674 comments

Why Bitcoin is Stupid

Well, shit. I’ve been watching this situation for a few years, and assuming it would just blow over so we wouldn’t have to talk about it here in this place where we are supposed to be busy improving our lives.

But a collective insanity has sprouted around the new field of ‘cryptocurrencies’, causing a totally irrational worldwide gold rush. It has reached the point that a big percentage of stories in the financial news and questions in Mr. Money Mustache’s email inbox are about whether or not we should all ‘invest’ in BitCoin.

We’ll start with the answer: No, you should not invest in Bitcoin. The reason is that it’s not an investment. Just like gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any hope of a product plan, “pre-construction pricing” Toronto condominiums you have no intent to occupy or rent out, and rare baseball cards are not investments.

Update, 15 months later: The imaginary price of Bitcoin is down over 70% since I wrote this, and a recent study reveals that about 95% of even the trading volume is fraudulent. So I’m feeling pretty good about this article in retrospect, but please read on to learn how to see and avoid future bubbles.

These are all things that people have bought in the past, and driven to completely irrational prices, not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.

When you make this kind of purchase, which you should never do, you are speculating, which is not a useful activity. You’re playing a psychological, win-lose battle against other humans with money as the only objective. Even if you win some money through dumb luck, you have lost some time and life energy, which means you have lost.

Noticed this ad on the corner of a website recently … because we ALL need daily updates on an obscure piece of niche software technology!

Investing means buying an asset that actually creates products and services and cashflow for an extended period of time. Like a piece of a profitable business or a rentable piece of real estate. An investment is something that has intrinsic value – that is, it would be worth owning from a financial perspective, even if you could never sell it.

Now, with that moral sermon out of the way, we might as well talk about why Bitcoin has become such a big thing, so we can separate the usefulness of the underlying technology called “Blockchain”, from the mania about how people have turned Bitcoin it into a big dumb lottery.

This separation is important because the usefulness of Blockchain is the primary justification people use for the big dumb Bitcoin lottery. 

Once you make this separation in your mind, you can see that Blockchain is a simply a nifty new software invention (which is open-source and free for anyone to use), whereas Bitcoin is just one well-known way to use it.

Blockchain is just a computer protocol, which allows two people (or machines) to do transactions even if they don’t trust each other or the network between them. It can have applications in the monetary system, contracts, and even as a component in higher level protocols like sharing files. But it’s not some spectacular Instant Trillionaire piece of magic.

As a real world comparison, I quote this nifty piece from a reader named The Unassuming Banker:

… imagine that someone had found a cure for cancer and posted the step-by-step instructions on how to make it on-line, freely available for anyone to use.

Now imagine that the same person also created a product called Cancer-Pill using their own instructions, trade marked it, and started selling it to the highest bidders.

I think we can all agree a cure for cancer is immensely valuable to society (blockchain may or may not be, we still have to see), however, how much is a Cancer-Pill worth?

 

Our Banker friend goes on to explain that the first Cancer-Pill might initially see some great sales. Prices would rise, especially if the supply of these pills was limited (just as an artificial supply limit is built right into the Bitcoin algorithm.)

But since the formula is open and free, other companies would quickly come out with their own cancer pills. Cancer-Away, CancerBgone, CancEthereum, and any other number of competitors would spring up. Anybody can make a pill, and it costs only a few cents per dose.

And yet imagine everybody started bidding up Cancer-Pills, to the point that they cost $17,000 each and fluctuate widely in price, seemingly for no reason. Because of this, newspapers start reporting on prices daily, triggering so many tales of instant riches that you notice even your barber and your massage therapist are offering tips on how to invest in this new “asset class”.

But instead of seeing how ridiculous this is, even more people start piling in and bidding up every new variety of pills (cryptocurrency), over and over and on and on, until they are some of the most “valuable” things on the planet.

NO, right?

And yet this is exactly what’s happening with Bitcoin. And if you haven’t been digging into the cryptocurrency world much, it gets way weirder than this. Take a look at this shot from the website coinmarketcap.com, and observe the preposterous herd behavior in real life:

Fig.1: Various cryptocurrencies, ranked by how many people have been fooled.

“Holy Shit!” is the only reasonable reaction. You’ve got Bitcoin with a market value of $234 Billion Dollars, then Ripple at $92 billion with Ethereum right behind at $85,792,800,592.

These are preposterous numbers. The imaginary value of these valueless bits of computer data represents enough money to change the course of the entire human race, for example eliminating all poverty or replacing the entire world’s 800 gigawatts of coal power plants with solar generation. Why? WHY???

An Aside: Why should we listen to you, Mustache?

I’m only a mediocre computer scientist. But coincidentally, after I got my computer engineering degree I ended up specializing in security and encryption technologies for most of my career. So I did learn a bit about locking and unlocking information, hacking, and ensuring that independent brains (whether they are two adjacent CPUs on a circuit board or two companies negotiating across the Pacific) can trust each other and coordinate their actions in lockstep. I even read about these things for fun, with Simon Singh’s The Code Book and the Neil Stephenson novel Cryptonomicon being particularly fun shortcuts to pick up some of the workings and the context of cryptography.

But that’s just the software side (Blockchain). Bitcoin (aka CancerPills) has become an investment bubble, with the complementary forces of Human herd behavior, greed, fear of missing out, and a lack of understanding of past financial bubbles amplifying it.

Mustachianism – the mental training that gets you to very early financial freedom – requires you to evaluate inefficiencies in our culture and call bullshit upon them. Even if you are the only one in the room willing to do it.

In the field of personal wealth, this means walking your children past the idling lineup of your neighbors’ Mercedes SUVs, over the snowy grass and up to the door of the school – and being confident that you are doing the right thing. Even if you’re the only one doing it.

When evaluating investment bubbles, it means looking at where everyone is throwing their money – no matter how many billions – and being willing to say “Bull. Shit. Guys. Not going to do this with you.”

So I also read a lot about investment bubbles and fundamentals and how to tell those apart. One book that I found very useful in understanding the greed-fear cycle (and Central Banking and the Federal Reserve system to boot) is the 2001 classic Towards Rational Exuberance by Mark Smith. For a shortcut to understanding good investing, you can also simply look up Warren Buffet’s thinking on almost any topic – he’s careful enough about offering opinions that by the time he makes a statement on something, you can be pretty sure it will be among the best answers out there.

And of course, the purpose of this whole aside is that I want to establish credibility with you, so you will give this article some consideration. I believe the current Cryptocurrency “investment” mania is a huge waste of human energy, and our rate of waste has been growing exponentially.

The sooner we debunk the myth and come to our senses, the richer our world will be. So we need more credible people to speak out against it. If you’re one of these credible people, please do so in the comments or in a blog post on Medium that we can all read.

Why was Bitcoin Even Invented?

Understanding the motivation is a big part of understanding Bitcoin. As the legend goes, an anonymous developer published this whitepaper in 2008 under the fake name Satoshi Nakamoto. It’s well written and pretty obviously by a real software and math person. But it also has some ideology built in – the assumption that giving national governments the ability to monitor flows of money in the financial system and use it as a form of law enforcement is wrong.

This financial libertarian streak is at the core of Bitcoin, and you’ll hear echoes of that sentiment in all the pro-crypto blogs and podcasts. The sensible-sounding ones will say, “Sure the G20 nations all have stable financial systems, but Bitcoin is a lifesaver in places like Venezuela where the government can vaporize your wealth when you sleep.”

The harder-core pundits say “Even the US Federal Reserve is a bunch ‘a’ CROOKS, stealing your money via INFLATION, and that nasty Fiat Currency they issue is nothing but TOILET PAPER!!”

It’s all the same stuff that people say about Gold, which is also a totally irrational waste of human investment energy.

