The Great Bitcoin Ponzi Scheme?

Madoff would have loved it.

A few short weeks ago Bitcoin was going for around €50,000, at the time of writing it was down to about €29,000. When I first looked seriously, back in 2015 it was trading at around €250. Therefore, no matter how you look at it, if you invested then and have since sold out you would have done well. Sadly, I was not that patient.

Bitcoin is not an investment, it is a purely speculative beast so if you invest you need to be prepared to lose most of your shirt. It is however, marginally better than gambling on horses or on roulette. It is a form of “managed gambling”, it relies on bubbles created by world economic conditions or the whims of billionaires. So what do you really need to look for when assessing bitcoin prices?

Price Rises: Look for Countries in Trouble

My experience of bitcoin prices is that you need to look for where people need to move from or want to hide their money in the world. Often this hiding is legitimate, it is not about tax evasion or crime but more about being able to survive. For example wheen Greece had financial problems and the people could not conduct meaningful bank transfers or to buy things, Bitcoin became a method of survival for many. The same applied when Cyprus was on the verge of collapse. I was in Cyprus for work during this time and the advice was to take cash with us; just in case the banks collapsed and the ATMs dried up. During this time, the Cypriot Government capped savings, and many people lost significant amounts of money. Here, people turned to Bitcoin in small numbers to survive. However, now for the less than clean side of Bitcoin. The price of Bitcoin spiked as the Russian oligarchs took their money out. You can of course debate the legality of the money in the first place but there no public proof it was dirty. Cyprus is also home to the Russian front company, which acts as an agency for the sale of natural resources. As more funds were used to buy Bitcoin, the more the price rose. Often these funds were taken out just before the currency controls came into effect, and the money needed to be moved fast and with no trace there after. 

Bitcoin has no underlying value, and its price is in part linked to the potential economic collapse and desire for flight of capital out of the country concerned. The more money which needs to be hidden and got out the higher the price spike. Add to that the need for Bitcoin just to survive daily life (e.g. sending something abroad to family or to avoid savings being destroyed) then again the price will go up as more people buy it.

Price Falls: The Desire for State Control

Recently, China announced a ban on financial organisations accepting Bitcoin. This is against the backdrop of China being the largest miner of Bitcoins on earth. However, what was the real reason for this? Answer: the philosophy of Bitcoin. Bitcoin is a decentralised monetary system over which no Government or Central Bank has control. Often the Bitcoin extremists see this as some kind of almost religious ideal. It is, however, precisely the financial system almost no country can accept. Especially when large parts of your populace (e.g. in Hong Kong) are in a state of unrest and need to store their funds. Also, Bitcoin would let the Chinese super rich (who fear their assets being frozen) hide at least some of their wealth. These are the extreme cases, but no doubt many Chinese citizens also invested in Bitcoin. Taking all these parts together, a sudden ban will only have one effect to lower demand and hence the price of Bitcoin. As countries like the UK, Hungary and Brasil edge towards managed democracy I would expect to see further clampdowns on Bitcoin, even if not total bans.

Price Whims

There are two words here: Elon and Musk. If a currency can go up and down on the actions of one individual, then you know it is not a real currency. Indeed, most currencies exist as Governments also use them for tax collection, so there is a natural demand. If you don’t have the Euro needed to pay your German tax bill, then you will need to find some fast. Here, the Euro or previously the D-Mark should remain relatively stable as they are recirculated in the economy. If Volkswagen (or any other EU company) stops accepting Euro, then it is unlikely it’s the value will crash but it may suffer a small fall. The opposite happened with Bitcoin, Mr Musk said Tesla accepted it, it soared, then he said it would not and it crashed. Some will argue that other organisations are accepting Bitcoin, but there is some debate on whether this really helps anything as they still accept other currencies. Also, it is most likely that they will pay their suppliers and staff in a normal fiat currency, therefore requiring the selling of Bitcoin (dropping the price) in order to pay their bills in their operating currency. Unless most staff and suppliers accept Bitcoin, then the price will probably only go down.

Ponzi Scheme?

In reality, all present day fiat currencies are bogus, anyway. For the most part, they are not backed by any physical assets, although in the case of Russia and China they have been buying up gold. The UK for example sold its gold of cheaply during the Blair years. However, in all cases the Governments effectively backstop their currency as they accept it for tax, it is widely used by the population for daily life and in order for this to work it has to be relatively stable. If trust in that breaks down (as in Zimbabwe) the currency quickly collapses. Likewise, sudden prices rises or drops are not sustainable for normal national currencies.

Bitcoin is not widely accepted, it is a relatively minor second currency, often used to get money across borders. Its prices spike like any Ponzi scheme when money goes in and it falls when money is taken out. Perhaps its only strength is that there will only ever be a fixed number. Assuming it survives that long, then it may actually have a value as the fiat currencies themselves become weaker.

Should you invest in Bitcoin? Probably not, it is not an investment. If you buy any crypto currency, you are effectively gambling on a horse. In traditional horse racing betting, the odds drop as more people bet on a horse. Here its, the opposite, the price rises as more pile in. The price falls as more sell. In both cases neither has any value until an event occurs a horse wins or as with Bitcoin recently, it was Elon Musk speaking. So would you seriously bet on a horse if you knew that if Elon Musk said something your winnings would be less? The only plus side is, you are unlikely to lose your entire stake. So if you view it as gambling, then fine.