Insanity: People still pumping Bitcoin
BTC is a particularly pathological cryptocurrency, and it is doomed in the long run
Two years ago I explained why Bitcoin (BTC) is structurally doomed to failure. I was surprised to see that there are still notable people pumping it. Example: Balaji Srinivasan who, citing risks of dollar hyperinflation, recently encouraged people to “Buy Bitcoin.”
Fiat currency inflation is a real risk to capital owners. And, as I have explained in the past, there are practical things that people can do to hedge against inflation, like owning real assets or inflation-protected securities.
Cryptocurrency in general has all the hallmarks of a manic bubble. BTC is particularly bad because it has substantial carry costs that scale with its value. I go into the exact mechanics in my earlier articles. The consequences are that even if nobody is conducting business with BTC, holders have to pay ongoing and non-trivial “mining” fees to preserve the value and integrity of BTC. Other cryptocurrencies like ETH have restructured (from using a Proof-of-Work ledger to ledgers based on Proof-of-Stake) to avoid this problem. There is no mechanism by which BTC could similarly restructure (which is one of its attractions to proponents).
BTC advocates laud the fact that the total supply of BTC is capped. In theory, anything that has a finite supply should be immune to long-term inflation and should therefore serve as a plausible store of value. A drawback of BTC is that it has no other value. Contrast with other things that have essentially finite supply, like land. Even if nobody else wants to buy your parcel of land, it still has intrinsic value to the extent that people exist and will always need physical space to live, create food, mine resources, etc.
And unlike land and other commodities that store value, the value of BTC requires ongoing expenditures of real resources to pay for “compute,” which refers to computer hardware and the electricity to power it. This is a constant drag on the value of BTC, and it scales with the value being stored in BTC. It is a built-in recurring tax on the value of BTC. The moment BTC holders stop paying this tax the value of all BTC disappears.
BTC boosters point out that all other stores of value also have carry costs. Real commodities have storage costs. Land is generally taxed. Maybe the carry cost of BTC is relatively low? Besides, BTC also has value as a medium of exchange. Since it is a virtual asset, transactions in BTC are virtually costless. Transactions in land are very expensive. Even precious metals are relatively illiquid. All true. But to the extent that cryptocurrencies are attractive mediums of exchange, BTC with its relatively high carry cost and finite supply is among the least attractive.
Finally, BTC hodlers cling to a notion that cryptocurrencies are so decentralized that they are immune to government manipulation. This illusion has been thoroughly shattered: Decentralized ledgers are, by design, public. Consequently, U.S. law enforcement agencies have seized billions of dollars of BTC that the government has linked to illegal activity. The IRS has demanded that owners of cryptocurrency disclose their ownership and pay taxes on their gains. People who do not comply face fines and imprisonment. So much for that dream.
Great analysis!