Bitcoin was legal tender all over the globe. Every transaction is a Bitcoin transaction.
How much data would be needed to store the blockchain in a distributed manner. How much energy does this take, etc?
Perhaps there are answers to all of these issues, and if so, yep, I was unaware of them. But even so ...
Bitcoin Will Never Have Widespread Monetary Use
Even if there are believable answers to distributed transaction storage and transaction costs, and merchants can instantaneously convert Bitcoin to dollars with no slippage, Bitcoin will never be globally used as money.
Q: Why is that?
Despite the hype will anyone buy meals with Bitcoin? What about a Tesla?
Some might, just to prove a point (they can), but any use has a tax consequence.
As soon as you sell, you have a capital gain (or loss). That capital gains issue preempts widespread transaction usage.
Mr. Whale has a interesting take on 7 False Bitcoin Narratives.
Mr. Whale, do we need to add the Lightning Network to the list of false narratives?
Getting Up to Speed
This is not a matter of getting curmudgeons up to speed on what's theoretically possible.
Rather, Bitcoin advocates need to understand the false narratives as well as the very real possibility that if central banks or governments ever feel threatened by cryptocurrencies they will destroy them.
China is cracking down on energy use and other countries will follow.
That is the common response and the source of another narrative with false conclusions: I keep my keys and bitcoin storage private, in cold storage, government will not get at my Bitcoins.
True, those people will keep their bitcoins. Hooray?
No. All governments will not ban Bitcoin. They will ban bitcoin transactions. The whole scheme implodes.
You have Bitcoins but cannot sell them for money or buy anything with them except by barter with someone who will take them.
Governments might ban them for any number of reasons: Money laundering, tax evasion, to stop speculation, and any number of made up causes.
Governments might also tax the hell out of mining or outright ban that for any number of reasons.
What About Tether?
And what about the Tether issue? Most Bitcoin transactions are via Tether, an alleged stablecoin that is actually backed by nothing observable.
For discussion, please see Investigating the Charge "Bitcoin Price is Dependent on $60 Billion Accounting Fraud".
Finally, what about the Shoeshine Boy?
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
The story relates to Joseph P. Kennedy as told by Wikipedia.
Kennedy formed alliances with several other Irish-Catholic investors, including Charles E. Mitchell, Michael J. Meehan, and Bernard Smith. He helped establish a "stock pool" to control trading in the stock of glassmaker Libbey-Owens-Ford. The arrangement drove up the value of the pool operators' holdings in the stock by using insider information and the public's lack of knowledge. Pool operators would bribe journalists to present information in the most advantageous manner. Pool operators tried to corner a stock and drive the price up, or drive the price down with a "bear raid". Kennedy got into a bidding war for control of Yellow Cab Company.
Kennedy later claimed he understood that the rampant stock speculation of the late 1920s would lead to a market crash. Supposedly, he said that he knew it was time to get out of the market when he received stock tips from a shoe-shine boy. Kennedy survived the crash "because he possessed a passion for facts, a complete lack of sentiment and a marvelous sense of timing".
Now, 15-year-olds are seeking or giving investment advice on cryptos. YOLO, you only live once, is the mantra investment advice of the day on Reddit.
I do not know when speculative mania ends, and now does anyone else.
But that is what the Fed has been promoting in spades, and so far beaten all expectations.
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