Recently BizNews published a piece that looked at Bitcoin with a rather pessimistic view. The piece was originally from Jonathan Katzenellenbogen and first appeared on the Daily Friend. Ivo Vegter has put forward an opposing point of view on the same website, arguing that we have heard all of this negative talk before. He puts forth examples of other technologies, which faced sceptics and all the times Bitcoin has bounced back in the past when it surely looked as though it could not. Vegter argues that all the problems related to cryptocurrencies come from the centralised institutions that have arisen to accommodate crypto, but not the crypto itself. More in this article from the Daily Friend – Ross Sinclair
Yeah, yeah, bitcoin is dead. We know
By Ivo Vegter
The price doldrums in which bitcoin finds itself, and the collapse of the FTX exchange, have made it fashionable, once again, to declare crypto, or bitcoin, or both, dead.
Every time something disappointing happens in the cryptocurrency space, people without even a vague idea of what bitcoin is, or how it works, write headlines declaring bitcoin, or cyptocurrencies, dead.
With all respect to my colleague, Jonathan Katzenellenbogen, who ordinarily is an excellent writer and journalist, I’m going to single out his article of two days ago, Bitcoin: Manias, Panics, and Crashes, for critique.
It isn’t necessary to understand the finer details of what happened to FTX last week, or to understand the details of the crypto markets.
There are four key things to understand.
One, the cryptocurrency space consists of a lot more than bitcoin. A substantial amount of that space is hype, get-rich-quick schemes, and outright fraud. That does not mean bitcoin can be painted with the same brush.
Two, one of the reasons for bitcoin’s existence is to obviate the need for ‘trusted’ third parties to conduct financial transactions. FTX was a ‘trusted’ third party. It ran off with the money, which proves the need for disintermediating ‘trusted’ third parties.
Three, asset bubbles, financial fraud, financial crises and Ponzi schemes happen with regulated, dollar-denominated assets too. If you’re going to blame bitcoin for FTX, then you must blame the dollar for Bernie Madoff, the dotcom crash, Enron, and Lehman Brothers.
And four, the death of bitcoin has been predicted so often, it’s a meme now.
The recent media frenzy that has declared bitcoin dead and cryptocurrencies a scam was precipitated by the spectacular collapse of FTX, a cryptocurrency exchange, whose name is short for ‘Futures Exchange’.
A cryptocurrency exchange is a centralised organisation with a website that allows people to deposit currencies, including both fiat (government-issued) and cryptocurrencies, in order to buy and sell them in pairs.
FTX wasn’t just any exchange. It was brand new, founded in 2019. Its owner, Sam Bankman-Fried, was a media darling. They positively fawned over him. He claimed to be in it to make billions so he could give his money away. ‘Effective altruism’, they called it.
He was on the cover of Fortune, fingered as the next Warren Buffet, three months before the collapse. (At least Fortune considered the possibility that disaster was a potential outcome.)
Sequoia Capital, the undisputed heavyweight champion of venture capital and an investor in FTX, penned a 13 000-word paean to SBF, as he was known. It has been removed from its website, but the internet never forgets.
Everyone wanted it to be legit, because it had an awesome backstory. This was the exchange that was going to get bigger than the banks. Effective altruism, where people earned or made money so they could donate it to worthy charities, was going to save the world.
FTX issued its own coin called FTT, out of thin air. Such coins are widely called ‘shitcoins’ in the crypto industry, and for good reason.
The history of cryptocurrency is littered with shitcoins that their creators sold with grand prospectuses, to people who bought them before discovering they were scams, or otherwise worthless.
Bitcoin is not one of them. There are others that have value and have a good reason to exist. Ethereum, which permits the construction of elaborate smart contracts, decentralised applications, and decentralised autonomous organisations, is one of them.
The further you go down the list of most valuable coins, however, the more likely you are to find shitcoins.
At number eight, for example, you’ll find dogecoin, which is literally a joke coin. It’s a joke coin worth $11.7 billion, but it has an infinite supply and is the pure embodiment of speculative hype.
FTX used their FTT shitcoin as collateral to raise loans. It also used that shitcoin to buy out one of its major investors.
When questions were raised about the value of the assets on the books of FTX, and an incestuously paired company called Alameda Trading that also belonged to SBF, people started yanking their deposits.
