# These people are not that smart (why Bitcoin is guaranteed to be a crappy investment)

Many people who are held up as experts, especially in the field of cryptocurrency, are not that smart. They make glaring logical and factual errors. These are the same people who say to buy Bitcoin and that Bitcoin will go to $100,000 or some other improbably high target. Except that any exponential growth process, such as stock returns, will appear like a bubble. This is because the derivative of an exponential function is a constant times itself. Even compounded interest from risk-free cash will look like a bubble if one zooms out enough and the x and y axis are chosen appropriately. So the sequence 1,2,4 will seem as much of a bubble as the sequence 4,8,16. This is why log charts are used for plotting long-term stock prices, because the parabolic shape is converted to a line. Also, in each the prior three instances when the market peaked (1987, 2000, and 2007), interest rates were much higher than they are now. This suggests stocks have much more upside, as I wrote last week. I stopped recommending Bitcoin after learning more about the technology and risks involved. Bitcoin is not an investment, but rather is more analogous to a commodity. This means it is driven not by a quantifiable value such as profits and earnings or EPS, but purely by supply and demand. But unlike a company, such as Google, in which there is a fixed number of shares, the supply of a commodity is monotonically increasing, such as oil production or gold production, and thus as prices rise, so does the rate of new supply added to the market, eventually depressing prices until an equilibrium is reached. Increased demand for Google stock does not mean more shares of Google are created. Cash flow generated by Google’s ad business is distributed to a fixed number of shares, thus increasing shareholder equity. This explains why stocks have vastly outperformed commodities over the long-term: Commodities over the long-run track inflation and do not produce the sort of inflation-adjusted excess returns that stocks do. This means that Bitcoin, in spite of large gains from 2010-2013 and from 2015-2017, is guaranteed to be a shitty investment. That is already happening, and had you bought Bitcoin 2 years ago you would already be down about 20% on your investment, whereas the S&P 500 is up 20% by comparison. These astronomical early Bitcoin gains can be treated as an anomaly arising from a price discovery process that will never be repeated. It’s similar to the discovery of gold. Some ancient peoples happened across some scarce shiny mineral that had some aesthetically pleasing properties but had no idea what to value it at, so initially it was very cheap until it settled at some fixed rate such as maybe 1 lump of gold equals a cart of rocks or something like that. The cavemen that bought gold at the price of a single rock felt very smart, but subsequent investors made little in terms of rock-adjusted returns. The irony is that although gold is equated with wealth and a symbol of wealth, no one gets rich with gold. When Bitcoin debuted, hardly anyone knew anything about it or what it was worth, and the market was tiny. So going from$0 to $100 was comparably easy and required little capital, versus going from$100 to $10,000. I don’t think Bitcoin will be worthless, but the odds of it ever making new highs are vanishingly small, IMHO. Nassim Taleb, who is another example of an overrated expert, supports Bitcoin because of its supposed anti-fragile properties, writing, “Bitcoin is an excellent idea. It fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right.” But Bitcoin is very fragile and has many points of failure (this goes for all coins and tokens, not just Bitcoin). If I go the bank and wish to transfer a lot of money at once, such as$100,000, I know with a high degree of certainty the money will go to the destination I intend it to. The bank teller and I confirm the transaction, and it works. In the extremely unlikely event there is a mistake (such as the money accidentally going to Bob’s account instead of to Sue), the bank is on the hook, as all the evidence is documented such as receipts clearly showing the money was supposed to go to Sue. But in the world of crypto, your money does sometimes go to Bob, such as because of hacks and other exploits, in which case you’re fucked. Despite how code is supposed to be immutable and how Bitcoin is mathematically sound, this sort of stuff happens all the time [a Reddit search shows tons of examples of similar incidents, of coins being stolen or sent to wrong addresses], not because of a failure of the protocol, by rather because of all the second-layer aspects of it that are used to interface with the protocol, such as browsers, websites, computers, and wallets.