Is Bitcoin, Millennial's "Fake Gold"?

Authored by Vitality Katsenelson via RealInvestmentAdvice.com,

I’ve been asked about Bitcoin a lot lately. I haven’t written anything about it because I find myself in an uncomfortable place in agreeing with the mainstream media: It’s a bubble. Bitcoin started out as what I’d call “millennial gold” – the young (digital) generation looked at it as their gold substitute.

Bitcoin is really two things: a blockchain technology and a (perceived) currency. The blockchain element of Bitcoin may have enormous future applications: It may be used for electronic contracts, voting, money transfers – and the list goes on. But there is a very important misconception about Bitcoin: Ownership of Bitcoin doesn’t give you ownership of the technology. I, without owning a single bitcoin, own as much Bitcoin technology as someone who owns a million bitcoins; that is, exactly none. It’s just like when you have $1,000 on a Visa debit card: That $1,000 doesn’t give you part ownership of the Visa network unless you actually own some Visa’ stock.

Owning Bitcoin gives you a right to … what, actually? Digital bits?

I can understand gold bugs and the original Bitcoin aficionados. The global economy is living beyond its means and financing its lifestyle by issuing a lot of debt. Normally this behavior would cause higher interest rates and inflation. But not when you have central banks. Our local central bankers simply bought this newly issued debt and brought global interest rates down to near-zero levels (and in many cases to what would have been previously unthinkable negative levels). If you think investing today is difficult, being a parent is even more difficult. I tried to explain the above to my sixteen-year-old son, Jonah. I saw the same puzzled look in his eyes as when he found out where babies come from. I also felt embarrassed, for my inability to explain how governments can buy the debt they just issued. The concept of negative interest rates goes against every logical fiber in my body and is as confusing to this forty-four-year-old parent as it is to my sixteen-year-old.

The logical inconsistencies and internal sickness of the global economy have manifested themselves into a digital creature: Bitcoin. The core argument for Bitcoin is not much different from the argument for gold: Central banks cannot print it. However, the shininess of gold has less appeal to millennials than Bitcoin does. They are not into jewelry as much as previous generations; they don’t wear watches (unless they track your heartbeat and steps). Unlike with gold, where transporting a million dollars requires an armored track and a few body builders, a nearly weightless thumb drive will store a dollar or a billion dollars of Bitcoin. Gold bugs would of course argue that gold has a tradition that goes back centuries. To which digital millennials would probably say, gold is analog and Bitcoin is digital. And they’d add, in today’s world the past is not a predictor of the future – Sears was around for 125 years and now it is almost dead.

A client jokingly told me that his biggest gripe with me in 2016 and 2017 was that I didn’t buy him any Bitcoin. I told him not so jokingly that if I bought him Bitcoin, he’d be right to fire me. Maybe I’m a dinosaur; but, like gold, Bitcoin is impossible to value. What is it worth? It has no cash flows. Is a coin worth $2, $200, or $20,000? But Wall Street strategists have already figured out how to model and value this creature. Their models sound like this:

“If only X percent of the global population buys Y amount of Bitcoin, then due to its scarcity it will be worth Z”.

On the surface, these types of models bring apparent rationality and an almost businesslike valuation to an asset that has no inherent value. You can let your imagination run wild with X’s and Y’s, but the simple truth is this: Bitcoin is un-valuable.

In 1997, when Coke’s valuation started to rival some dotcoms, bulls used this math:

“The average consumer of Coke in developed markets drinks 296 ounces of Coke a year. These markets represent only 20% of the global population.”

And then the punchline:

“Can you imagine what Coke’s sales would be if only X% of the rest of the world consumed 296 ounces of Coke a year?”

Somehow, the rest of the world still doesn’t consume 296 ounce of Coke. Twenty years later, Coke’s stock price is not far from where it was then – but on the way it declined 60% and stayed there for a decade. Coke, however, was a real company with a real product, real sales, a real brand and real tangible, dividend-producing cash flows.

If you cannot value an asset you cannot be rational. With Bitcoin at $11,000 today, it is crystal clear to me, with the benefit of hindsight, that I should have bought Bitcoin at 28 cents. But you only get hindsight in hindsight. Let’s mentally (only mentally) buy Bitcoin today at $11,000. If it goes up 5% a day like a clock and gets to $110,000 – you don’t need rationality. Just buy and gloat. But what do you do if the price goes down to $8,000? You’ll probably say, “No big deal, I believe in cryptocurrencies.” What if it then goes to $5,500? Half of your hard-earned money is gone. Do you buy more? Trust me, at that point in time the celebratory articles you are reading today will have vanished. The awesome stories of a plumber becoming an overnight millionaire with the help of Bitcoin will not be gracing the social media. The moral support – which is really peer pressure – that drives you to own Bitcoin will be gone, too.

Then you’ll be reading stories about other suckers like you who bought it at what – in hindsight – turned out to be the all-time high and who got sucked into the potential for future riches. And then Bitcoin will tumble to $2,000 and then to $100. Since you have no idea what this crypto thing is worth, there is no center of gravity to guide you or anyone else to make rational decisions. With Coke or another real business that generates actual cash flows, we can at least have an intelligent conversation about what the company is worth. We can’t have one with Bitcoin. The X times Y = Z math will be reapplied by Wall Street as it moves on to something else.