This included the investor who had been bought out with shitcoins, who inexplicably announced they were about to dump $2 billion worth of said shitcoin on the market. The market reacted as one might expect, dumping the FTT faster than a hot potato, driving its price to its real value, which was zero all along.
The details aren’t really important, but essentially there was a bank run on FTX, which it couldn’t cover with its liquid assets. Besides a liquidation, there will be investigations into fraud. I’d put the chance that SBF avoids prison at somewhere near the value of his shitcoin.
All this had nothing at all to do with bitcoin.
Bitcoin is an electronic currency, with programmatically limited supply. It can be used to pay for purchases without going through an intermediary, such as a bank, or it can be held as an investment.
One key purpose of bitcoin is to establish a currency which dispenses with the need for trusted intermediaries. What happened here is that people gave their bitcoins to, ahem, ‘trusted’ third parties, and then they were surprised they couldn’t trust the third parties.
It’s as if they haven’t heard of Mt. Gox, an exchange which handled 70% of all bitcoin transactions in 2014, before disappearing with hundreds of thousands of bitcoins, then worth hundreds of millions of dollars.
In the wake of Mt. Gox, the adage in crypto circles became, ‘Not your keys, not your coins’.
And exchange has one purpose: exchanging one currency for another. Do not use it as a bank. If you’re day-trading (which you shouldn’t be doing), keep only as much as you need on the exchange, and no more.
Withdraw your cryptocurrency to a wallet that you control, on your own computer, your own smartphone, or better yet, a hardware wallet specifically designed to keep your keys and coins safe.
That way, if an exchange gets knocked over by a liquidity crisis, or a hack, or a fraud, your coins are safely under your own control.
If you give your money to someone else and they run off with it, don’t blame the currency. The solution to that problem is not to give your money to third parties, and if you do, to do your homework first.
FTX didn’t publish audited financial statements. Venture capital investors were asleep at the wheel, wilfully ignoring red flags because they were hoping to make a killing.
A balance sheet had to be leaked before anyone realised that there was fraud going on. If you contract with a payment processor, or an investment broker, or a bank, are you going to choose someone that was founded in 2019 and doesn’t publish its financials?
If you do, you have a level of faith in strangers that one might charitably describe as over-generous.
Katzenellenbogen is correct to point to other major failures in the crypto-financial space this year, but again, they all involve third parties.
In many ways, the crypto boom is mimicking the dot-com boom. In the late 1990s, companies were way overvalued. Many companies existed on hot air and eyeballs alone, with no clue how they were going to make actual profits. A lot of fraud was committed. Very many companies went under.
Newspapers called the internet dead. Far from it, however. Although everyone took a beating, including the good companies that survived, like Apple, Microsoft and Google, the underlying technology was perfectly sound.
Likewise, the collapse of hypecoins, shitcoins, exchanges, or other crypto schemes does not impugn the value of the underlying blockchain technology, the idea of decentralised finance, or bitcoin itself.
Katzenellenbogen writes: ‘Many central banks have been tolerant of these assets, but they are worried that cryptocurrencies could at some point undermine the effectiveness of their monetary policy.’
That is excellent news, because undermining the effectiveness of inflationary monetary policy is a primary raison d’etre of bitcoin. The entire point of a strictly limited supply of coins with no need for intermediaries is that third parties, including governments, cannot devalue your holdings.
This worry on the part of central banks strongly suggests bitcoin is succeeding, not failing.
‘It is strange that so many are not troubled by the lack of knowledge about Satoshi Nakamoto, the supposed founder of Bitcoin,’ he writes. ‘There is a lot going against private digital currencies. Lack of transparency and the absurd concept of mining and their volatility are just three.’
There is absolutely no need to know who Satoshi Nakamoto is, because he exercises no control whatsoever over your bitcoins. He cannot run off with them. He cannot suddenly decide to lift the limit on the number of bitcoins that will ever be issued.
The entire codebase of bitcoin is open source and published, for all to read, on GitHub. This is the ultimate in transparency.
Go ask your bank if you can check the source code for the software that adds all those charges to your bank statement every time you so much as look at your account balance and see how transparent they are.
As for the ‘absurd concept of mining’, I’ll grant that the term mining is a bit of a misnomer. Yes, ‘mining’ does produce new bitcoins, but it does so as a reward for performing a vital function: dedicating computing power to maintaining and validating a decentralised public ledger.
