Where else can you use real money to buy something that has no intrinsic or extrinsic value, has no physical form, has a value that fluctuates based on a highly illiquid market, and is not backed by any form of government?
Welcome to bitcoin.
Let me start by making it very clear: Bitcon’s fundamental intrinsic and extrinsic values are zero.
That’s ZE-RO.
Sure, you may argue that diamonds or gold, like that which is traded in SPDR Gold Shares (NYSEARCA:GLD), has no intrinsic value, either. It just happens to be relatively rare and difficult to mine and only has a store of value because humans decided to give it one.
The difference, however, is that both gold and diamonds have extrinsic value and from that, intrinsic value is born. That is, there a multitude of uses for gold and diamonds, and thus their scarcity does make them worth something.
Bitcoin has neither and never will because it’s literally fantasy. It’s vapor.
The technology that facilitates its existence is called blockchain, and because it isn’t proprietary, cryptocurrencies can be created out of thin air and have been. There are tons of them now. Despite the fact that bitcoin is the most popular, it can still take days to convert your bitcoins into actual cash, and in the process, thanks to its volatility, its value could drop.
That’s because you cannot value bitcoin. This goes back to the nature of intrinsic and extrinsic value. Its value is determined entirely by a highly illiquid market, and whatever price two people decide to transact at. It is so volatile that it ran up hundreds of percent and has since cratered in value. What value will it have in a month? Nobody knows or can even guess.
Bitcoin’s security is also questionable. All that needs to happen is for some bitcoin marketplace to get hacked, and poof, your vapor value is gone. That has happened. It happened to NiceHash and $70 million worth went away.
It may seem like a grand libertarian ideal to have a currency that is not controlled by a central government, but that doesn’t stop governments from regulating it. Bitcoin payments are being used to transact criminal activity, and the dangers of losing money in hacking or just via volatility could convince governments to crackdown based on “saving the consumer.”
The volatility alone is the reason to stay away. Compare bitcoin’s moves to that of the euro versus the dollar. With the latter, transactions run into the billions, so the spread is tiny, and volatility is low. Only in times of economic trouble might these exchange rates move as much as 20%, as the euro did between 2014 and 2016. Yet the average monthly change is about 2%.
Bitcoin’s value has changed 2% in a matter of minutes, and it skyrocketed over a period of years, only to collapse in a matter of days. South Korea was considering banning bitcoin, and its value fell through the floor. Then it said the country may not ban it after all, and it flew up 8%.
Why do this to yourself?
Bottom Line on Bitcoin
If you want to gamble in a casino, then buy bitcoin directly or buy Bitcoin Investment Trust (NASDAQ:GBTC), which holds actual bitcoin vapor (insert eye roll), and see if you can get out day to day with a profit. Don’t hold it overnight. And good luck finding shares to short.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