People who are buying Bitcoin today are doing it for one simple reason: FOMO – fear of missing out. Yes, this behavior is so predominant in our society that we even have an acronym for it. Bitcoin is priced today at $11,000 because the fool who bought it for $11,000 is hoping that there is another, greater fool who will pay $12,000 for it tomorrow. This game of greater fools is not new. The Dutch played it with tulips in the 1600s– it did not end well. Americans took the game to a new level with dotcoms in the late 1990s – that round ended in tears, too. And now millennials and millennial-wannabes are playing it with Bitcoin and few hundred other competing cryptocurrencies.

The counterargument to everything I have said so far is that those dollar bills you have in your wallet or that digitally reside in your bank account are as fictional as Bitcoin. True. Currencies, like most things in our lives, are stories that we all have (mostly) unconsciously bought into. (I highly encourage you to read my favorite book of 2015: Sapiens, by Yuval Harari.) Of course, society and, even more importantly, governments have agreed that these fiat currencies are going to be the means of exchange. Also, taxation by the government turns the dollar bill “story” into a very physical reality: If you don’t pay taxes in dollars, you go to jail. (The US government will not accept Bitcoins, gold, chunks of granite, or even British pounds).

And finally, governments tend to look at Bitcoin and other cryptocurrencies as a threat to their existence. First, governments are very particular about their monopolistic right to control and print currencies – this is how they can overpromise and underdeliver. No less important, the anonymity of cryptocurrencies makes them a heaven for tax avoiders – governments don’t like that. The Chinese government outlawed cryptocurrencies in September 2017. Western governments are most likely not far behind. If you think outlawing a competitor can happen only in a dictatorial regime like China’s, think again. This can and did happen in a democracy like the US. With Executive Order 6102 in 1933, US President Franklin D. Roosevelt made it illegal for the US population to “hoard gold coin, gold bullion, or gold certificates.”

However, nothing I have written above will matter until it does. Bitcoin may go up to $110,000 by the end of the 2018 before it comes down to … earth. That is how bubbles work. Just because I called it a bubble doesn’t mean it will automatically pop.

Comments

IH8OBAMA secretargentman Mon, 12/11/2017 - 22:24 Permalink

I haven't changed my mind that I believe cryptocoins will not survive as currency but.....  I look at it as a super hot penny stock market.  There is money to be made and possibly BIG money.  You just have to pick your purchase spots and watch for signs of trouble and keep up on the crypto news.  As long as the market is hot there's no reason not to use it as a short term trading vehicle to make some easy money. 

In reply to by secretargentman

BobEore DownWithYogaPants Mon, 12/11/2017 - 23:33 Permalink

Maybe I’m a dinosaur; but, like gold, Bitcoin is impossible to value.

Wrong. Is the new right. And it's a dinosaur fight...tween equally doomed to extinction goldhuggers and crypto-nuggers of the western lands. Where ALL ROADS to ALL MOUSETRAPS announcing "untold wealth - this way!" will lead the bagholders to their doom.
\but/
outsida GULAGISTAN/DOLLARLAND... in places where gold still shines,

Gold... held in it's proper form, in the RIGHT locales, with the correct perception of how to employ it to achieve one's aim of financial survival and independence FROM ALL depredations of STATE and finance capital...

is impossible NOT TO value. It's the spring in one's step... the cushion of confidence, the measure of self worth... which allows the lucky holder to treat the TSUNAMIS of hate/envy/malice and ignorance which wash over them daily on boards like this one...

with the blithe nonchalance of a gazelle outrunning it's huffin hyena enemies - or a RR beepbeeping the Wily E lect ric al Engineers whose sneers are the only thing left for the wacked out world of attack dog style social maladjustment.

A world o 'troll-callin trolls' Hate crime-callin haters...
and at the bottom o the whole sorry barrel o monkeyshiners...

the 'envy-callin enviers!'

Snivel dat... snivellin fella!

In reply to by DownWithYogaPants

poeg BobEore Tue, 12/12/2017 - 08:06 Permalink

The rub with Bitcoin is that scrubs are yapping away about blockchain being as great a leap forward as tcp/ip and other scrubs are vocal believers with a platform to pitch from. Companies poured resources into purchasing IPv4 addresses (MIT was a huge investor and dumped millions of addresses into what's left of the market last year). When we were handed IPv6, the world who had sunk fortune into IPv4 dug in their collective heals and leaned into slowing the adoption of a vastly superior addressing model for the sake of their earlier investments. Everyone in production heard about the shortages of addresses for at least a decade and the pitch there was "don't be caught on the outside of this" as well.

Bottom line, blockchain isn't an irreplaceable tech but just a tech and like every other tech, on its way out the day it lands. Sure folks heavy into it will dig their heels in but this time around, the next big thing won't be held back like IPv6.