The entire infrastructure of bitcoin, including its security against attack, is built upon the service ‘miners’ perform.
There are other ways to secure a coin, such as ‘proof of stake’ instead of ‘proof of work’. Ethereum recently switched to proof of stake. The difference is beyond the scope of this article, however.
‘Even under systems of “Free Banking” under which private banks were able to issue their own currency with no restrictions, there was greater market discipline than there is in the Wild West of digital currencies,’ says Katzenellenbogen. ‘If a bank issued too much currency or did not have the assets to back its paper, it could go under.’
The exact same thing is true for cryptocurrencies, which is why bitcoin, and most other reliable cryptocurrencies, strictly limit how much new currency can be created.
A commenter elaborates on the other point: ‘Unlike precious metals or money markets, for example, it has nothing tangible to prop it up and give it value.’
Government-issued fiat money also has nothing to prop it up, other than the willingness of counterparties to accept it as a medium of exchange. Government can, and routinely do, create vast amounts of currency out of thin air. Banks, too, create loans out of thin air. They write down a liability (your loan) on one side of the ledger and add this amount to your account. They write down an asset, the expectation of future repayments, on the other side of the ledger, and voilà, you have money. The bank’s only constraint is that it may not lend more than X times the money it actually does have on deposit, where X is determined by banking regulations.
For that matter, gold itself has nothing to back it up. The utility value of gold is extremely limited. You can make pretty baubles and non-corroding wires or surface coatings out of gold. It has little intrinsic value.
The value of gold is entirely premised on a few useful properties. These are:
- Acceptability: There must be an expectation that anyone will accept it as payment.
- Portability: It must be convenient to carry. Gold is heavy, but its high value by weight makes it relatively portable, although this is the reason we mostly use paper money today.
- Durability: If a material degrades or corrodes easily, it does not make a good currency. That’s why gold is better than iron, and iron is better than rice.
- Homogeneity: Any one unit of currency must be entirely interchangeable with any other.
- Divisibility: It must be possible to split the currency into smaller units, for convenience.
- Malleability: It should be easily coinable and able to maintain imprints.
- Cognisability: It must be easily recognisable and not easily confused with some other material.
- Stability: Its value should not be highly volatile.
There is nothing, other than convenience, to back gold as a medium of exchange. It outperforms paper money on some of these criteria, particularly stability. Paper money is always losing value, as a matter of deliberate monetary policy. On others, like portability, paper money wins.
Bitcoin has most of these features. It does not (yet) have stability, which is why it isn’t (yet) widely used as a medium of exchange. It is also not (yet) sufficiently widely acceptable, but that is changing.
Katzenellenbogen writes: ‘After years of reasonable stability in its price since the first Bitcoin token was issued in 2009, Bitcoin gained serious traction in September 2018, and from mid-September 2020 to late March 2021 its price rose almost six-fold. Since then, it has been volatile, dropping and then peaking about a year ago, and since then it has been almost a one-way slide.’
He’s wrong. Bitcoin has never had ‘reasonable stability’, and one-year slides have occurred frequently throughout its history.
From April to June 2011, it spiked from $1 to almost $30 a coin. By November that year, it reached a low of $2.05, a 93% decline. ‘So that’s the end of bitcoin, then,’ wrote Forbes.
In April 2013, it peaked at $230, having started the year at $13.51. By July it was back down below $67, a 70% decline. ‘Bitcoins would have been considered foolish by Adam Smith,’ wrote Paul Krugman.
By December 2013 it had shot up over 1 610% to $1 147. However, the excitement was short-lived, and the entire year 2014 was one unrelenting bear market, bottoming out at $117 in January 2015, 85% off its peak.
‘Is this the end for bitcoin?’ asked MyBroadband. Yet even at $177, it was 1 200% up on its value just two short years earlier.
Bitcoin stayed in the doldrums for almost all of 2015, until it began a sustained rise in October. This time, despite significant volatility along the way, the bull run to near $20 000 in December 2017 had begun.
Still, throughout that climb, we heard bitcoin was dead.
‘Bitcoin will not survive,’ said JP Morgan CEO Jamie Dimon in November 2015.
‘R.I.P. bitcoin. It’s time to move on,’ wrote the Washington Post in February 2016.
‘Is bitcoin doomed?’ asked Newsweek in October 2016.
‘Bitcoin is quickly becoming a thing of the past,’ wrote Bloomberg in November 2016.
