The Problem With Bitcoin

It's not too big to fail. It's too small to succeed.

A reader asks:

Today I have had a discussion with my brother about Bitcoin, he is for some reason super against it because its "unsafe" for example controllable by controlling the people i.e. china (I don't think that's how it works). Well, I have searched for one point he made that I couldn't answer, if Bitcoin could be boycotted/is in danger when there is another Stuxnet type worm made to attack the network, miner or what ever.

I have seen your answer partly, but I cant read the whole answer to this, also this was 6 years ago so maybe you have something new to add to that.

My Own History
I first bought Bitcoin when it was < $1000 but I was so paranoid about it that I didn’t put much money into any exchange until I could get my own hard wallet. It literally took 3 months for me to get a Ledger Nano shipped to me the demand was that great at the time. Then I bought something like a half a coin the following year in and sold pretty much all of it by the end of 2018. That’s about all I can remember, so I did just fine. The one thing I didn’t do was go all in and expect the moon, although I did consider mining for a short time. I’m super satisfied that I got an excellent return and emptied all of my major investments before the Feds figured out how to get some compliance out of the exchanges where I did my deeds. Me and the Feds are square, and I’ve had my share of tax difficulties.

I also attended a lot of the hacker ICO seminars and meetups in LA when that was a thing. It reminded me of a kind of high tech circus / dive bar. It was pretty much impossible to tell the people who knew what they were talking about from the ones who were straight out scamming. It was only when you listened really carefully. One of the schemes / scams was Filecoin. It sounded like a good idea when the guy was i my face. Then I remembered it’s him vs Amazon. Which, duh was exactly his pitch. Like we could ‘democratize’ file storage and still make him rich. I mean us. Yeah US!

So I learned a lot of lessons, most of them out of an abundance of caution.

1. There is only Bitcoin. All the rest is hackable junk. Except for ETH, but ETH’s price always only tracks Bitcoin.

2. Exchanges are dodgy. It’s more important that you find a reputable exchange than you find a reputable currency.

3. Crypto is super volatile. This is a day trader’s paradise. You’re never going to outwit the day traders.

4. Mining is the surest way to make money, but only if you’re ready to buy hardware and start spending $2000/mo for your electric bill.

5. Have your own hard wallet. If you’re not smart enough to figure that out, you really don’t belong here.

So with those ground rules I did well. But there were still several disappointments along the way, because there were and still are excellent ideas to implement with blockchain technology but relatively speaking, nobody cares about those ideas. The overwhelming majority of people in cyrpto are playing it like a stock market, and a greater fool stock market at that.

So I got in somewhere around Fall of 2016 and was out by 2018. I messed around with BTC, ETH (several iterations), LTC, ADA, ALGO, XLM and USDT. I have about $30 worth of DOGE. Altogether I have maybe 0.03 BTC in various places. I like ALGO based on the guy who invented it, but again, these projects are all self-funded by enthusiasts who have solved very interesting mathematical and computer science problems with very few practical applications better than investor speculation.

My Great Crypto Ideas

1. Frequent Flyer Exchange
   The closest thing to crypto are the rewards currencies that all of the travel industry dabbles in. Wouldn’t it be marvelous if they actually responded to an open market? I would love to trade American Airlines points for Marriott points. Unless and until such an unhackable exchange and market is made, we’ll never know the actual value of all those. The carriers and hotel chains have an interest in keeping their customers captured. I think they’ve conspired to keep their currencies private.

2. Video Game Exchange
   Same thing with perks in videogames. Companies like Ubisoft have bought into this in their own way, but I think everybody in the game world understands that their respective games are too easily glitched and such glitching can devalue their currencies. Also they are too easily hacked, especially by insiders.

3. Triple Entry Accounting
   Add an independent third-party realtime accounting audit trail to any and all public (Government, NGO & Non-Profit) organizations. Thereby eliminating the probability of fraud.

Interestingly, I would still like to build the third idea. But that kind of transparency… hmm. I know what kind of market would like it. Any company in receivership. I know who to talk to about that, but I’m getting too old for this.

