I’ve been calling a bitcoin bubble for some time now and admittedly I haven’t been right yet. In fact, the bitcoin price today is above $8,000, for the first time in a month — an increase that some analysts are labeling “bizarre“.
Despite all the madness so far in 2018, bitcoin still trades above the $6,000 level I criticized back in November. Traders — at least nimble ones — have been able to make some money over the past few months.
Long-term, however, I still see bitcoin, and cryptocurrencies more broadly, as a bubble. And increasingly, I think that bubble is in the process of deflating.
That’s not just because the bitcoin price today is barely one-third of what it was in December. It’s also because the arguments for bitcoin are getting increasingly ludicrous. And the need for bitcoin, beyond a very specialized niche, remains vague at best. The problems bitcoin and cryptocurrencies are supposed to solve in most cases aren’t problems. And the ones that are, bitcoin isn’t solving.
Bitcoin as a Currency
I made a detailed argument back in January as to why bitcoin is a terrible currency, but it’s worth reiterating the major points here.
There’s the liquidity trap problem. There’s the counting problem. A Big Mac at McDonald’s Corporation (NYSE:MCD) costs $3.99, or 0.0005779777442354 bitcoin. Transaction fees are high; processing times are slow.
On top of all of that, there’s the potential volatility. Does anyone really want to accept a currency that could lose 60%+ of its dollar value in a matter of months. The answer is no, which is why the efforts of companies like Square Inc (NYSE:SQ) and Overstock.com Inc (NASDAQ:OSTK) to accept bitcoin have been little more than publicity stunts.
And are cryptocurrency believers really going to pay in bitcoin, if they believe its value is going to rise exponentially? Who wants to have the regret of buying a pizza for what in retrospect turns out to be millions of dollars?
The other issue is that currency isn’t really a problem in this day and age. PayPal Holdings Inc (NASDAQ:PYPL) can send money around the world in an instant. I can take a Capital One Financial Corp. (NYSE:COF) to nearly every country on Earth and be charged in dozens of different currencies … instantly.
The only use cases for bitcoin is for criminal activity or for those convinced that fiat currencies are doomed to fail. That’s a small niche, however. And it’s too small to believe that bitcoin can provide a consistent, rational, payment system that can come close to competing with those already in existence.
The Store of Value Problem
With the hurdles to currency acceptance now obvious, the narrative has changed. Suddenly, bitcoin is a “store of value“. And that’s a ridiculous argument.
What, exactly, is the value that can be stored in an electronic key? More broadly, the point of a “store of value” is safety. Yet as Lawrence Meyers pointed out in December, $15 billion worth of bitcoin already has been hacked.
A “store of value” is a circular argument. In fact, it’s basically the basis of a bitcoin bubble. Bitcoin is worth $10,000, or $30,000 because everyone else will say so. Aside from the obvious irony that it’s awfully close to the same argument underlying the supposedly untenable fiat currency, here, too, bitcoin is creating something that already exists. Gold is the most well-known store of value. Modern art, and even classic cars, can fill the same role.
Heck, in the 1800’s, Mark Twain said, “Buy land, they’re not making it anymore.” Here, too, bitcoin is claiming to fix a problem that doesn’t exist — and doing it poorly.
The ‘Decentralized’ Problem
Already, the long-running argument that bitcoin is ‘decentralized’ is starting to fall apart. But that aside, the argument for ‘decentralization’ rests on shaky ground.
The lack of a central authority is one of the selling points of bitcoin, particularly to libertarians and those who distrust fiat currency and central banks. But as the always-excellent Matt Levine at Bloomberg View — and many others — have pointed out, trust-based systems have a large role to play in the financial world.
The problem with decentralization is that disputes aren’t just about who owns what, and when. An irrevocable distributed ledger removes a central authority, and provides a concrete history of transactions and ownership.
But when a transaction happened and what the two (or more) parties agreed to isn’t the foundation of most disputes. If I transfer my car title to you on a blockchain, and I think you hid defective brakes, the lack of a central authority does nothing to change the nature of our dispute. The idea of blockchain-based “smart contracts” ignores the fact that contract law usually isn’t about black and white, predetermined issues. It’s in the gray area where disputes most commonly sit.
“Decentralization” doesn’t fix that problem. It doesn’t alter power structures. It doesn’t create some libertarian paradise. The bookkeeping changes; the arguments may not.
The claim of the intrinsic benefit of decentralized ledgers goes straight to the arrogance that underlies bitcoins and cryptocurrencies. Supporters believe they can change the world. But bitcoin can’t even do badly what existing structures already do exceptionally well. Those structures, and those currencies, and those banks, exist for a reason. If an investor is going to bet that they will be undercut, they will need a much better tool than bitcoin.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities or any cryptocurrency or cryptocurrency-exposed stock.