A collective insanity has sprouted around the new field of ‘cryptocurrencies’, causing an irrational gold rush worldwide. As a matter of fact, when Bitcoin was first invented in 2009, very few people thought it was worth a second thought, with a value of just $0.0001. Today, Bitcoin is a lot more.
The Bitcoin phenomenon isn’t just about a bunch of people who believe the cryptocurrency is a good ‘investment’. For many, the belief in Bitcoin’s power to transform society runs much deeper: it’s an article of faith. Indeed, currency has always been fused with notions of faith and trust, and Bitcoin takes them to new heights. But believe it or not, Bitcoin has substantial and intrinsic defects, making it an unworthy object of worship.
The first of the many flaws is its patent opacity and unintelligible characteristic in popular parlance. Bitcoin was developed by a mystical figure, with no known corporeal presence, called Satoshi Nakamoto. Being at the core of its design, this is also true for the anonymity that they provide to users. This has created considerable regulatory challenges, including the use of cryptocurrencies in illegal trade (drugs, hacks and thefts, illegal pornography, even murder-for-hire), potential to fund terrorism, launder money, and avoid capital controls. There is little doubt that by providing a digital and anonymous payment mechanism, cryptocurrencies such as Bitcoin have facilitated the growth of dark-web online marketplaces in which illegal goods and services are traded and any associated scams are carried out.
Indeed, it should be remembered that Bitcoin is a decentralized payment system that operates independently of any government or central bank. People can exchange value on a peer-to-peer basis, without passing through any ‘classic’ financial intermediary. This means that the Bitcoin network does not reside in any given regulation. But it would be naive to think that the devoted followers of Bitcoin have no in-built ideology. The assumption is clearly to say that by giving national governments the ability to monitor flows of money in the financial system, they can use it as a form of law enforcement. The financial libertarian streak is thus at the core of Bitcoin, and we can easily echo that sentiment in all the pro-crypto blogs and podcasts.
However, most analysts agree that this lack of regulation is the main risk Bitcoin and other cryptocurrencies face. As Bitcoin sees its popularity and adoption increase, it becomes increasingly evident that regulators and governments will eventually define a clear legal framework for the cryptocurrency market. In fact, some countries have already taken the first drastic step to ban Bitcoin altogether, including China, Columbia, Saudi Arabia and several more.
In addition to this, Bitcoin is neither equitable nor is its market exempt from manipulation. While believers may tout Bitcoin as the democratising money of the future, in truth the market is concentred in the hands of a few hungry ‘whales’. Bitcoin whale is a crypto-term that refers to individuals or entities that hold enough cryptocurrency that they subsequently have the potential to manipulate its valuations.
Telsa and MicroStrategy are the most famous Bitcoin whales and the two largest examples of a new phenomenon of Bitcoin being the central part of a ‘corporate treasury’ strategy. When Tesla announced its $1.5 billion bitcoin purchase in early February 2021, the Bitcoin price hit a new high on the news, soaring 15% to USD $44,000. Telsa’s move followed MicroStrategy’s series of large bitcoin buys which since August 2020 has seen the company spend over $2.1 billion buying Bitcoin. And as if that was not enough, Michael Saylor, co-founder of MicroStrategy, gave Bitcoin a religious significance by saying: “If God had intended gold as a treasury reserve asset to hold for 100 years he would have made 21 million gold coins and made it impossible to make any more.”
If those whales are one of the main reasons behind Bitcoin’s price surge, this also comes with tremendous risks as its volatile price moves can wipe out any profit margin within a matter of hours. Bitcoin is thus ‘investible’ but only in the speculative sense. Speculators are left to play with unpredictable residual patterns within the random walks of stock price movements through the adoption of different ‘gambling’ positions. Among the features seen in gambling is the exposure to ill-considered risk, as the possibility of a loss is far greater than the possibility of making a profit.
In fact, at a time when central bank’s monetary floodgates are wide open, we currently have the perfect storm of ‘emotional investing’, according to the market’s tech-firm Oxford Risk. The pandemic means many investors are currently highly emotionally sensitive and have a shortened emotional time horizon, and this increases the appeal of get-rich-quick gambles. The practice of speculation of some traders consisting in examining the markets’ daily gyration merely for the purpose of making quick profit undeniably possess harm and danger, not only to the individual speculators but also to the economy as a whole.
Our world is beset by financial crises, geopolitical risks and very loose monetary policy. There is growing demand for safe haven assets that are a hedge against inflation. Desperately seeking for the ‘magic cure’, we have fabricated a new digital golden calf; an idol that can be worshipped and prayed to, to lead us out of our ‘growth-deserted global village’. However, Bitcoin’s volatility and unpredictability may leave one skeptical about its role as a future safe-haven.
With all due respect to our modern-day alchemists, there are strong grounds to believe that Bitcoin is closer to lead than gold.
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