Bitcoin Is Unhackable But
It has a fatal flaw which is exactly why it was designed as it was. You can’t print money, right? But human beings print humans. So when people decide that sex is worth it, and print more humans, why should the late humans only get a fraction of the money early humans get? This is the fundamental problem with Bitcoin. It’s mercantile. This is exactly the same problem, as I see it, with BRK.A. I can remember when Berkshire Hathaway was about $30,000 per share back in the 90s. Their idea was simple. There will always be a fixed amount of this stock, and we’re not going to split it or dilute it or do any such thing to monkey with it. You’ll always know the value. Today BRK.A is 20x that at about 641k per share. Sorry, you can’t buy a fraction. You’re locked out. Whales rule BTC and they are not going extinct. Only whales can buy BRK.A.

You can buy a fraction of BTC, but now how much is your influence?

Bitcoin Can Be Bought
Because BTC always had a problem with the speed of transactions, it was never liquid enough for retail stuff. You couldn’t use BTC for shopping for groceries. So people said, OK let it be for big escrow kinds of transactions. A mortgage here, a piece of that company there. Well, fine and dandy, but the entire market capitalization of BTC depended on the price going high enough for it to be too big to fail. It never got that big, and it’s still dominated by big holders.

Understand it this way. Imagine you made the greatest lemonade in the world. It’s perfect in every way and it never gets warm - so it’s always fresh and cold forever. So since it’s fresh and cold it cannot be infinite. (Pick two). So you decide that you’re going make to sell 1000 gallons and that’s it. You never expect that somebody is going to buy 10 gallons. But you get a line around the block and after the first day, you only have 500 gallons left. A new line starts, and it begins again. People buy and sell it among themselves. And the more they bid up the price, the more difficult it is for any individual to have enough lemonade to actually fill a dixie cup. That’s not going to cool you off on a hot day, even though it’s cold and fresh forever. And yet there are still people holding 10 gallons. And some consortium of people can always put together enough to buy 10 gallons from all the little holders. Now you have billions worth of perfect lemonade. Or to be more accurate, all of the exchanges on the planet are working with $1.3 Trillion of BTC. Now that’s a lot of lemonade. BUT

Picking a bank out of thin air, HSBC has $3 Trillion in assets. So if you think BTC is too big to fail, you are just dead wrong. One global bank could, in theory, buy all of the BTC and become the target of one hostile administration. So it’s precisely the opposite. BTC is too small to succeed globally. And the only way it becomes the global currency is that a bunch of banks have to fail, meaning a bunch of economies need to fail. BTC whales will still not go extinct because they were there first. Like kids who inherit Beverly Hills mansions. Sure, bigger than you and I, but really still kids. There’s other places to live. Besides. HSBC holds the assets for all the air conditioning companies. Sometimes A/C is better than lemonade, and it’s scalable.

What Killed Crypto?
But in the end, what real assets are BTC investors investing in? Well, just BTC. So it’s not actually an asset but a currency, but the only reason it has inherent value is because its buyers treat it like an asset, which it is not.

Besides all that, the real apps that killed BTC are Venmo, Zelle, Cash Card and Apple Pay. So crypto has already locked itself out of the marketplace of global transactions by not being big enough not to be manipulated by governments and big banks, and not being fast enough so that Venmo, Zelle, etc can move faster to market with ubiquitous apps on smartphones. The real end of crypto was the rapid adaptation of touchless payments that went global in 2020 owing to COVID.

So crypto maximalists had to figure out another scheme, and that was NFTs. You gotta laugh.

Bottom Line
Crypto is fungible currency. Exactly like pennies or Susan B Anthony dollars. Sure they’re legal tender and you can exchange them for anything you can buy. But there aren’t enough pennies in the world to buy the State of Illinois, and there never will be, even though nobody in the Land of Lincoln would support the elimination of the penny or the five dollar bill for that matter.

BTC was a genius solution to what its inventors estimated was the problem in 2008. 16 years later, nobody cares. Now they’re buying NVIDIA stocks, because that’s the future. So they say. Sadly, few of the blockchain side projects have yielded fruit.

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IF
If BTC ends up working like a financial instrument, which it has been legally cleared to do, then financial institutions like Blackrock and other hedge geniuses can figure out a way to make it more liquid. I have not looked at what kind of things they can do with leverage and market making to see what’s going on there. But if it becomes stable in any sort of way, it will be because such Blackrockers have figured out the global BTC market and will know what it can and cannot do. So in the end, those clever capitalists will prove themselves the be the smartest holders of large fractions of the global BTC market. Not you and me.

Still, I think, just like the weed maximalists, they’ll believe their favorite product is a bigger economy than it actually is.

AND: Notice how nobody is saying that AI will replace attorneys and make smart contracts?

AND FINALLY: What if the Euro doesn’t end up working?