Bitcoin and cryptocurrencies

Bitcoin (and many other cryptocurrencies) have been making headlines lately.  Their prices seem to be going through the roof.  Some people even claim that they are long-term ‘investments’.  What’s really going on?  Should you buy some?

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To start the ball rolling let me first say that I do not own any Bitcoin.  I do not own any Ethereum.  I do not own any cryptocurrencies at all.  I have nothing to gain or lose whether you buy cryptos or not.  That stands in stark contrast to most of the people who are pumping cryptos, who own cryptos, and who stand to financially gain if they can convince you to start buying cryptos.

If you are new to cryptos, you would have read a lot about how they are anonymous and secure, can’t be tracked or traced, cannot be manipulated by governments or central banks, greatly lower the cost of transactions, cannot be devalued by inflating the supply, and so-on and so-forth.  That was the great promise of cryptocurrencies… but those folks paying attention to developments over the last few years know that every single one of those claims is either blatantly untrue, or not as black-and-white as the pumpers would have you believe.

The ‘appeal’ of cryptos for many, many people is that they seem (at first glance) to be a viable alternative to the corrupt financial system that we’re all trapped by.  Buying some cryptos will let you break free of that, right?  Well, unfortunately, no.

The word cryptocurrency is made up of two parts — crypto and currency.  Crypto describes ‘how it works’ and currency describes ‘what it does’.  Cryptocurrencies like Bitcoin were designed from the ground up to act as a currency — to be a unit of exchange, to solve the ‘coincidence of wants’ problem, to let you buy stuff without having to use legal tender (i.e. government-approved money), to let you bypass ‘the system’.

That last point is where it all comes crashing down.  The government doesn’t want you to bypass the system.  They’ve spent hundreds of years developing that system — a system that is strictly regulated and which forces you to transact using a very limited number of financial instruments that they ultimately control.  Every time you transact within the system, the government is able to tax the transaction.

Tax revenues are the lifeblood of government.  If you are able to freely transact outside the system, in a way that prevents government from tracking and taxing your transactions, you are depriving them of tax revenues.  If enough people do it, government will no longer have enough tax revenue to operate and will fall apart.

Do you really think they are going to let that happen?  Really?  Governments have gone to war and sacrificed millions of their own citizens over petty issues — how do you think they will react to an existential threat?

If you approach the whole issue of cryptocurrencies from the government’s point-of-view, the whole thing becomes very clear indeed:  Unregulated (uncontrolled) currencies threaten the tax base so either have to be regulated, controlled, or outlawed.  Simple as that.  There are no other options.

If a cryptocurrency is regulated or controlled, it will end up with properties similar to current legal tender (trackable/taxable) and, in that case, why bother owning it?  If it can’t be regulated or controlled then it will be outlawed, anyone transacting with it will face prison time and, in that case, why bother owning it?  So regardless of what happens, there’s no point owning it in the long term — it will either become ‘just as bad’ as legal tender, or it will become illegal.

Technical arguments are irrelevant.  The ‘crypto’ part can not save the ‘currency’ part.

Already in 2017 we have seen governments (e.g. Russia, China, South Korea) ban ICOs and cryptocurrency exchanges because they don’t want to let their citizens be sucked in by the hype and throw ‘good’ money into a system that is doomed to fail.

Now, to be clear, you might be able to make a bit of money speculating on some cryptos in the short term, but that’s a very, very risky proposition and not at all an ‘investment’.  Non-government-controlled cryptos will all approach their intrinsic value of $0 in the long term.

Finally, it’s worth mentioning that governments have already looked hard at the technology underlying cryptocurrencies, and many will undoubtedly launch their own form of digital currency — because that would allow them to ban cash and force their populations into using a centrally-controlled system that has tracking and denial-of-funds features inbuilt.  Having such a system would also then allow central banks to drop interest rates into negative territory to have wealth confiscated directly from the entire population — with no way for regular folk to escape.  In this respect, the crypto community has voluntarily developed and freely handed government the very tools that will be used to financially enslave them in the future!

So, to summarise:

  • technical arguments are irrelevant
  • cryptocurrencies threaten tax revenues
  • if they can’t be regulated or controlled they will be outlawed
  • the technology will be used to further financially enslave the populace
  • the long-term intrinsic value of all non-government-controlled cryptos is $0
  • short-term speculation may still yield profits
  • beware of biased pumpers
  • if it seems too good to be true, it probably is

Take care out there.

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2 Responses to Bitcoin and cryptocurrencies

  1. Susan Abston says:

    Why do bitcoins have value?

    • Tim says:

      Prior to 2011, whenever the markets destabilised, investors would flee to ‘safe haven‘ assets like gold and silver to protect their wealth. This would result in the price of precious metals rising. Once the market bottomed out, the investors would liquidate their precious metals and buy back in at market lows. Rinse and repeat for over a century.

      As post-GFC court cases have shown, however, the precious metal markets became heavily manipulated around 2011 — rigged. They no longer functioned the same way that they did before. They no longer functioned as predictable safe havens.

      Wary investors started looking around for an alternative safe haven ‘asset’ that they could shift their funds into when the markets destabilised again. Something, preferably, that could not be manipulated by the same banksters that manipulated precious metals. Enter Bitcoin. The rest is history.

      So, the only reason Bitcoin became popular is because the banks rigged the precious metals markets and wary investors needed an alternative safe haven to shelter in when the going got rough. That was what gave Bitcoin its initial “value” — it promised safety.

      What has recently driven the price of Bitcoin up to crazy high levels, however, is pure speculation. Tulip mania.

      Bitcoins are created out of nothing. They have no intrinsic value. They are worth $0. Ultimately, that will be their market price.

      Bitcoin’s price will be very volatile until one of two things happen: 1) The normal markets crash (in which case Bitcoin will go through the roof for a few minutes before its network locks up), or 2) Bitcoin gets banned or regulated into irrelevance by a major Western economy like the USA or EU (in which case Bitcoin will fall through the floor as everyone tries to sell at the same time, and it ends up at $0). Even if 1) happens first, 2) is inevitable. When 2) finally does occur, the only people who can react fast enough to get out in time are the handful of insiders that are well positioned to front-run the move. I’m not one of them. Neither are you. Neither are the 99.999% of people that own Bitcoin. When that day comes, literally a handful of insiders will walk away with a fortune — the rest will lose everything.

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