Courtesy of Jaime Falcon.
March 23, 2013
Apparently I struck a nerve this morning when I asked Barry Ritholtz when he was going to write something about Bitcoin’s recent activity. He lashed out at me for asking his opinion. In case you are not familiar with Barry Ritholtz, he writes The Big Picture blog. He covers macro trends. Rithotz is somewhat unique in the world of money and analysis in that he is honest, has integrity, and is incredibly even-handed in his approach to investments. He also does not pull his punches when it comes to calling out cronyism, corruption, and fraud.
So why is it that even-handed Ritholtz is reacting with scorn and vitriol when asked his opininion of Bitcoin? There are a few possibilities. One is that he is in the money-making-advice business and his clients are badgering him about why they are missing out on the parabolic rise of Bitcoin’s value.
Another possibility is that he lumps Bitcoin with gold accumilation, tin hats, and conspiracy nuts. I’m guessing he started with the latter perspective and is now dealing with the former.
I understand BR’s discomfort with these things. He is a quant. He is an excellent analyst when it comes to risk and income and assets and liabilities. He is also adept at overlaying the psychological component of investment behavior when it comes to traditional assets and markets. But things that do not produce income and are of questionable mainstream acceptance make him understandably nervous. He warns regularly against getting too caught up in narratives that confidently point investors to keep money on the sidelines or in non-traditional, faith-based vehicles.
My own opinion is that anyone who blogs about the economy and technology should be willing to address one of the most important money developments of the millenium… even if he or she does not consider it to be a currency. It is unquestionably global, it is currently a store of value, it is being used for transactions and speculation, and it is an outlet for people who lack confidence in the global economic system and in central bank management of currency.
Since BR is not taking on the challenge, here is my own take on purchasing Bitcoins:
Why buying Bitcoins is a terrible idea:
1. No legal entity = no accountability. What happens if your Bitcoins disappear? Whom do you sue? What law enforcement unit do you call? Answer: You may well be SOL.
2. No income, no assets, no P/E, no equity…
3. Governments must oppose Bitcoin because Bitcoins are designed to evade government. You can be sure that Bitcoin is in the crosshairs of the US, and other, governments. See this: On Monday, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) released its first “guidance” as to how “de-centralized virtual currencies” should fit into the larger regulatory regime under which currencies of all kinds are required to operate.
4. The next crash may be worse than the last one. And governments have an interest in making this happen.
5. People are at this moment conspiring to manipulate and milk the Bitcoin market. How could they not be? Given the relatively small market cap, there are serious opportunities for manipulation. Given the anonymous nature of the market, it is attracting everyone who is interested in hiding assets and transactions. Guess what happens when you attract everyone who has a nefarious financial goal and everyone who knows how to manipulate financial markets? Those are the people on the other end of your transactions. Let us not underestimate what will be attempted with Bitcoin as the tool. Think of the Hunt Brothers without effective tools to bring them down. There will be hackers attacking the Bitcoin world in every possible way. Will its encryption hold?
6. The train has left the station. You missed the time to buy. Unfortunately no one knows where the next station is. It may be back at the first station (or it may be on the moon).
7. Someone created the Bitcoin formula. That person knows the back door. That person knows how to break the code. That person knows how to circumvent the mining process. After all, it is, at its core, just a series of ones and zeros. (Good point, Peter)
On the other hand, here is why you are a complete fool if you do not purchase Bitcoins immediately:
1. Compromised equity markets. Our laws are written by bankers for bankers. Corrupt politicians are the catalyst. If legislators were woking for citizens of America, we would have very simple legislation and we would have bankers behind bars. As it stands now, we have maintained a deeply compromised financial system and have maintained criminals in positions of influence and power.
2. Compromised central banks. Central bankers in the US and UK have no interest in cleaning up the fraud and corruption that permeates our financial world. Their answer is to paper over the problems, infuse ever more debt into the system, and to enrich the rich by keeping asset prices rising. There is an end-game to this cycle.
3. Compromised legislators and regulators. Legislators and regulators work primarily for the financial institutions now known as Too Big Too Fail. They are not in the business of protecting investors, savers, or the general public.
4. The United States crisis management team, made up of all the compromised parties named above, will be saving themselves and their benefactors when the next crisis hits.
5. The value of Bitcoins has gone from practically nothing to over $100 in a very short period of time. A Bitcoin could be worth $1000 soon. Or $10,000. No one knows.
6. Manipulation of Bitcoin will mean more parabolic moves relative to whatever crappy fiat currency you currently hold.
7. The credit rating agencies maintain their conflicted structure. While there is now some scrutiny on them, nothing has changed to make those ratings inherently more trustworthy. Those ratings form a foundation for much of our current financial system. Guess what happens when you layer trillions in derivatives and debt on top of a compromised financial foundation?
I don’t know why Ritholtz is so testy about Bitcoins. He was inappropriately insulting when I brought it up. But there is no denying that Bitcoins are here today and are making some people very rich very quickly. Who knows where they will be tomorrow? Maybe they will disappear. Or maybe they will become a darling of central bankers once they figure out how to harness its power. Or maybe the inventor is right now in Shanghai selling the secret formula to the Chinese government. Lots of questions. Not a lot of real answers.
In the meantime, it is quite fascinating to watch Bitcoins as they vault into mainstream consciousness.