Government-issued currencies have value because they represent human trust and cooperation. There is no wealth and no trade without these two things, so you might as well go all-in and trust people. There are no financial instruments that will protect you from a world where we no longer trust each other.

So, Bitcoin is a protocol invented to solve a money problem that simply does not exist in the rich countries, which is where most of the money is. Sure, an anonymous way to exchange money and escape the eyes of a corrupt government is a good thing for human rights. But at least 98% of MMM readers do not live in countries where this is an issue.

So just relax, lean into it, and grow rich with me.

OK, But What if Bitcoin Becomes the World Currency?

The other argument for Bitcoin’s “value” is that there will only ever be 21 million of them, and they will eventually replace all other world currencies, or at least become the “new gold”, so the fundamental value is either the entire world’s GDP or at least the total value of all gold, divided by 21 million.

People then go on to say, “If there’s even a ONE PERCENT CHANCE that this happens, Bitcoins are severely undervalued and they should really be worth, like, at least a quadrillion dollars each!!

This is not going to happen. After all, you could make the same argument about Mr. Money Mustache’s fingernail clippings: they may have no intrinsic value, but at least they are in limited supply so let’s use them as the new world currency! 

Why not somebody else’s fingernail clippings? Why not one of the other 1500 cryptocurrencies? Shut up, just send me $100 via PayPal and I’ll send you a bag of my fingernail clippings.

Let’s get this straight: in order for Bitcoin to be a real currency, it needs several things:

  • easy and frictionless trading between people 
  • to be widely accepted as legal tender for all debts, public and private
  • a stable value that does not fluctuate (otherwise it’s impossible to set prices)

Bitcoin has none of these things, and even safely storing it is difficult (see Mt. Gox, Bitfinex, and the various wallets and exchanges that have been hacked)

The second point is also critical: Bitcoin is only valuable if it truly becomes a critical world currency. In other words, if you truly need it to buy stuff, and thus you need to buy coins from some other person in order to conduct important bits of world commerce that you can’t do any other way. Right now, the only people driving up the price are other speculators. The bitcoin price isn’t rising because people are buying the coins to conduct real business. It’s rising because people are buying it up, hoping someone else will buy it at an even higher price later. It’s only valuable when you cash it out to a real currency again, like the US dollar, and use it to buy something useful like a nice house or a business. When the supply of foolish speculators dries up, the value evaporates – often very quickly.

Also, a currency should not be artificially sparse. It needs to expand with the supply of goods and services in the world, otherwise we end up with deflation and hoarding. It also helps to have wise, centralized humans (the Federal Reserve system and other central banks) guiding the system. In a world of human trust, putting the wisest and most respected people in a position of Adult Supervision is a useful tactic.

Finally, nothing becomes a good investment just because “it’s been going up in price lately.”

If you disagree with me on that point, the price of my fingernails has just increased by 70,000% and they are now $70,000 per bag. Quick, get me that money on PayPal before you miss out on any more of this incredible “performance!”

Figure 2: Random people on Twitter doing some deep, useful Investment Analysis on Bitcoin. (Update from late 2018 – Mike ended up being wayyyy wrong.)

The world’s governments are not going to let everyone start trading money anonymously and evading taxes using Bitcoin. If cryptocurrency does take off, it will be in a government-backed form, like a new “Fedcoin” or “G20coin.” Full anonymity and government evasion will not be one of its features.

And you don’t want it for this purpose anyway – after all, do you currently hide your money in offshore tax havens and transact your business on black markets? Do you practice illegal tax evasion as your primary wealth strategy? Probably not, because life is better and wealthier when you aren’t living a life of crime.

The Cryptocurrency bubble is really a replay of the past: A good percentage of Humans are prone to mass delusions which lead to irrational behavior. This is a known bug in our operating system, and we have designed some parts of our society to protect us against it.

These days, stocks are regulated by the SEC, precisely because in the olden days, there were many, many stocks issued that were much like Bitcoin. Marketed to unsophisticated investors as a get-rich-quick scheme. The very definition of an unsophisticated investor is “Being more willing to buy something, the more its price goes up.”

Don’t be one of these fools.

Further Notes

About the Comments Section: Normally, I try not to publish comments that are just emotional reactions or totally uninformed. For this article, I have set the bar much lower to show you the religious conviction that crypto speculators have.

People are genuinely mad at me for calling out this speculative aspect (note that I did not criticize blockchain at all, just the idea of uninformed people betting on future price increases for the arbitrary “coins”).

The general trend seems to be accusing me of “not doing enough research”, even after I dug into this stuff pretty deeply for a long, long time. I remain open to more information on the uses of Blockchain, but I’ve never seen a valid fundamental reason for betting on future increases in the prices of these things.

And just as a warning, I am always going to tell you that price speculation is a bad way to spend your life. This part of it is ideological to me: You Must Earn Your Money By Creating Value for Everyone.

Here’s a great description of the whole scene by Chain CEO Adam Ludwin. You’ll note that without prejudice and emotion, he describes the actual uses of the technology, without getting into how we should all place uninformed bets on its future value. 

The real test of if you should be a cryptocurrency supporter: would you be exactly as passionate and spend the same amount of time thinking about it, if Bitcoin were still an obscure piece of code, worth less than one cent, and offered no chance of ever earning you any money? Because if you’re going to be an evangelist for anything, it needs to be purely based on the underlying merits, not what you hope it will do for your personal fortune.

This YouTube Video is one of the best shortcuts I found for explaining how Blockchain (and Bitcoin) works.

This Vice article explains yet another ridiculous aspect of Cryptocurrency: running the transaction network (called “Mining”) involves a deliberate computer-intensive crypto challenge syetem called “proof of work”. This inefficient design is now wasting more electricity than many entire countries. Doing one transaction burns 215 kilowatt-hours of electricity, enough to run the entire MMM household for more than a full month, or to power an electric car for more than 800 miles of driving.

Another interesting side-effect of bitcoin mining: big sales of computer graphics cards, and theft of electricity and cloud computer services. One of my coworkers at MMM-HQ works for nVidia, and part of his job is hunting down mining thieves who comandeer virtual servers (cloud computing) to mine coins on their behalf. Some of my conversations with him inspired the research in this article.

I enjoyed this analysis by Aswath Damodaran, a thoughtful investor and Professor at NYU school of business

Another intelligent case by highly experienced crypto business lawyer Preston Byrne. Favorite quote:

“Bitcoin’s growth is not based on its technology alone (which, while powerful, is open-source and therefore easily replicable) but rather on the strength of virality, encouraged by the vested interests who held early and invested in marketing it; with no genuine business underlying it, it acquires its (very substantial) memetic potency only from the evangelism of those who hodl and preach.”

David Webb’s great explanation: Bitcoin: the World’s First Decentralized Ponzi Scheme

Preston Byrne again (brilliant guy!): the Problem with calling Bitcoin a Ponzi Scheme

 

 

  • Just it January 3, 2018, 2:51 pm

    Mustache, you don’t understand anything about Economics. I don’t like cryptocurrencies, i don’t buy that, but your economic arguments are wrong. Read Carl Menger, stop saying “intrisic value”.

    Reply
  • TPMoney January 3, 2018, 2:52 pm

    Speculating on Bitcoin is the very definition of greater fool theory. Even with my speculative dollars I chose to put the money in something that has a reasonable chance of not losing money and an easily identifiable intrinsic value. I hope those that are invested find a great return, but this one is certainly a pass.

    Reply
  • BigKev January 3, 2018, 3:08 pm

    It looks like Bitcoin/Cryptocurrency is fast becoming another pseudo religion like Global Warming. I don’t really care about the claims of massive wealth made by these early adopters (if they are even true). I heard all these same stories when my friends were trying to convince me to join their network marketing scams decades ago.

