A couple of days ago, former President Donald Trump chimed in on Bitcoin and the cryptocurrency boom. As he put it, “Bitcoin, it just seems like a scam.”
With Bitcoin now trading at nearly half its peak of $63,346, the knives are out once again for cryptocurrencies and the “libertarian crypto evangelists” who support them.
Of course, Bitcoin has crashed before. And it has always picked itself up, brushed itself off and rebounded to ever-higher highs.
This resilience has made Bitcoin a cult as much as an investment.
Bitcoin buyers are more believers than investors.
For those who have not drunk the Bitcoin Kool-Aid, the question arises…
Is this the beginning of the end for Bitcoin, or is it yet another opportunity for true believers to buy the dip?
Is Bitcoin Even Money?
Let me start by going back to first principles…
The hope for digital cryptocurrencies is that they will one day replace government-issued money.
Bitcoin and altcoins are not issued or controlled by a central bank or any other authority. In contrast, fiat and traditional currencies are issued and controlled by central banks and governments.
An economy in which private currency issuers compete with government currency may seem revolutionary.
Yet private currencies were the rule in the early history of the United States. Plenty of wildcat banks in the U.S. issued their own currencies far into the 1800s.
You can think of money – at its core – in two ways…
It can be a store of value. With a gold-backed currency, you can go to the bank and exchange your dollars for gold.
Alternatively, money can be a medium of exchange with no intrinsic value. A $100 bill is intrinsically worth only the paper it’s printed on. But you can exchange that piece of paper for something far more valuable.
Investors talk about Bitcoin as an alternative to gold – a “store of value.”
But I just don’t get it. How can bits of digital code have an intrinsic value?
If Bitcoin is worth anything, it’s worth the good or service you can exchange it for. In practice, Bitcoin is just a (clunky) medium of exchange.
Why You Should Worry About Bitcoin
Whether Bitcoin’s current pullback is its final one matters little. Bitcoin is eventually set to fail.
And here’s why…
First, Bitcoin’s extreme volatility makes it a lousy store of value.
If you own Bitcoin, you can lose your shirt in the span of a few hours. On a single day – May 19 – Bitcoin fell by 30%.
Imagine if the value of your U.S. dollar holdings were as volatile.
A currency must be stable to gain widespread acceptance. And Bitcoin has failed miserably on that front.
Second, the Bitcoin market is refusing to mature. Usually, an asset becomes less volatile as its value grows and its investor base widens.
Bitcoin’s market capitalization has risen more than 4,400% since 2016. Yet it remains just as volatile as it was five years ago.
That’s very odd. Bitcoin remains a speculative asset and goes in and out of fashion at the whim of investors.
Third, the regulatory risks to Bitcoin are massive. Bitcoin sits under a Sword of Damocles… and the thread that holds the sword is fraying quickly.
Just last week, regulators in China banned banks and payment companies from accepting cryptocurrencies.
This isn’t China’s first crackdown on crypto. In 2017, it shut down many cryptocurrency exchanges and banned initial coin offerings.
Nor is China alone.
The U.S. Treasury now requires all crypto transfers worth more than $10,000 to be reported to the tax authorities.
And don’t forget, governments have a monopoly on coercion. If the government wants your Bitcoin key, a complete record of your crypto transactions and, say, 90% of your Bitcoin as a one-off wealth tax, it will have it.
Four, the smart money is getting cold feet about crypto.
Superficially, Wall Street investment banks have embraced cryptocurrencies. Goldman Sachs recently relaunched its crypto desk. BNY Mellon is rolling out Bitcoin exchange-traded funds.
At the same time, JPMorgan reports that professional investors have been shifting their crypto assets to gold.
Today, customers are rabid about crypto. Tomorrow, a crash or regulatory crackdown could end the party fast.
No Matter the Question, Bitcoin Has One Answer
Whatever the criticism, Bitcoin bulls will always have one answer: Had you bought Bitcoin five years ago, you’d still be sitting on gains of more than 6,000%.
That’s a facile argument. And a classic example of confusing brains with a bull market.
The bottom line?
Go ahead and dabble in cryptocurrencies. But do so only as a form of entertainment.
Think of it as going to the racetrack or gambling in Las Vegas. And make sure you don’t play with money you can’t afford to lose.
P.S. I’m looking forward to sharing all of my thoughts on the latest investment trends during The Oxford Club’s upcoming Wealth, Wine & Wander Retreat through Paris, Normandy and Amsterdam. I hope you’ll consider joining me from August 28 to September 5 on this extraordinary adventure. But act quickly – space is extremely limited. Click here to view the itinerary, then contact Maggie Stephens at 800.638.7640, ext. 125, or Maggie@aesu.com to learn more and register.
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