‘Bitcoin is a bubble we’ve seen before. So if you are “holding” any Bitcoins (not that anyone can actually hold something so ethereal), your moment to exit and flee is rapidly approaching,’ wrote financial analyst Tom McLellan in January 2017, when it was still trading at $915, a mere 682% up from its low two years earlier, but with another 9 800% to go to the peak it would reach in December that same year.
‘Stay away from bitcoin. It’s complete garbage,’ wrote someone who was sore they didn’t buy two years earlier for MarketWatch in June 2017, with the price at $2 457.
Warnings and declarations of worthlessness punctuated the climb up to $19 343, which it reached on 17 December 2017.
Then came the crash. Throughout 2018, bitcoin went largely one way – down – until it reached a bottom of $3 224 almost exactly a year after the peak.
This was ‘the biggest bubble in human history,’ declared Nouriel Roubini, who clearly wasn’t going to buy the dip.
‘Talk of bitcoin’s demise was on the money,’ wrote The NZ Herald, in June 2018, with the price still at $6 170, over 5 000% up on the price of January 2015, and 125% up year-on-year.
The Daily Friend doesn’t have the server space to recount all the declarations of death, scam, pyramid schemes, bubble and going to zero that were published in 2018.
There’d be a mini-peak during 2019 again, and prices remained wildly volatile with prices between $5 000 and well over $10 000 until the middle of 2020. The declarations did not end, but then a new bull run began.
‘Bitcoin is disgusting,’ declared CNBC on 1 May 2021, shortly after bitcoin hit $63 000, a 100 000% increase since Krugman called it foolish eight years earlier, and ten years after Forbes had declared it dead.
It fell back below $30 000 not long afterwards. ‘Billionaire investor says bitcoin is headed for $0, which is very far from the moon,’ wrote Gizmodo, on 20 July 2021, whining about a price level crossed for the first time six months earlier and 225% up year-on-year.
On 9 November 2021, one month after Jamie Dimon called bitcoin ‘worthless’ again, it hit its all-time-high (to date) of $67 545.
Today, once again, bitcoin has had a year of declines. Just like it has had before, many, many times over.
‘Bitcoin and Ethereum will go to zero,’ declared Bloomberg on 13 June 2022, with the price at $25,424 – a price bitcoin had never seen until 18 months earlier, 168% up over two years, and 858% up on five years earlier.
‘Bitcoin’s libertarian dream is over,’ declared The Telegraph.
‘Sign cryptocurrency is dead as bitcoin dips to $17K,’ says News Corp.
That’s what it was worth exactly two years ago. So yeah, bitcoin has lost two years of gains. But declaring it dead seems mighty bold, given its history.
As I write this, a friend texts me this:
Show me any other asset that is 110% up over the last three years that merits such a cover.
‘Can’t see this ageing well,’ said my friend.
Here is an amusing and instructive timeline of bitcoin death predictions, marked on its long-term price chart.
Katzenellenbogen is in good company. All of the arguments he made have been thrown at bitcoin time and time again. Most either reveal a superficial understanding of the crypto industry or have been proven false by history time and time again.
It is true that cryptocurrencies are the Wild West. It’s filled with people out to make a quick buck and trying to part fools and their money.
If you’re going to dip your toes in, at least be a little streetwise. Stick to bitcoin only, unless you’re prepared to do a ton of research into alternative coins. Nobody ever got poor avoiding shitcoin hype.
Don’t believe scammers. Deal with reputable exchanges only. Even then, figure out how to store your coins safely yourself. Don’t just wing it. Read up about it. Cryptos exist so banks don’t have to, so if you cannot keep your own money safe, don’t put your life savings into it.
Invest only what you can afford to lose, at least until you’re far more familiar with the crypto market.
And if you do lose your money, because of fly-by-nights, frauds, or market volatility, don’t blame the currency. It could have happened with any currency.
It isn’t bitcoin’s fault. Bitcoin will outlive any number of bankrupt exchanges, just like the internet handsomely outlived the dot-com crash.
- The views of the writer are not necessarily the views of the Daily Friend or the IRR
- If you like what you have just read, support the Daily Friend
- An alternative, pessimistic view of Bitcoin
- CrypTalk ep 9 – The likelihood of more Bitcoin volatility and the $100m Binance Bridge hack
- Bitcoin volatility looks to return
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