    Reply
  • David January 3, 2018, 3:20 pm

    I get that the tech is open sourced and that bitcoin is speculative at best, where I think the value my lie is in the application of block chain for other industries over the next few years. Yes any one can use the technology which may lead to people using it to produce helpful, tangible value.

    Anyone have any ideas of applications coming down the pipeline where blockchain could be utilized to create value worth investing in?

    Reply
  • steve pieper January 3, 2018, 3:40 pm

    Hey Pete. You’re right about a great many things… but I think your view on this might be missing something very important.

    You’re an index investor, and this is a great hedge against many risks.

    But it’s not a hedge against the most substantial risk: loss of confidence in the currency.

    The USD is the world’s most widespread fiat currency. A fiat currency is simply a currency whose value is not tied to a finite underlying asset, and is therefore subject to strong manipulation by governments and banks.

    The dollar has been the victim of unprecedented money-printing over the past decade or so. This is how fiat currencies meet their end… in 100% of cases throughout history.

    Perhaps the USD will be unique in all of human history, and no catastrophic collapse will occur on our way to ten-thousand-dollar loaves of bread…

    But this isn’t a safe bet.

    Yet, it’s the bet you’re making by ignoring stores of value that are not demarcated in USD.

    “Yes, but stocks will be re-valued in whatever currency succeeds the dollar,” is the usual counter-argument. I don’t disagree. The question is, at a loss of how much “value”?

    It’s also worth noting that your “no intrinsic value” argument is not incorrect regarding gold, bitcoin, or anything else. In fact, asparagus has more “intrinsic value” than either of them, because asparagus can actually replenish my cells.

    But the same argument is true of the US dollar. It has no intrinsic value. It only has the value we all agree on.

    And unless the dollar is unique in human history, there will come a time when people realize that you can’t print an infinite number of slips of paper, and simultaneously trick people into believing that each slip of paper holds value of some sort.

    Keep doing good things — you’re awesome — but you should definitely revisit this topic, with one question in mind: does my argument still hold water after the majority of people get wise to what’s happened to the dollar’s value since 1971?

    Reply
  • Louisa January 3, 2018, 3:40 pm

    Inspired by your recent post on contrubuting, my husband and I just put a healthy chunk of money into a charitable trust. FWIW, the money came from our Bitcoin profits!

    Reply
  • Adam January 3, 2018, 3:42 pm

    Even though I own some digital currency, I’d agree with about 99% of this post. Bitcoin will eventually fall to $0, but that’s true about just about any currency – the US Dollar included. It won’t fall to $0 until there is no one using it. As long as people are using it for reasons that solve their problems (whether legal or not) it’ll work as a value store for them – albeit one that fluctuates like crazy.

    The idea of a global currency is crazy interesting. Anytime I travel, needing to learn the local currency rules always eats up time. If there was a single currency that businesses in any country could accept — that would be amazing. Right now that’s Bitcoin – and idea of what could be.

    I don’t think Bitcoin will ever fully be that, but it is actually being used by businesses (both legitimate and not) that want to cash in on the newfound wealth of those who have speculated. I’m curious about where things will go, and would love for it to work out from the end user standpoint, but we’re a waaaays from there. If Bitcoin does become that, then it’s amazing, otherwise it’ll stay niche.

    Reply
  • Justin January 3, 2018, 3:57 pm

    “Netscape Navigator sucks, hence so will the internet”
    -20 years ago

    I usually agree with all of your articles but this a a bad take. Yes, the market caps and some the of the speculation is over the top but it’s because blockchain is the future for the financial sector, information storage and countless other applications. To dismiss it as “stupid” in it’s infancy is foolish.

    Also, Peter Theil just placed a huge bet on crypto – he’s not really known for betting big on “bubbles”.
    https://www.wsj.com/articles/peter-thiels-founders-fund-makes-big-bet-on-bitcoin-1514917433

    Reply
    • Cameron December 10, 2018, 6:02 pm

      He will be now

      Reply
  • Adam January 3, 2018, 4:19 pm

    The following sentence is where you lost me completely:

    “It also helps to have wise, centralized humans (the Federal Reserve system and other central banks) guiding the system.”

    Do you really believe this?

    BTW – I was holding Bitcoin for a little over a year and just sold it all because it does seem overvalued at this point.

    Although I did get a 14x return on it.

    Reply
  • Dylan January 3, 2018, 4:30 pm

    Bitcoin is old and it sucks. Investing in commodity backed cryptocurrencies which are more than just a currency is going to be what will last. Mr mustache needs to research crypto a little more before he says this type of thing. I guarantee he has bought a certain type of crypto before. Mark Cuban called it a scam, how he promotes it. Jamie Dimon called it a scam, now he’s buying it..

    Reply
  • FinancialOstrich January 3, 2018, 4:41 pm

    I truly hope that the internet of money is successful in the long run, because it will help those in the poorest and most corrupt countries in the world safely store their wealth and buy goods they need to survive. In lots of places they do this today with USD – you struggle to pay for anything in Cambodia with Rial, or Myanmar with Kyat, their legal tenders; prices are in USD, and its what people want you to pay with. This is the definition of currency requiring trust to work. I think its fine if people want to speculate on Bitcoin and other crypocurrencies, just like they do on USD and other government backed currencies. I hope the trust holds. Good luck to those speculators, and I wish them success. I also wish for the overall improvement in wealth and financial security for the poorest peoples of the world. It is all a journey and if in 20 years I use bitcoin to buy my milk and bread that is fine. I am OK with not being the first person who bought a USD from the US government to do this, and because its gone up in value I can buy a million loaves and 2 million pints of milk – I only need one of each! I will trade my commodity, me, by working, to get the bitcoins required that allow me to buy milk and bread. I hope others elsewhere can do the same, regardless of what their governments are doing. Do I think its a bubble – I have no idea and I don’t mind either way.

    Reply
  • Vlada January 3, 2018, 4:58 pm

    Thank you for your post, Mr. Mustache. But I think, you’re missing a very important benefit of the Bitcoin system. You’re not taking into account a huge part of humanity that. The benefit of sending/receiving money to/from the other part of the world in seconds with almost no cost. (I know that Bitcoin is still not super fast but the technology is there and it’s just a matter of developing and enhancing it). Even still it’s way-WAY better than banks, that rip you off with HUGE fees and the transfer takes weeks.
    This system is great for people who work online and live in Third World Countries (that don’t have Paypal, with crazy crazy expensive bank transfers). Like me. I’m from Ukraine and I have an American employer, who now can pay me with the help of bitcoin. YAY!! Before, my Boss would have to overpay hugely for the money transfer and I would lose a part of my salary when withdrawing the money.
    Moreover, I DO use Bitcoin as a way of investment (or at least a way of storing a little bit of my money). Because as a Ukrainian citizen, I can’t invest in S&P 500 or other stock markets like you Americans can.
    I understand that Bitcoin is not good for investing but you have to admit that it’s a great technology for sending money to countries like Ukraine and using it as cash.
    And I really hope that this technology will survive and cryptocurrency will substitute the banking system.

    Reply
  • Jarvis January 3, 2018, 5:47 pm

    Interesting take, MMM. I certainly admit that a lot of speculation and greed is currently involved in the cryptocurrency market. However, the same could be said leading to the dotcom bubble, but, even though that bubble burst, tech, and most of those companies, ended up being extremely valuable and profitable. I see cryptocurrencies as a potentially similar case.