In reply to by BobEore

rphb secretargentman Tue, 12/12/2017 - 03:56 Permalink

It is actually the exact opposite, that tulips despite being rare, is a real and beautiful flower. And in the wake of the tulip bubbles collapse, and actual flower market emerged that have lasted to this very day. Holland remains the king of the production of not just tulips, but roses, orchid and all the other big commercial flowers.Understand this, these flowers are objectively beautiful, that is their intrinsic value, that is why there can be a sustained market for them.Scarcity on the other hand is a bad thing, something that all non-fraudulent economic activities seek ways to overcome.The analogy ends here: in the fact that TULIPS DO HAVE VALUE, that is why we still pay money for them, Bitcoin don't, it can't be used for anything but speculation.

In reply to by secretargentman

ZazzOne Mon, 12/11/2017 - 21:51 Permalink

The unintended consequence of the Fed's over-manipulation of the price of precious metals and commodities (via JP Morgan's Blythe Masters derivatives) is the explosive adoption of crypto currencies. Most people (including myself) who were stacking PM's, have thrown in the towel and switched to HODLing or trading cryptos. As wild as the crypto space is, it's a breath of fresh air to be buying and selling in an unmanipulated marketplace!!! Bitcoin (and cryptos) are the people's way of shoving it up the Fed's and Jamie Dimon's ass!!!!!!! 

paulbain ZazzOne Mon, 12/11/2017 - 23:00 Permalink

======================================    ZazzOne wrote:

The unintended consequence of the Fed's over-manipulation of the price of precious metals and commodities (via JP Morgan's Blythe Masters derivatives) is the explosive adoption of crypto currencies. Most people (including myself) who were stacking PM's, have thrown in the towel and switched to HODLing or trading cryptos.

YESSSSSS!!!!  That is EXACTLY the reason.  I know that TMosley is one of these investors, and I know of a few others (who are NOT ZH participants).  The establishment can thank ITSELF for the popularity of crypto-currencies.    ======================================

In reply to by ZazzOne

Anopheles Mon, 12/11/2017 - 21:58 Permalink

Bitcoin is a Ponzi.  A fabulous Ponzi if you happened to catch it early, and even now, you can make money at it.Why is it a Ponzi?Because there's zero backing, zero equity, zero assets, zero cash in the entire Bitcoin ecosystem. That valuation which is now, what? $400 billion?  Fantasy.  There's absolutely zero cash to that valuation. The ONLY cash is NEW cash deposited to exchanges, which is then used to pay out miners and people cashing out of exchanges.  (Or a rare, private, coin/cash transaction).In fact, to maintain today's price, takes an estimated $30 billion a year in NEW cash injected into the Bitcoin system.   But, that's only about $80 million a day.  The system is getting that, because the price is being maintained.  Want to see higher prices? Means more money has to be injected on a daily basis.  Want to see $30,000? Means that about $150 million a day needs to be injected. that's about $60 billion a year in new cash. And they can't take it out, it has to remain in the system.    Probably a lot more, because lots of people will be cashing out the higher it goes. Easy to get that much cash in when prices are high.  What happens when the hype is gone, and people slow down putting new money in?Think about what happened to Bernie Madoff when the money stopped coming in.... 

Sabibaby Anopheles Mon, 12/11/2017 - 22:16 Permalink

Nothing new, taxes are important and have value in society. The problem is fractional reserve banking. This is what Bitcoin and other crypto-currencies are trying to solve.People who trade with bitcoin are both in agreement of it's value. If you don't use it you can value it at whatever you want to value it at.

In reply to by Anopheles

TheEndIsNear Anopheles Mon, 12/11/2017 - 22:38 Permalink

Good point that so called "miners" (which are required for Bitcon transactions) are slowly bleeding out the fiat cash "invested" by suckers. Only if all transactions halted and no one exited Bitcon its price should remain where it is, but whenever transactions occur Bitcon's valuation is slowly bled away.

In reply to by Anopheles

itsaugood Anopheles Mon, 12/11/2017 - 23:51 Permalink

Why is it a Ponzi? Because there's zero backing, zero equity, zero assets, zero cash in the entire Bitcoin ecosystem.Right on!BTC users say that the block chain infrastructure is what gives BTC its monetary value. This is ridiculous. Just because an elaborate computer system is invented, and then used to move worthless digits from one place to another, does not make those digits valuable.A train can also move from one place to another, over an elaborate system of rails and switches. However, unlike BTC, trains serve a useful purpose by actually moving things that have real value. If there were only empty cars, and nothing of value on that train, all of the infrastructure needed to move that train would be worthless. 

In reply to by Anopheles

MagicMoney Mon, 12/11/2017 - 22:06 Permalink

Game Of Fools - Coming to HBO in 2018.Well, Bitcoin supporters think it is going to 100,000, 200,000 or whatever. They actually think they will have such great purchasing power simply by holding it. Just a matter of time.You can clearly see the FOMO in the crypto market itself. They sell their alternative coins to buy Bitcoin.

j.darkness Mon, 12/11/2017 - 22:02 Permalink

I interact with quite a few in the under 30 crowd and only one of them knows a thing about crypto. He made a killing and now owns a pot farm bed and breakfast in rural maine! He won.