Hiltzik: Bitcoin is not a good currency

All eyes in the bitcoin world and beyond were on Coinbase on April 14 when the company became the first cryptocurrency platform to go public.

It was a very good day. Shares opened at $ 381, hitting $ 429.54 before leveling off at $ 328.28. They were valued at the close of Monday’s session at $ 304.54 as the frenzy subsided, but that still valued the company at $ 60.6 billion.

Financial experts said it was the dawn of a new day. “Coinbase’s direct listing is a watershed moment for the crypto industry,” said a securities analyst.

Two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government or other institution.


Another called the company’s Nasdaq listing a sign of “the increasing adoption of bitcoin and crypto by the general public for years to come.”

Or maybe not. Coinbase’s IPO could be a sign of another market craze, with investors buying because they think others are buying, so why not? Evidence that bitcoin is becoming a “mainstream” financial asset is still scarce.

Of course, some banks have started to facilitate Bitcoin investments: JP Morgan Chase is preparing to deploy a Bitcoin mutual fund, for example. But whether this indicates its desire to offer something that some customers want rather than an asset approval in principle, it is unclear.

Elon Musk says his electric vehicle business Tesla will accept bitcoin payments, but as Coindesk, a crypto news service, recently observed, “It’s not easy.”

Customers must complete their payments within 30 minutes of a deal being made or the price of bitcoin expires and they must start over. Tesla warns that if you make a mistake – say entering the wrong recipient code into your Bitcoin account and Tesla will never get the money, that’s your problem.

The terms recognize that the value of Bitcoin can change drastically in the blink of an eye and that Bitcoin transactions cannot be reversed, even if they are in error. In other words, why don’t you pay in dollars, man?

Bitcoin fans say it’s an alternative to traditional currencies, which can be manipulated by national central banks to manage (or mismanage, if you prefer) their savings. Bitcoin – a financial instrument created by a computer algorithm and valued essentially at what everyone is willing to pay for it – is arguably immune to this kind of tinkering.

As an investment, bitcoin has been largely oversold by its fan base. Every now and then someone, often on reddit, brings up one of the columns I’ve written on Bitcoin over the years, invariably advising readers to be wary of investing in the thing. They’ll point out the latest price spike and chuckle at the madness of advising people to avoid $ 600 bitcoin when it’s now $ 20,000, $ 30,000, or (as it has been recently) $ 50,000.

Sure. If you’ve been hanging on to bitcoin since, say, 2013, when cryptocurrency first swam into public consciousness and was priced at a few hundred dollars per coin, until today (current listing on Coinbase: $ 53,924.99), you made a mint.

But how many people did that? To have been in the market for those eight or nine years, or even a good part of it, you would have had to survive not one, not three, but countless waves of bulls and bears.

From December 18, 2017 to February 10, 2018, the value of bitcoin fell 55%. This year alone, there have been three downdrafts of 20% or more in a week or two, and a further 16% drop over 12 days in March. (All metrics are from Coinbase.)

It is true that the stock market has been no stranger to bear markets, defined as declines of 20% or more. But there have been 16 since 1926, an average of every six years – not three in a single year.

Bitcoin fanatics, however, don’t really present cryptocurrency as an investment vehicle. They present it as a currency.

The problem is, as bad as bitcoin is as an investment, it’s even worse as a currency. Blogger Kevin Drum lists five characteristics that a currency should have: it should be difficult to counterfeit, stable in value, easy to transport, widely accepted and 100% liquid. Bitcoin fails three of these tests – its value is not stable, widely accepted, or 100% liquid.

As I have written in the past, the key bitcoin test is what we might call the Kenya storefront test. This stems from my time as a foreign correspondent in Nairobi in the 1980s, when the official exchange rate was around eight Kenyan shillings to the dollar.

Experienced foreign residents would not think of buying shillings at the official rate; they would like the black market rate, which was closer to 16 shillings to the dollar.

Expats wanting the best rate would go to a grocery store or ice cream parlor owned by an Indian merchant and write him a dollar check on an American bank in exchange for black market shillings. He mailed the check to a relative in the United States or Canada to deposit it there, and thus took out dollars out of Kenya in violation of the country’s strict currency exchange regulations.

