deconstructing the bitcoin hype

people are talking a lot about bitcoin lately as if it's something significant or important. there are videos trying to scare you by saying the bitcoin bubble is like the dot com and housing bubble without telling you that the big difference is that a bitcoin crash won't affect the economy. i don't think it will even make a dent or even a scratch to the stock market. bitcoin is only dangerous if you take a huge risk in it unlike the dot com and housing bust that destroyed the lives of millions of people and left them in tears even if they didn't own a tech stock or own a house. a bitcoin crash can only spread to other parts of the economy if banks and major mutual funds start to have large bitcoin holdings. as of now only criminal entities are mostly the holders and banks and major funds are not allowed to invest in bitcoin.

on the flip side others are incorrectly demonizing bitcoin saying bitcoin is valuable only because people think it's valuable and that. it has no intrinsic value. well, that's also true for gold and even the stock market. gold is valuable only because we decide it's valuable and the stocks are always trading many times their book value and many times their earnings per share simply because people decide that's the value of a stock. same with the dollar. ever since nixon went off the gold standard, the dollar is technically a fiat currency whose value depends on the full faith and credit of the US government. the only difference of course is that the US government is reliable.

as a matter of fact venezuela is making their own cryptocurrency that would be backed by their oil reserves. so you would think the venezuelan crypto would be the most reliable currency since it is the only currency in the world that is backed by something that has an intrinsic value. the only problem is the venezuelan government itself is unreliable so nobody would still trust the venezuelan crypto. maybe i'm missing something but why would venezuela need to go through the hassle of a cryptocurrency when the currency is already backed by oil anyway and therefore the value is easily determined by simple math using the amount of their oil reserves? isn't the purpose of mining a cryptocurrency is to simulate rarity and increase the value of the currency by using an algorithm that makes it very difficult for a computer to mine? that does not make sense.

there really is no difference between bitcoin and the US dollar in terms of functionality and usefulness. it's the holders, buyers, and sellers that make bitcoin unsafe. just like a gun - in the hands of a responsible citizen a gun can be useful and safe. but in the hands of a criminal, a gun can be unpredictable and unsafe.

there is nothing that can stop us from making bitcoin also stable like the US dollar if we all agree that we should never pay too much when buying bitcoin.  i think the reason why the price of bitcoin is skyrocketing out of control, rising from $700 to $15k in just a year is that right now it's mostly the illegal drug traffickers and criminals who use bitcoin.  just watch the movie "american made" starring tom cruise. his problem was storing, transporting  and keeping or securing all his money. can you imagine if at that time they had bitcoin? if the drug cartels paid him using bitcoin instead of cash, would tom cruise's character really care if  bitcoin is overvalued and can crash from $14k to $5k in a blink of an eye as long as there is no risk of losing all his money or being traced and confiscated by federal agents and used as evidence to send him to prison? if you are a top drug lord and you had a choice: buy $100 million worth of bitcoin even if there is an 80% chance it will crash 50%? or keep it in cash. the US dollar may not crash overnight unlike bitcoin, but there is a 70% chance all that cash  will be confiscated by the FBI so you lose 100% and it can even be used as evidence to send you to jail for the rest of your life.  with bitcoin even if you go to jail at least the authorities can not trace it and confiscate it and your family can enjoy the $50 million even if it crashed from $100 million because the bitcoin bubble just burst.

here is how bitcoin can skyrocket out of control: the drug cartels need to buy bitcoin to pay tom cruise's character in the movie. but there are no sellers. there are no sellers because again, most bitcoin holders are like tom cruise's character who does not really need the money right now they just need a safe place to store their wealth without the danger of being traced by the FBI or CIA. in the movie, tom cruise's character had so much money he did not know what to do with them. so for the drug cartel to be able to buy bitcoin, they will have to offer a very high price, enough to motivate the holders to sell. if the current price of bitcoin is $10k, the drug cartel would not mind offering $15k if that's what it takes for the holder to sell them some bitcoins. the drug cartels would not really mind overpaying for bitcoin because they got their wealth through easy money anyway and for them the convenience, the speed, and the anonymity or security of the transaction, which cannot be traced by the FBI or CIA is more important than the price of bitcoin

it's true that bitcoin is a bubble that can burst anytime, but when i hear people say the rapid price appreciation is unsustainable, that's a useless statement. of course the statement is true but that's a useless or incomplete statement because, if the price appreciation of bitcoin will finally stop doubling every year because of course it's unsustainable, but guaranteed to increase 20% a year, everyone would still love to buy bitcoin. the greatest investor of all time warren buffet only averaged 15% a year. i see what they are trying to do. they are trying to use a popular scary phrase in wall street and incorrectly use it to make their video more entertaining and viral. the phrase "unsustainable growth rate" is only a scary phrase in wall street if it refers to the REVENUE of a growth stock, not the PRICE of a growth stock. because as soon as the words "unsustainable growth rate of revenue" comes out of the CEO's mouth, the investors would be running for the exit  and cause the stock price to get a huge haircut.