    I’ve done pretty well with my initial bitcoin investment because, when I heard about it 4 years ago, I thought, if I put some money in, it was more likely to give great returns than plummet to zero. I chose a number I could afford to completely lose and invested. I acknowledge that the value could still go to zero, but I think it is more likely to continue to grow. One of the reasons is that speculation isn’t the only thing going on with cryptocurrencies. Many young, excited engineers are putting a lot of work into developing and improving the technology. There are legitimate, exciting applications, such as decentralized banking via cellphone for unbanked people in the poorest parts of the world.

    Way back when you posted a recommendation about Lending Club, I gave it a try, and I have come to really regret it. With $30k in well diversified notes, I’m doing worse than 3% there, although Lending Club (and your post) suggested much better returns were expected. Your philosophy and writings have had an important impact on my wife and my life, but, after many years of reading, your investing advice is the only category that I broadly ignore (besides the obvious buy and hold of index funds, which is the majority of my portfolio).

    Reply
  • MisterBister January 3, 2018, 6:20 pm

    Satoshi Nakamoto is not a human but a rogue AI. It invented Bitcoin to rule the world. It tricked us into creating a massive processing infrastructure for its brain. The Bitcoin is a carrot on a stick. But the AI didn’t count on the power of human greed. Like a tragic Dilbert cartoon, humans created application-specific hardware and assembled a massive brain, on a global scale, whose only capability is to pop useless Bitcoins into existence.

    How’s that for a crazy tin foil hat theory? I think the crypto-currency crowd is just as nuts when it tries to convince me that this is more than a speculative bubble. Totally bonkers.

    Reply
    • savetheday January 6, 2018, 5:52 pm

      satoshi nakamoto is most likely dead. see hal finney

      Reply
  • RDO January 3, 2018, 6:30 pm

    Hear me out: you can take this article 100% to heart and agree with it fully — which I do. While at the same time making many-fold profits as a day-trader converting to fiat daily and using tight stop-loss to prevent losses that could offset profits or capital loss. I’ve made more profits in the last two months than in the last decade of index funds. Now, would I gamble my retirement (or any fraction of it) or my kids’ college fund, etc. But if you have pocket money you can afford to lose and you know how to trade and hedge your bets, good money can be made. My point is: are cryptos good long term or even mid term investment? Absolutely not. Can you make good pennies while the collective mania rages on? You bet!

    Reply
  • Kevin January 3, 2018, 6:33 pm

    I hear you and i agree entirely: it is not an investment.

    however, to quibble, some of your criticisms of Bitcoin as a currency are pretty weak. That’s not to say whether it is good or bad, i have zero skin in the game, but two of your reasons for why it couldn’t be a currency were purely technicalities – like someone saying Tesla will never take over the car market because there aren’t enough charging stations, or because their battery range isn’t large enough. current barriers, not fatal problems. easy and frictionless transfer between people? a technical problem that i’m sure many, many people are working on. does anyone doubt the ability of software engineers to design a nice convenient interface that is readily exportable to millions of payment systems? security problems surrounding bitcoin wallets? i’m sure there are people on that too. both of those seem like eminently solvable problems. to me the more powerful criticism is the reliable pricing, because that seems to be rather a chicken or egg scenario. as long as it’s a game only a few powerful players are playing, it will always run the risk of being subject to manipulation by hoarders. to be a more stable pricing mechanism, everyone has to have skin in the game, and thus the risks are spread as widely as possibly and no one wants to see the thing fail. but to get everyone to buy in, it has to be stable. so i do see potentially a fatal flaw there in comparison to fiat currencies where central banks can turn the dials as need be.

    my larger concern, and one that you didn’t really deal with, is that either way, this thing can’t be stopped. to hear proponents talk about it, short of shutting down the internet, there is no way to stop it as long as there are a decent number of users. they seem to think the level of encryption is far superior to any centralized system we currently have, and i mean, you’d think gov’ts would have been trying to quash this thing from the beginning), and yet here we are. what the hell does that mean for what it might be used for and how it could change society, whether most of us like it or not? i sure as hell dont know.

    Reply
  • Andy D January 3, 2018, 6:38 pm

    I’m glad you are helping to put a damper on the speculative bitcoin mania which seems to have its hold on everyone.

    That said, calling the Fed a group of wise, respected “adult supervisors” is laughable. They have no idea how to stop the bubble they are creating, and Yellen has essentially admitted as much (and please, look at a chart of our total money supply and then tell me it doesn’t look like Bitcoin-esque growth.)

    For a guy who cares about sustainability, I’d love to hear a mathematical explanation of how our debt and our economy can sustainably continue growing exponentially, but with a faster growth rate on the debt side. I know you like to poke at libertarians, even though it’s generally so compatible with your philosophy… but let’s be real, the 2 main parties are only there to screw over their constituents while staying in power and doing nothing to address long-term prosperity.

    MMM the principles you espouse help individuals and communities both, which is why I’ve stuck around for years… but that doesn’t mean you don’t have some blind spots on this issue; preconceived notions that will truly hurt your readers if they fail to possess real wealth (real estate/precious metals/machinery/etc) in their asset allocation.

    Reply
  • Accidental Fire January 3, 2018, 6:43 pm

    My toenail clippings are worh more than you fingenail clippings.

    Seriously, great post as always and great anaylsis. I do think Blockchain has tremendous value and I’m already thinking of ways to use it that don’t involve crypto. And blockchain is one of those simple things that you kinda say “why didn’t I think of that?”

    Reply
    • isaac January 3, 2018, 10:00 pm

      there is no blockchain without cryptography…..

      Reply
  • jp January 3, 2018, 7:30 pm

    “replacing the entire world’s 800 gigawatts of coal power plants with solar generation” This is not very thoughtful, ok way too dumb for a smart guy like you. You can’t do this because solar generation is intermittent (but you know this already), you can’t solve a problem by making dishonest statement.

    Reply
  • Kevin January 3, 2018, 8:28 pm

    Chancellor, E., (2000), Devil Take the Hindmost: A History of Financial Speculation, New York, NY: Penguin Group

    “Speculators did not buy bubble company shares as long-term investments, they bought them with the intention of selling them on to greater fools.” (p. 72)

    Bitcoin reminds me of “Fools Gold: The Emerging Markets of the 1820s” (p. 96-121) since it combines ideology with it’s marketing spin, although, to be fair many of the bubbles have a good “story.” Still, (in my mind) the Libertarian ideal of liberating money from government is similar to liberating South American countries from Spain. Plus the promise of “efficiency” etc.

    The comment above that it can’t be a bubble because it’s so hated is false. For instance, the Railway Mania of 1845 was denounced by the Economist and the Times (p. 136).

    “There is not a single dabbler in scrip who does not steadfastly believe– first, that a crash sooner or later, is inevitable; and secondly, that he himself will escape it.” (p. 136)

    Really good read. There were a bunch of bubbles I’d never heard of.

    Reply
  • Scott January 3, 2018, 8:33 pm

    This blog post was nothing more than an angry rant from someone who fails to understand what money actually is. That’s quite a bit of irony considered that his entire website is about financial advice. The Mustache Man is now rooting for bitcoin to fail and fiat to win. Why? Why would you root for the banks… The dollar is backed by war and violence. BTC is freedom. Will it win? Nobody has a crystal ball… It’s just as much conjecture to say the bubble will burst as it is to say the coin will hit 1 million USD. If the Mustache Man really did understand bitcoin, then he would’ve invested long ago, and that pain is obvious in this rant.

    And, for all of you penny pinching frugal folks, there is nothing wrong with that. In many ways it’s irresponsible to spend money on luxury items, etc. But, let’s not pretend like the bankers don’t live lives of extreme opulence and extravagance. Try googling “Rothschild Houses”… Those bankers are not contributing “value” to society… They are making money doing absolutely nothing but profiting off of debt slavery and warfare.