The system has served everyone, except obviously the government. Indian families, who lived in fear of being kicked out of the country and their livelihoods by the Kenyan regime, would accumulate a nest egg abroad, and the foreigner would double its hold of shillings.

I have often thought that bitcoin would serve these merchants down to the ground – they could convert shillings or dollars into bitcoin wherever they were and convert them to dollars from a distance.

Of course, black market conversions were illegal, which is just one more class of users who value Bitcoin’s usefulness are criminals.

Bitcoin propagandists claim that the qualities that make cryptocurrency so useful for underground transactions are its virtue – a feature, not a bug. The advantage of bitcoin, they say, is that it works outside national central banking systems.

As Coinbase explains, “two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government or other institution.”

It’s supposed to be a good thing. “Most traditional liquid asset systems – banks, credit unions, brokerage houses, or even high-tech like PayPal – take control of your funds and leave you under their terms of service,” the finance site explains. personal Due.com. “If they decide that you have violated these terms, they can suspend your account.”

When it comes to suspending an account for violating a financial institution‘s terms of service, I’m with Nathan J. Robinson, the editor of Current Affairs, who pointed me to the above quote and writes : “This has not happened to me, ever.”

In fact, as Robinson points out, many of the oft-mentioned benefits of bitcoin – such as rock-solid “security”, anonymity, convenience – are either detrimental to the user or non-existent at all.

Who benefits from Bitcoin security, which takes the form of the inability to reverse a Bitcoin transaction once it is completed? Not the average consumer. Because these transactions take place without a trusted or regulated intermediary, no one can rectify a Bitcoin transaction with a counterparty that turns out to be fraudulent.

I may never have had an account suspended due to the terms of service, but many times I had to dispute a credit card bill or bank payment because I did not receive the goods or paid services. I have had stolen and misused credit and debit cards, and the allegedly untrustworthy bank that stood between me and the thieves provided all the compensation required by law. With Bitcoin, forget about it.

There are two keys to securing financial transactions: supervision and an audit trail. The money in your bank account goes astray, and bank records almost always show what happened and correct the error. With Bitcoin, there’s no oversight and no audit trail – and that’s supposed to be a plus?

It should be noted that “security” in the context of bitcoin does not mean “security against loss”. The most dramatic loss may be that linked to the old bitcoin exchange known as Mt. Gox, in which customer holdings went astray, at one point estimated at $ 1 trillion. The losses are almost certainly less than that, but some clients will never get all of their holdings back.

There are many other episodes in which Bitcoin accounts have been hacked by cybercriminals or lost when their owners lose their access codes, which cannot be reproduced.

Nothing in the bitcoin universe is like the FDIC or Securities Investor Protection Corp., U.S. government agencies that protect clients of banks and brokers against losses of up to $ 250,000 (FDIC) or $ 500,000 (SIPC). ) in the event of default of their financial institution.

Convenience? Bitcoin annals are bristling with threads about users who have lost their passcodes or “seeds” – phrases that can be used to regain access to a Bitcoin account – or who have had to go to extraordinary lengths to protect these. thieves codes.

“Store your seeds securely,” advises one user on reddit. “I used a metal stamp to punch my seed into a ¼ inch steel plate. After that I soaked it in plastisol so that it could not be read and stored in my safe with a description written on the outside. I also had another copy of the seed stored behind a photo at a trusted family member just in case.

As Bloomberg’s Matt Levine observes, “Everything I read about Bitcoin storage is exhausting.”

Bitcoin is not a mainstream asset by any stretch of the imagination. Drum likens it to collectibles, like baseball cards, although “a collector’s item that’s been the subject of a lot of hype.” It has no intrinsic value. It doesn’t even represent a theoretical claim on a national gold treasure, for example.

Its value depends on two interrelated factors: the desire of Bitcoin fans to continue buying and holding, and an artificially created scarcity. According to its creation document, the maximum number of bitcoins that can be “struck”, through a process of solving algorithms by powerful computers, is 21 million. About 18.7 million are already in circulation.

So invest in bitcoin if you want to. Try to buy a Tesla with them, if you have the patience. But they’re so painful to deal with that the smartest way to get a share of the stock is the way the smart gold bugs invest in this metal – they don’t buy bullion, but stocks in gold. companies in the gold industry. Now you can do it with Bitcoin, thanks to some ‘breakthrough’ IPO.

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