A professional speculator once told me: “It’s really not gambling unless you risk losing your house or selling your organs in Shenzhen.” I hate to spoil an exquisite financial bubble, but it’s growing ever more evident that the cryptocurrency and bitcoin craze is shaping up to be an epic, legendary Ponzi scheme.
Psychologically and financially, you’re either inside a bubble plotting when to cash out or outside guessing when to jump in. Bubbles usually make fools out of those who sell out too early or too late – which is almost everyone. Cryptocurrencies represent a perfectly intersecting storm of desperation, greed and overwrought imaginations, all enabled by sexy trading platforms and mobile technology.
Each successive jump in bitcoin price cruelly tempts punters like a treasure ship that hangs out at the horizon, taunting suitors by neither coming into dock nor receding out of sight. The closer the dream approaches you and the higher the price, the more real it becomes. The key to making a Ponzi work is to exploit the subtle but crucial difference between what the “mark” (victim) wants and what he or she really wants. And the scheme is most potent when those who are being manipulated are confident they’re acting of their own free will.
Enough millennials and their cultural heroes had already made millions, and after being sequestered for a year in their Covid bunkers, they ardently believe they’ve taken the red pill from The Matrix and know the unsettling and life-changing truth. And the blue pill has consigned the rest of us to the fiat-currency enslavement of our fake world. Yet, an examination of how currencies really work in our daily lives and economic history is sobering and revealing.
The fundamental premise and argument on why cryptocurrencies will eventually replace fiat money is that central banks have been printing money irresponsibly since the Global Financial Crisis or the 1970s. Out of control inflation and the debasement of currencies – and especially the US dollar – will inevitably lead to a new Dark Age of economic and social collapse.
Bitcoin emerged as financial salvation, but the world has actually experienced a history of commodity-pegged currencies that’s much longer than paper money. The gold-exchange standard ended for the US in 1971, when President Nixon de-pegged the dollar from gold and ushered in the age of the petrodollar. During the long reign of the gold standard, price levels rose and fell in line with gold-output growth relative to GDP. High inflation surged in Spain in the 16th century as a result of large gold imports from the New World.
The gold standard was eventually dumped, because the gold supply proved to be inflexible and resulted in cycles of panics and recessions. In the 19th century, there were 16 major financial panics, depressions and sustained price deflation under a pegged system.
Cryptocurrency fans can’t accept that currency systems pegged to a rigid money supply have caused more financial and economic crises and price instability than the current regime.
Even worse, cryptocurrencies don’t fulfil the critical roles of fiat currencies. Bitcoin has failed to act as a medium of exchange, a unit of accounting or a store of value for the economy, even though it was invented 12 years ago.
It doesn’t matter if Tesla recently decided to spend billions on an inventory of bitcoin and accept it as legal payment for its cars. Ultimately, it’s judged by its revenues and profits no matter how much bitcoin it holds. And don’t forget, its public listing is in US dollars. Remember: Tesla’s expenses and salaries are paid in fiat currency. It’s a clever marketing gimmick for Elon Musk’s cars, but it highlights bitcoin’s biggest flaw and challenge: it must find a breakthrough to operate independently from its dollar-exchange equivalent. Until then, its only purpose is to make profits by arbitraging among fiat currencies.
Bitcoin’s massive price swings and volatility has made it impossible for it to act as a unit of account. Its price volatility is 15 times higher than the DXY dollar index. So it’s difficult to price anything in bitcoin as the numbers fluctuate way too much.
Bitcoin’s very nature means it cannot reliably act as a store of value. Unlike other assets, it demonstrates no positive utility to consumers or businesses. For example, gold and silver are widely used for industrial applications. Even paintings can be enjoyed. The only realistic utility of bitcoin is the pure speculation that its price in US dollars will increase and it might dominate the new world of future money. But, as soon as the price appreciation ceases, the absence of any real-world utility means that the dollar price of bitcoin must fall to zero.
That bitcoin has become history’s greatest Ponzi scheme is best demonstrated by the wild speculative, self-reinforcing behaviour. Investors and traders actually don’t want to own or use bitcoin. They simply believe that their exchange price in dollars and other fiat currencies will rise. Bitcoin and cryptocurrencies are merely platforms for pure speculation and making profits in real currencies. The only way to value bitcoin is to sell it at a higher price. And once this chain falters the entire Ponzi pyramid collapses.
There’s nothing wrong with speculation, so long as you know your downside. Just don’t end up losing your house or pleading with your organ broker in Shenzhen to pay your margin call.
This story first appeared in the July 2021 issue of Prestige Singapore.
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