    Bitcoin may lose… But do we want that? Mustache Man needs to question his motives. He’s being way to adversarial here rather than truly trying to be objective about what Bitcoin can do for society. He wants it to lose, because he wasn’t an early proponent… that’s completely transparent here. The Bitcoin community understands the risks, but how else can we attack the tyrannous central banks?

    And it’s not about the “blockchain technology”…. It’s about BITCOIN. BITCOIN, BITCOIN, BITCOIN, BITCOIN… Decentralized currency. Blockchain makes it go, but we can’t pretend like the subject is not the crypto currency itself. That’s pure ignorance. Perhaps the banks, the corporate overlords, and the warfare machine will win. But, I wouldn’t bet on it. Remember, it’s not money for the internet, it’s the INTERNET OF MONEY!

    Reply
  • MiddleMan January 3, 2018, 8:35 pm

    Spot on MMM. What people don’t get is that a good currency should be a marginal store of value. That is why we have planned moderate inflation. Money is there to remove friction in trade. To grease the economy. There are a zillion stores of value like land, gold, stocks, bonds, etc. We don’t need money to be a good store of wealth. Money should hold some value until it can be traded again, but should be a “hot potato” in a way to keep trade happening. That “hot potato” action is caused by moderate price inflation… that is caused by appropriate monetary inflation…which is what Bitcoin lacks. Hoarding of cash causes deflation in that money’s economy. A hoarded currency is a currency with diminishing trade. So Bitcoin is a bad currency for that alone. Then is it “digital gold?” No. Because it is just random bits in a computer and that has no real utility and isn’t in short supply…unlike the decorative value of gold and limited supply of gold. If Bitcoin is a bad currency AND a bad asset, it is just a speculation.

    Reply
  • Righty January 3, 2018, 8:41 pm

    I just had to reply…

    I am glad to see all these pro BTC posts by the same user!

    I strongly disagree with his opinions, but the fact his posts have not been filtered or removed gives me faith in the transparency of this website. Confirmation bias is always in the back of my mind while reading MMM posts and it is good too see conflicting opinions. Frankly I’d choose a swath of contradicting opinions over a single zealous opinion, but we can’t have everything… ;)

    Cheers everyone!

    Reply
    • Scott January 17, 2018, 5:34 pm

      I think those trying to present the other side of the bitcoin and cryptocurrency argument were severely damaged by the way this comment chain began. It’s a good argument for filtering a little. After all, there are pages and pages of informed and cogent arguments supporting the potential of bitcoin. However, if you just read the first page all anyone sees is Vijay talking about wiping his butt with paper money.

      Reply
  • isaac January 3, 2018, 9:58 pm

    “Government-issued currencies have value because they represent human trust and cooperation.”

    maybe part of the story, but USD has value because the US bombed the living fuck out of Iraq when they stopped accepting it as payment for oil in 2000.

    Reply
    • savetheday January 4, 2018, 6:47 am

      and on this point, how many countries now use the USD as the currency of choice during trading with other countries. and if they were given an alternative currency (which was stable, if you assume that in the future bitcoin would stabilize in value) would they choose the alternative currency?

      Reply
  • Ryan January 3, 2018, 10:12 pm

    Bubbles accompany technological disruption. The companies in the bubble may not survive but the technology will. As a result, we may see a bitcoin correction, however, digital currency is the future – the winners in the space are “to be determined.”

    Coin meets code! Modern fiat currency. Currency is portable accumulated labor/goods. Currency is perception. Shared perception is reality. Speculation is effort to shift perception.

    Reply
  • Thomas January 3, 2018, 10:40 pm

    The crazy thing is since you posted this article YESTERDAY, the market cap of these toenail clippings has gone up almost 100 billion dollars. Equivalent of UPS, NVIDIA, etc. At least with the tulip bubble you had tulips when it went bust….

    Reply
  • James Murphey January 3, 2018, 11:27 pm

    Long time reader, and mustachian. The cancer pill comparison is way off. Comparing bitcoin to Ether is like comparing apples to oranges. Bitcoin may ultimately fail, but it has created a market with many new technologies that are already helping many people. Some of these technologies have improved safety, sidestepped institutions with high fees, created decentralized applications, etc. Investing in bitcoin is very risky, in the book Cryptoassets-Innovative-Investors-Bitcoin-Beyond – the authors discuss how just having 1 percent of bitcoin in your portfolio over the past 4 years with rebalancing would have given the investor a 38 percent growth with very little exposure. They also use several metrics and compare its risk closely to Amazon, Apple, and Google. I think you might have had on your complainy pants while writing this. 😉. Keep up the good work though.

    Reply
  • Brian January 3, 2018, 11:58 pm

    For people in the developed world, yes, Bitcoin is over hyped, speculative, dumb, etc. We have a stable currency (dollars, euros, whatever.)

    However, for people in the developing world, it’s nice to have a readily available currency that their government can’t fuck up. Zimbabwe, to cite the most extreme example, has had hyperinflation for years. Bitcoin has been a safe haven for many people there.

    Just because it’s not useful to you, doesn’t mean that it has no value to anyone.

    Reply
  • Suvi January 4, 2018, 12:20 am

    Maybe bitcoin is not stupid. But I surely am, I don’t understand one bit about blockchains and the mining even less. I just tried to learn something and opened up a website about mining, it said I could use some 500-2000 dollars to buy equipment for it, or just mine in a cloud for less hassle. I would then *insert the thing I did not get* and be paid -I guess- in Bcoins.

    The thing is, I am not an expert in this field and not a genius. There are things beoynd my intelligence. But I know for a fact that there are dummer people than me also. I just cannot believe all cryptoinvestors know what they’re buying. And if they don’t, the valuations may be correct or they can be absolutely bonkers.

    Would someone be so kind as to very simply explain the mining for me in two sentances, and what the bonus in it is? I would feel much smarter (or perhaps the opposite if I still don’t get it).

    Reply
    • Scott January 17, 2018, 5:39 pm

      Mining = Using computers to validate transactions in a distributed ledger, for this service the owner of those computers receives bitcoin as an incentive.

      Reply
  • Andre January 4, 2018, 1:15 am

    Hey MMMM,

    I agree with you on certain points:
    – There has been a gold rush mania in crypto and a massive amount of speculators have joined the crypto communities without understanding what they are speculating on. However there is a strong core of true believers who would not care that their “asset” loses 90% in value as long as the fundamentals have not changed. There are many use cases for crypto currencies and blockchain apart from just simple transactions like bitcoin.

    What you fail to see is that your beliefs do not apply to everyone – crypto has a clear anti-government/anti-institutions mindset attached to it. This obviously clashes with your beliefs. I suggest you try to read your article from the perspective of someone who holds the belief that institutions can and should not be trusted.

    A few more details I would like to point out:
    – Blockchain comes in many flavours. Over-simplifying it to the extent you did is like saying every computer is the same – why would you buy a mac for 2k when you can get a calculator for $10 that can do the very same calculations?
    – WB himself said he isn’t a techie. He has missed quite a few great opportunities because he didn’t understand the disruptiveness of tech behind it. Blockchain is – if you believe in it – as disruptive as the internet.
    – You have a premise that trusting central authorities is a good thing. Not everyone holds that belief.
    – Doing business without having a mediator (3rd party that you have to pay) can be a huge benefit for businesses (zero credit risk). Read up on network effects and Metcalfe’s law why a higher price of a currency makes it securer (harder to attack).
    – Just because bitcoin is open-source it does not mean it’s easily replicable. While bitcoin is not the ideal example, creating a decentralized network (which bitcoin unfortunately isn’t, but others are) does not just come with just having the source code.