it may be true that bitcoin is a bubble that could burst anytime, but there really is nothing new or interesting about it because it's no different than going to the casino and betting your kid's college fund on red or black at the roullete table. it's just another risky bet. it's just like hantak or tongits. even if bitcoin is in a bubble, buying bitcoin is not necessarily risky. it depends on the amount of risk you are taking. if you are a multi billionaire and you buy $100k worth of bitcoin because you just want to have fun range trading the ups and downs of bitcoin, then what's the big deal?

a more interesting conversation is whether bitcoin is inflationary or deflationary. after learning about bitcoin, i notice the experts say the disadvantage of bitcoin is that it's deflationary. actually i disagree. maybe i'm just missing something but i think it's inflationary.  i understand why they say it's deflationary - because it's just limited to 20 million coins. but the software is actually simple and the code is open for everyone to see. that means it's easy to make another currency similar to bitcoin, just rename the variables.

while paper currencies from different countries have geographical boundaries, cryptocurrencies don't. it won't be just inflationary, it would be confusionary. nothing can stop anyone from making yet another cryptocurrency. with paper currency - at least you need to have a country.

you might say, well we just have to come up with rules of the game where everyone will agree on. just like we agreed that gold and silver is valuable so you can't just hoard a a warehouse full of aluminum and declare aluminum is currency. the advantage of precious metals is that they are rare so we can assign values depending on how rare they are. gold is harder to find than aluminum so gold is more valuable. cryptos may be similar because you can intentionally create an algorithm that would make it harder or easier to mine the currency. but with precious metals, the number of elements in the periodic table is limited and you have to be einstein to discover another element. but with cryptocurrency there is no limit to the different kinds of cryptos that people will create. the result is inflationary, and even confusionary.

another interesting discussion is whether bitcoin will ever be used as a common currency by average folks to buy their groceries. bitcoin is functionally the same as the US dollar (maybe even better because it's more like gold where the rarity and the cost and difficulty to mine is simulated by an algorithm).  just like a gun in the hands of a responsible citizen, bitcoin can be very useful and stable if the buyers and sellers are responsible investors whose only goal is to make a profit. because no normal investor in their right mind will overpay for bitcoin and cause wild swings or volatility. but the question is will enough responsible people ever come together and use bitcoin or another crypto currency as a normal stable currency? i don't see why not.

update fb post 9/6/22:

it pays to be a dummy

by ian crystal

if you noticed i never got into the bitcoin or crypto hype. that's because i never found the answer to my question that is as simple as 1+1=2. the main argument for bitcoin was it was a hedge against inflation because unlike the central bank who can just print money as much as they want, the supply of bitcoin is limited. 

alarm bells immediately rang in my brain. what could stop anyone from creating another bitcoin? surely enough, many other types of cryptos started to emerge such as ethereum. i continued to search the internet for any answer to my very simple yet VERY VERY VERY IMPORTANT QUESTION. i finally got a partial answer. it said yes it's true anyone can create another crypto and as more and more cryptos emerge, cryptos start to lose it's benefit as an inflation hedge. the article also said that SO FAR there are not enough cryptos and the demand still overwhelmes the supply.  that means cryptos are a very bad long term investment. today there are literally THOUSANDS of different crytpos, so of course the cryptos are crashing. 

my suspicion was correct that cryptos were really for smart short term traders who can time the market. i'm just a dummy who has no brain power to  make short term trades. i can only invest in LONG TERM THEMES that surely will work such as diabetes, 5G, e-commerce, humanization of pets, liquified natural gas, surgical robotics, cashless society, food shortage, coffee, etc ... search "ian's knowledge bombs" in the internet and click "stock-picking-for-dummies" in the table of contents to get a list of all my long term themes.

i'm also not smart enough to be ahead of the heard. i only get in the stock when the long term thesis is already confirmed, which means the money has already been made short term. i can only take advantage of the long term gains. which means i can never afford a speed boat. but i can always afford a rubberboat.  

the moral of the story is that never blindly follow what everyone is doing because if you just learn from history, humans are really just winging it and learning as we go along. the greatest humans in history owned slaves. the catholic church used to torture people to death just for being gay. and during the bitcoin hype, one of the greatest investment advisers in history jim cramer recommended coinbase. 

you need to do your own research and think for yourself. in 2017, i wrote an article "deconstructing the bitcoin hype" to summarize my research and analysis.

(for more of my knowledge bombs, click the "ian's knowledge bombs" banner at the top of this article and choose any article in the table of contents that piques your interest)