Bitcoin: The Cookie Keeps Crumbling

Bitcoin Falls Below $45,000 as Global Market Rout Infects Crypto

The great crypto scam continues to unravel. Bitcoin is down another 10%, on top of a 13% crash a couple weeks ago. The selling is being blamed on China. Whatever the reason is, it was expected.

[On a related note, the whole China Evergrande Group implosion is a nothing-burger, and I would be buying any dips on the S&P 500 or NASDAQ now.]

Anyone who bought Bitcoin over the past 8 or so months has lost money, compared to 10% gains for the S&P 500 and bigger gains for tech. Anyone with even a room temp IQ can see that crypto is a ripoff/scheme in which capital from late adopters is transferred to early adopters and founders. Early adopters have thousands of Bitcoin and Ethereum, and there is not enough suckers for them to all cash out without tanking the price completely. Crypto needs a constant inflow of new suckers to pay off early adopters and founders.

The risk vs. reward payoff is terrible too. The bigger bitcoins get, the worse it becomes. Bitcoin pre-2013/2014 was a speculative gamble that paid off, as it was so small and it did not take much capital to make it go higher, but now its well above $800 billion. The total crypto market is $1.9 trillion. It is much more conceivable it could fall in half than double given how big it is. The reason why a company like Disney cannot just fall in half despite its size is because it makes so much money. It is implicitly understood that a company is worth some multiple of its earnings, but Bitcoin does not earn anything. To get Bitcoin to go up requires billions of dollars , so good luck with that. Anyone with so much money is not going to waste it on Bitcoin when superior investments exist. They will buy Facebook stock instead.

As it turns out, crypto is a bad hedge in any market condition. It falls no matter what, deflation or inflation. Strategies and investments that are hyped by the media are doomed to fail as soon as average people enter, such as tech stocks in the late 90s or Miami real estate in 2006. You think taking investment advice from a coke addict and criminal can possibly end in any way but badly?

The incentives are so skewed. Look at the people who hype Bitcoin on twitter and other social media. They are investment advisers or video personalities. These are people who are successful, not because of buying and holding Bitcoin or Ethereum, but rather with ads or by charging commissions on the money they manage (and with bad performance to match). Even if Bitcoin was to go to zero these people will still come out ahead. They will still have their commissions, YouTube channels, and ad revenue. Like the 2008 crisis, far fewer professional careers will be ruined than personal lives ruined.

At least the losers of the 2008 crisis had a home to show for it, at least until it was foreclosed on. People who buy digital air get nothing. The crypto market is about 40x the size of Enron and 80x the size of Madoff’s fund. I don’t think it will go to zero, but the potential for massive losses is an extant possibility. Bitcoin losing 90% or more of its value will not lead to bailouts and systemic failure like in 2008 (because that would require that Bitcoin be tied to the economy in some way due to adoption, in which it has none), but a lot of college savings plans will be wiped out and some hedge funds will be ruined. A lot of tears over at 4chan /biz/ and other communities.

Any investment in which past performance of the investment justifies owning the investment, is doomed to fail (or at least is doomed to be a bad investment). Stocks are different in that you are investing in an actual company that can generate cash flows, that can be returned in investors. Surging share prices are justified by underlying business and economic fundamentals, not people blinding buying into a false promise of future returns based on unsustainable past returns. Imagine if 10 people own an asset presently priced at $50 and they each vow to sell after it doubles. What is the logical thing to do? Person #9 will realize that if he sells at $99 instead of $100, he can undercut #10 and still make a good return. Person #8 realizes that #9 will undercut #10, so he undercuts #9 by promising to sell at $98. Repeat ad-infinitum,and this is why Bitcoin does not go up ,because everyone is undercutting everyone else, so the present price is the only game-theoretic justifiable price.

1 comment

Comments are closed.