    Reply
  • Maria January 4, 2018, 3:08 am

    Although I agree with the article, I fail to see why investing in Bitcoin is worse than investing in real estate. When you buy a property as an investment you are speculating, i.e. you hope to make money from people who are willing to pay more than you have paid and/or invested in the property. Why is that considered a good thing as opposed to speculating on bitcoin? It is the same bubble and the same moral objections apply.

    Reply
    • Justin C January 4, 2018, 6:24 am

      This is incorrect. If you buy real estate as an “investment” you are doing so because it costs you less to own than it earns you in monthly income.

      Investment real estate, by definition, should have a positive cash flow.

      The same general concept applies to stocks. This means that many (though not all) stocks in the S&P 500 are speculative. MOST of them, however, are simply bad investments from current prices.

      Reply
      • Maria January 4, 2018, 8:27 am

        The point is not how you make money but whether or not is okay to make money this way.
        With regard to investment real estate why should it have a positive cash flow? Why should you charge people more than the costs you have?
        Same goes with bitcoin. It has a certain value – let’s say zero or 1 dollar – why should you sell it for more than this value?
        In my opinion in both cases the answer ‘just because someone else is willing to pay more’. I do not see why this is okay when it comes to real estate and a problem when it comes to bitcoin.

        Reply
        • anon_financier January 4, 2018, 3:33 pm

          There’s no issue of morality here, both are ok. The distinction has to to with whether they are productive investments or only speculative instruments. The critical test is whether you would be happy to own it if you weren’t able to sell it – ever. I would be very happy to own a house that I rent out or a stock that pays dividends, and earning the income. Bitcoin (or gold) are only good as “stores of value” under the assumption that they will maintain (or increase) that value in the future because others will pay more for them (aka the Greater Fool Theory).

          Reply
  • carlos January 4, 2018, 3:20 am

    Lots of haters here for digital currencies. I think the article has some good points. I dont agree with those people who decide to bank their entire savings in digital currencies, but if you can make some money – why not? The thought of paying off my debts faster is very appealing and if my $100 investment in digital currencies can yeild me huge returns and pay off all my debtz, I’m all for it.

    Reply
  • Terry O'Donnell Faulkner January 4, 2018, 7:04 am

    Guys, I generally agree with MMM but I am still on the fence with cryptocurrency.

    I agree with some of his points. Bitcoin is being driven by speculation. Some people have used and do use it for purchases but the blocks have become so large that it takes time and is expensive to use.

    So Bitcoin isn’t very practical to use, but it’s growth has allowed for the rise of other coins, many of which do offer value, not to mention the potential for blockchain tech to revolutionize many industries.

    Currency should never be artificially limited? Look at the U.S. debt after decoupling for the gold standard.
    Proof of work and energy consumption. I agree. There are other alternatives in the works like Proof of Stake coins.

    Security. Banks and financial systems get hacked too.

    Crypto being blocked by government for it’s potential to be used in illegal activities. What’s the number one form of currency used in drug/alcohol/sex/etc transactions? Cash. And it’s completely anonymous. They call this fungibility and there are several privacy coins dedicated to this. Because crypto is not controlled by any one group or government, it can’t be stopped.

    Bitcoin is a bubble, yes. It isn’t a finished, practical product but was the original coin and has brand value. But this is a new industry with lots of room for growth. The blockchain technology is revolutionary and coins that offer real value/product will continue to grow.

    I am all ears folks.

    Reply
  • aperture January 4, 2018, 7:16 am

    MMM, thanks for going on the record on this topic. Irrational exuberance means that even the most boring buy ‘n hold index investor has to wonder if they should throw some ‘fun’ money at Bitcoin (or the next crypto). It is important to get the collective facepunch from mighty mustache to keep our heads on straight.

    Reply
  • Joe Bobb January 4, 2018, 7:29 am

    Now this is just an excellent article. Probably the best I have run across at explaining why Bitcoin is a bad investment. The author puts into words what I already intuitively suspected, but could never articulate. Thanks.

    Reply
  • Mads January 4, 2018, 7:32 am

    I normally like your posts but I have to say: I feel there are so many flaws in your logic here (especially in regard to your analogies)

    The biggest flaw is saying Blockchain is the technology behind bitcoin. No it’s not. This is the most widespread fallacy in terms of cryptocurrency tech.

    Blockchain is one of several technologies that make bitcoin useful. There are others WHICH ARE NOT A PART OF THE BLOCKCHAIN.

    Decentralization. Bitcoin is the most decentralized coin of all cryptocurrencies and decentralization is not neccesary to have a blockchain.
    Mining: also not a requirement to have blockchain. Bitcoin uses a proof-of-work principle. Some other coins have chosen not to use this approach but uses instead something different.

    Your fingerclip analogy is the worst and i cannot but lose a bit of respect for you when you say something like that. Are your fingerclips:
    infinitely divisable?
    easily transactable across borders all over the globe over the internet?
    and do they have the most media- and developer attention in comparison to other people’s fingerclip nails?

    I say all this from a position of being far more spiritually invested in bitcoin than financially. I have less than 2% of my wealth in bitcoin.

    Bitcoin, not Blockchain is the future because it contains the right amount of properties in comparison to all the alt-coins with no decentralization and no proof-of-work. Without these properties the altcoin becomes a shitcoin. Doing a longerchain attack on their blockchain is suddenly far easier and government and institutional manipulation will be possible.

    In my opinion bitcoins proof-of-work is essential because it makes sure that time and energy has been used to put something into the blockchain which makes it close to impossible to manipualte because you will need the same time and energy to create something similar. This is why hacking bitcoin is impossible.

    All of the things you mention that is needed for it to be a real currency will happen in time.

    Right now people invest in it for its future potential. And that is not necessarily bad as long as they dont put half of their life savings into it.

    Using energy that amounts to what Denmark uses is not too bad considering it can keep an immutable chain of all the worlds transactions. The energy usage could go up but it doesn’t need to. That won’t help with more transactions only providing more security. Just think about how much energy is wasted everyday by people playing games on their xboxes, PS4 and PCs across the globe. Far more than is wasted in bitcoin which can actually prove useful to society in other ways than just entertainment.

    Reply
    • J.G. January 4, 2018, 8:05 am

      Thank you for this excellent comment. MMM really missed the boat on this one. Calling it stupid is embarrassingly short-sighted. I really expected more from someone as smart as he seems to be.

      Reply
    • SR January 4, 2018, 6:15 pm

      Agreed – this is by far the most disappointing MMM post. He underestimated and insulted the readership’s intelligence and missed an opportunity to educate. I was going to write something along the same lines as what you have written, but this post is most likely better articulated than what I was going to write :) Thanks.

      Reply
  • patrick January 4, 2018, 7:51 am

    Reply
  • Brian Bailey January 4, 2018, 7:57 am

    Spot on as usual, MMM. Thanks.

    Your posts are increasingly being picked up and prominently featured on MarketWatch. I love the “Serious-Pete-Holding-A-Serious-Stick-Of-Celery” stock photo. Brilliant.

    Reply
  • Dazed and Confused January 4, 2018, 8:13 am

    After reading the article and almost all of the comments, I am more confused than ever. I do not own any cryptocurrencies but I have been encouraged by a friend who bought some to get in now before the prices get too high. It seems more like a commodity that a currency to me which is why I hesitate.

    My questions for those who are pro-Bitcoin are “How much is your Bitcoin investment worth right now as a percentage of when you got in?” “If you want to spend that money to purchase groceries, a pair of pants, a car, a house, etc. how do you do it?”

    I need to cash out of my current investments to free up cash to purchase Bitcoin (or a more affordable alternative).

    Reply
  • Diane January 4, 2018, 8:45 am

    Thanks for writing a rational post when it comes to the irrational view of Bitcoins. I also thought of purchasing for about a few minutes. Then realized why would I buy something like this? I don’t buy lottery tickets and this is along the same lines. It’s clearly not an investment, but purely speculation.
    As you stated, “An investment is something that has intrinsic value – that is, it would be worth owning from a financial perspective, even if you could never sell it.”

    I think about beanie babies and how that craze, like so many others, came and went.

    I have no idea, if it will become less speculative. Perhaps at some in the future. But certainly not in the immediate future.

    Reply
  • Zoltan January 4, 2018, 8:55 am

    As much as I count myself a Mustachian and I adore (almost) everything Mr MM has written so far, this article is hugely disappointing and it should not have been published (by him). We a have a saying that “you would have remained wise if you had stayed silent” which is very much applicable here. As one of the commenters before me cited Warren Buffet’s “don’t invest in something that you don’t understand”, I would add that don’t even try to explain why you don’t invest in something that you don’t understand. Just don’t.

    This article is full of factual errors, misunderstandings and high level of prejudice, some of which have been highlighted by my fellow commenter, Vijay. I totally respect Mr MM’s opinion but he should have made his homework (as he claims “research”) properly before writing anything on the cryptocurrency phenomena.

    Mr MM and most of his audience are extremely privileged as they are part of middle-class Americans, with a more-or-less stable currency and democracy (so far – but it would be a mistake making predictions based of history), they have an uninterrupted 24/7 access to the world banking and monetary system. Painfully, at least 6 billion of people do not share the same privileges. For them, cryptocurrencies may show a glimpse of better future, a way to get rid of their despotic and corrupt government and totalitarian regimes of absolute monetary control.

    And yes, bitcoin is not an investment in a classical sense. I would also discourage people to see it as a normal asset class. It’s a protocol like TCP/IP, it’s the world first battle-tested implementation a transparent, distributed, highly decentralized ledger that secured by mathematical algorithms and consensus via thermodynamic proof-of-work.
    It’s the internet of money.
    It’s disruptive in ways we cannot imagine yet. It’s going to cause massive social transformations at a global scale.

    And no, don’t put your money in it, nobody is forcing you. But calling it stupid is – well, kind of stupid.

    Reply
    • Richardlol January 4, 2018, 10:53 am

      Agreed!

      I was about to write an impassioned reply but you covered the points I wanted to make.

      I consider myself to be Mustacian AF :) (I am FI and no longer working) but I really hate the clickbait article title used here.

      People see “Bitcoin is Stupid” and many (in this thread) read that as “The Idea of Cryptocurrencies in General is Stupid.”

      Let’s be clear – an Internet-based, verifiable, trusted, borderless currency is coming. It’s just too good of an idea. Detaching currency from governments will indeed be transformative in unforeseeable ways.

      If I was in Venezuala right now I’d be looking at BTC or ETH- I’d certanly stay away from Petro :)

      Reply
  • Stephen January 4, 2018, 9:35 am

    Who really knows? I think the likely upside outweighs the downside substantially, so I’m invested with about 10% of liquid net worth

    Rough estimates
    10% chance BTC and my alt coin portofolio falls to zero in next 5 years
    10% chance it fall 10-80% and stays there, next 5 years
    30% chance it goes nowhere in next 5 years, and ends up at these levels
    25% it goes up 2x to 5x in next several years
    25% it goes up 10x + in next several years
    Given the distribution of returns, makes sense for me to be in it.

    Reply
    • Glen January 7, 2018, 12:35 pm

      But those “Rough estimates” are something you just made up. Substitute in a different and more likely set of estimates and you would get a different answer:
      99% chance BTC and my alt coin portofolio falls to zero in next 5 years
      1% chance it falls 10-80% and stays there, next 5 years
      0% chance it goes nowhere in next 5 years, and ends up at these levels
      0% it goes up 2x to 5x in next several years
      0% it goes up 10x + in next several years

      Reply
  • Shayne Wissler January 4, 2018, 10:03 am

    Overall this was good article but it’s disappointing to see these sorts of myths as well:

    “Government-issued currencies have value because they represent human trust and cooperation.”

    On the contrary, the government-issued currencies have value mostly because we are forced at virtual gunpoint into using them. Don’t believe me? Then why not repeal the legal tender laws, and the SEC prohibitions on using stocks as money like we used to do in the United States before ca 1900?

    And yes, there was this and that fraud going on as well, which allegedly is what they were trying to fight, but if so then they would have surgically attacked the fraud, not the monetary liberty.

    Authentic trust and cooperation isn’t built on a foundation of coercion, obviously.

    Reply
  • Morten January 4, 2018, 10:28 am

    Funny reading and you draw the same conclusions as I do. I do however miss some thoughts on these matters:
    -The dependency of exchanges, which surely are under governmental control.
    -The dependence on a working society
    -The legal aspect. If there are no laws protecting the currency, there is no value in the currency. If a shop refuses to take your dollars, you have a government support behind you. If bitcoin owners would make their own legal system, I guess it would be pretty much like a mafia.

    Maybe bitcoin would work if they took a 10% fee and put it in a fund? Or maybe 100%?

    Its a bit ironic, the bitcoin worshippers doesn’t trust their own banking system, so they choose to trust some completely strangers instead..

    Reply
  • Strob January 4, 2018, 10:28 am

    Very nice article. Yes it’s a bubble and artificial value like gold and diamonds are. It’s not investement it’s gambling but still with a lot more chances to make money than the casino or buying a loto ticket. I got my Ripple loto ticket basically for free in 2014 and just sold it at a insane return rate. I’m now using part of the gain to mine with equipement I need for my work anyway. So once the bubble burst I will loose nothing.

    So yes it’s a bubble but like the dotcom bubble some like Ebay and amazon did will keep growing way above the highest peak of the bubble. So there was still a safe way to play it for the wisers. But it’s not investment. And it’s probably too late for most people.

    Reply
  • Some guy on the internet January 4, 2018, 10:33 am

    Preface: I calculated what I thought would be a rational market price range for Bitcoin (and other cryptocurrencies). When they were lower than that range, I bought them. Then, an explosion in price happened and all were overvalued (by my calculations), and I sold it all. I currently hold no cryptocurrencies and believe we are in a bubble situation where valuations are completely irrational.

    Normally, I find your articles pretty well researched, but the dismissive tone and certainty in this article is very much misplaced. If I had to explain out all the intricacies, it would take hundreds of pages, so instead let me leave you with some points to ponder.

    You mention that Bitcoin has no value because it is not being used as money. So while the USD has no intrinsic value, it has value because it is used as money. So how do you arrive at a $0 for Bitcoin? There are ways to calculate the value of a currency, even though it is not an asset. Why does $1 USD buy 1.3 Canadian dollars? Why not 2? Why not 100? Or 0.01? Clearly there is a way to calculate these things that you are missing. What if $1 USD suddenly bought 10,000 Canadian dollars for no apparent reason (market being irrational).

    You mention Bitcoin has no value because it is not being used today. If a company has just discovered the cure for cancer, would they have a $0 value if they haven’t produced any sales yet?

    For Blockchain technology, it is just a buzzword. A blockchain is basically just a spreadsheet. Imagine I have my own blockchain on my computer, nobody can change any of the blocks without changing all the other blocks. This sounds great in theory, but in reality, there’s nothing preventing me from just changing all those other blocks. A computer can hash millions of blocks a second. I could reverse decades of transactions in seconds. So what would prevent someone from copying the blockchain from my computer and then editing it? Who has the real blockchain?

    One of the key innovations of Bitcoin is “Proof of Work”. After each block is hashed, a huge amount of work needs to be performed to find the key to the block. This is what prevents people from going backwards and rewriting history – because the cost (in time and in power) is so astronomical that it is impossible. Proof of Work is what makes the Blockchain valuable.

    So then the logical next step is to criticize the power consumption. I work in the power industry at a very large utility in the NW. Bitcoin’s energy consumption is absolutely trivial. Another key item you’re missing is that Bitcoin is NOT about banking the unbanked. It is unbanking everybody. How much energy does it take to build a bank? Or to power it? Or to fuel people getting to/from work? The financial industry accounts for something like 15-20% of the US economy. Does this have no power consumption? In comparison, Bitcoin would be a huge energy saver.

    Lastly, Bitcoin and Cryptocurrencies are not synonymous. I personally have a lot of reservations about Bitcoin in particular. But just as Pets.com was not the internet, Bitcoin is not cryptocurrency. I think that anyone who has tried to do wire transfers, especially across borders would immediately appreciate cryptocurrencies for their simplicity. I personally have offered to send cryptocurrency rather than an international wire transfer – and even offering to pay an additional 5% fee to do so! It is literally better than fiat money for that purpose.

    Summary: Bitcoin’s value is not $0, but it is also not $15k. There are other cryptocurrencies besides Bitcoin – and Bitcoin may be the Pets.com of cryptocurrencies. Or maybe it’s the Amazon.com of cryptocurrencies. Who knows? Not MMM. Not anyone.

    Reply
    • Morten January 6, 2018, 5:20 pm

      The proof of work (or proof of wasted energy) does not make a bitcoin special. The sha256^2 algorithm needs to end up with a sum starting with 0’s. You could change that rule to anything and make a new coin. What if we start with ending with a certain number of 1’s, or alternate 1’s and 0’s.. or maybe equal number of 1s and 0’s? Why is bitcoin special? You can as many coins as you like using the almost the exact same software, just changing the POW rule.

      I’ve also been thinking. What if you connected some real asset to a fraction of the bitcoin? All of sudden the value would be visible, and a lot lower than it is now (provided it was connected at an early date). With no real asset at all, it is all of a sudden worth a lot of money? Neh, I don’t fall for that. But obviously a lot of ppl do. The bitcoin salesmen are believeing their own bullshit. The real users are scarce and doesn’t drive the value at all.

      Reply
  • Garrett January 4, 2018, 11:01 am

    Hey MMM,

    I agree that the current speculation is insane, and nobody should be taking on debt to “invest” in Bitcoin. However, I do have a few counter-arguments.

    1. You mention that cryptocurrencies are just speculation and not investing because “Investing means buying an asset that actually creates products and services and cashflow for an extended period of time”. If you dig a bit deeper you’ll find projects like Etheroll, an online gambling platform where investors are paid out dividends depending on the winnings of the house. It runs on the Ethereum blockchain in order to be provably fair and decentralized. Etheroll is something that is currently running in production and has already paid out rounds of dividends.

    2. In addition to my first point, some cryptocurrencies use various forms of Proof of Stake (mining with a stake of your holdings) instead of Proof of Work (mining with hardware running algorithms). This allows you to earn “dividends” without burning huge amounts of electricity. Of course, your “dividends” are paid out in the cryptocurrency itself, but some companies pay out dividends in shares.

    3. The value provided by the Bitcoin network or the Ethereum network is being able to transact value in a completely trustless way. Going back to the Etheroll example, how do we know that a slot machine in a casino or a gambling mobile app are actually giving us fair odds? Well, maybe there are laws in place that try to enforce it but there are a few issues with that approach. For one, how do you even prove that you’re being swindled by a slot machine? Second, there is a huge overhead of compliance. Third, you have to put trust in the government to properly enforce the laws. Because Etheroll runs on the Ethereum blockchain, not only can you prove that you were given fair odds but also you don’t need to put trust in anybody to ensure that the program/slot machine is doing what it said it was going to do.

    4. Because decentralization is at the core of the value of blockchain technology, it’s not so simple to just take the same code and rebrand it as your own. I can use the ethereum client to start a brand new blockchain and call it Garrethereum. Because this is a brand-new blockchain, the storage requirements will be a fraction of Bitcoin’s or Ethereum’s. Will anybody use my low-storage blockchain? Of course not. With your CancerPill analogy, people can just start making their own CancerPill and selling it for cheaper than the original. With cryptocurrencies, you can’t just copy-paste a history of transactions and a network of computers and claim it as your own. This is something Amazon and Google will struggle with as they try to develop their own blockchain technology. Although it’s not as simple as “company X makes product Y and sells it to customer Z”, there is value still value in currencies like Bitcoin and Ethereum. Now, whether or not that value is really worth $730 billion is another story.

    I think what it really boils down to is your risk tolerance. A year into my first job out of college I spent my tax return on cryptocurrency, knowing that I could very well lose all of that money. However, things turned out for the better and I’ve been able to pay off student debt and buy a home with a down payment. My time horizon is the same reason my 401(k) is 80% domestic stocks. I think the point shouldn’t be “Bitcoin is always a bad investment”, but instead should be “do your homework and be smart”.

    Reply
  • Ryan January 4, 2018, 11:31 am

    Totally disagree with this post. I feel MMM has failed to do his research fully on some of the altcoins and how efficiently they can move money compared to the current banking fraudsters. Bitcoin and Altcoins especially, are solving real world problems. Try telling someone in Venezuela, who’s currency is worthless, and has to rely on Bitcoin to transact that there aren’t real world uses for these. Why does the USD have value?? It is backed by trillions of dollars of debt we will never be able to repay. So do you consider the USD to have value? I don’t….

    Reply
  • Spencer January 4, 2018, 11:33 am

    Reply
  • Redsky January 4, 2018, 11:33 am

    I firmly believe that crypto currency is here to stay, the hacker or cyber punk community is too big, and embraces this non fiat movement. Much like you stated in your article, it’s about trust, and those people online trust in crypto currency (not just bitcoin but many difference usable tokens). Not saying that bitcoin or any of the others will replace cash (at least not yet), but there are more and more vendors each day accepting various crypto currencies for their product. The CME and other institutions already created a futures product for bitcoin, and i guarantee you more is to follow.

    Is this whole thing a bit crazy and growing at an exponential rate, YES, it’s actually a bit scary.

    Your toe nail clippings are useless because you cannot use them as currency. Tough to transport around and count out… also tough to divide into equal fractions, so your argument is much like comparing apples to carpets. However, if you come up with a MMM coin and place it on the market, i guarantee you people with trade it and it will grow in value.
    Your own community will buy it if they know you are behind the coin.

    I say, don’t immediately compare it to tulips. Definitely good to have a healthy skepticism or even fear of bitcoin and crypto, but it’s not healthy to just say “no, it’s trash, bubble means trash, so i cannot believe in it because it’s new and it’s different and it’s growing like i’ve never seen”

    Bitcoin came out in 2008, it had many hurdles. People lost their entire holdings when exchanges went down, but it’s still hear, and people still have confidence, and those same people are still in the game. Being hacked is like being robbed… don’t be stupid and it wont happen.

    Very disappointed to read this article. You always mentioned it’s good to learn new things, well here is a new thing and everyone seems to KNOW everything about it (especially people who keep screaming bubble), but the truth is, no one really knows where this will land.

    Keep an open mind, use your own brain and be skeptical when appropriate. Study and learn of course.

    if anyone wants MMM toe nail clippings, i can make you guys a coin, will even send it to you for free :)

    thanks!

    Reply
    • Morten January 6, 2018, 5:25 pm

      The toenails doesn’t have to be shipped. As for bitcoin, you only need a proof of ownership, but for bitcoin you pretend you own a number. But as opposed to art, you don’t own it for your eyes only. Everyone can see that number. The only thing you own is your secret key, which you generate yourself.. Weird, eh?

      Reply

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