The Dow closed over 16,000 yesterday. Glory hallelujah! Onwards and upwards from now and for all eternity.
Oh, dear reader, tears came to our eyes as the bell rang and we reflected on the majestic delusion that drives stocks higher and higher, day after day, to some breathtaking pinnacle.
Thirteen years ago, the value of America’s capital stock – as measured by the Dow – was under 12,000. Now, it is fully a third higher.
Wait. Thirteen years ago was the height of the dotcom bubble. Since then, there has been a real estate bubble. And a debt bubble. And now, another stock-market bubble?
What else has happened? GDP is up $6trn. But total debt is up $30trn. Debt is rising five times faster than output. How could the capital stock of this economy be worth 33% more now than it was then?
Sell? Buy? Old-timer Richard Russell thinks we are just at the beginning of the exciting third stage of a market bubble: the fireworks stage, where prices skyrocket, before blowing up.
Who knows? So let’s change the subject to bitcoin. Nobody knows anything about bitcoin either, but everybody seems to have an opinion.
First, a dear reader writes from Switzerland:
“You are becoming a speculator… I am extremely surprised and disappointed.
“From gold to virtual currency… you are losing your mind.
“I am in Montreux for a conference for the wealthiest family offices in Europe. Nobody give a chance to this virtual currency.
“We just had a session how families lose wealth over the long run – I think bitcoin may be added to the list.”
Just to clarify. We are not crazy enough to recommend putting the family fortune in bitcoin. As for speculating, we only speculate on ideas, not on investments. Bitcoin, the idea, may be worth speculating on.
Meanwhile, another dear reader sent us this opinion from Matthew O’Brien at The Atlantic:
“Bitcoin is a Ponzi scheme libertarians use to make money off each other – because gold wasn’t enough of one for them.”
Ponzi scheme? Huh? A ponzi scheme requires a Ponzi, a mastermind who fraudulently attracts investors and then uses their money to pay off earlier investors. That’s not how bitcoin works.
Mr O’Brien sees a parallel between Segway and bitcoin. It’s true that people have made big claims for both. True too that Segway hasn’t revolutionised transportation. And it may be true that bitcoin won’t revolutionise the money system.
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We don’t know. Neither does Mr O’Brien. But he believes he knows:
“What’s revolutionary is that it’s a payments system with no third-party, like a credit card company, standing in between buyers and sellers. See, any time you buy something, it’s a minor leap of faith. You choose to believe that the seller will deliver as promised—and if they don’t, you want your money back. That’s where financial intermediaries like credit card companies and Paypal come in. They make sure buyers and sellers are both trustworthy, and handle any disputes.
“Now, it’s nice to be able to get your money back if things go wrong, but that’s not free. The middlemen take their cut. Bitcoin, though, has no middlemen. It’s just a decentralised peer-to-peer system. So you can’t get your bitcoins back if things go wrong, but there won’t be any transaction fees. The question is whether non-enthusiasts will think this trade-off is worth it.
“…The people who have bitcoins still have no reason to spend them, and the people who don’t still have no reason to get them. They don’t want a currency whose value you can’t predict from one hour to the next. They don’t want to buy things anonymously. And they don’t want transactions to be irreversible (and certainly wouldn’t want that if they got hacked).
“Every big idea starts out sounding crazy. But not every crazy-sounding idea ends up being big. History is littered with Segways. But for all its majestic dweebiness, at least the Segway was kind of useful. You really could zoom across sidewalks without anything resembling effort. I don’t know why you’d want to, but you could. But what can you do with bitcoin? Well, it’s good for real and fake gambling. Since it doesn’t have any actual fundamentals, it can be worth anything: bitcoin 36,000 and 36 are about equally plausible. That’s good for making money at the expense of people who get in the game later, but little else.”
Poor Mr O’Brien lacks imagination. Had he been around when the telephone was introduced, he surely would have remarked: “Who will want one? It only works if you have someone you can call. And as of today, there are only 109 of these contraptions in all of North America.”
At first, the value of any new innovation is unclear. Its price should be volatile. Its immediate usefulness, too, will be limited.
Most innovations fail. But some don’t. We’re not saying that bitcoin will be one of the successes. It could crash and die tomorrow for all we know. But the promise of virtual money – crypto currencies – is, like the telephone, revolutionary.
Here’s Joel Bowman – the first bitcoin miner we ever met – writing for the defence:
“I suspect you’ll receive a lot of emails – both love and hate – on the subject. If nothing else comes of the experiment, it will have invited us all to challenge some unexamined ‘truths’ regarding what we thought we knew about money…
“One of the mental roadblocks I encounter from the “hard money” crowd (to which many of your dear readers belong, I suspect) is that bitcoin is, by nature, intangible. This they see as necessarily negative, a priori.
“The glitch lies in conflating the concept ‘fiat’ with ‘intangible’. It is assumed that the latter is synonymous with the former, which is simply not the case. It is, rather, classic deductive fallacy: all fiat monies are intangible, therefore all intangible monies are fiat.
It’s a bit like the old example, “All thumbs are fingers… therefore, all fingers are thumbs.”
“Not all intangible monies are fiat, as bitcoin demonstrates. Fiat means a money that is declared to have value simply because the state says so. (From the latin, “it shall be”.) Bitcoin is nothing of the sort. It relies solely on subjective value, which is to say, value assigned to it by voluntary individuals who, after weighing up its characteristics, determine its utility as a medium of exchange in a given context (a digital context, for example). It is the very opposite of value by decree, by coercion, by violence. It is value by voluntary market determination.
“The hard money crowd is right to distrust the state, given its abysmal track record of destroying purchasing power through inflation. But they are wrong to throw the potential value of intangibles out with the putrid, fiat bathwater.
“There are many intangibles to which we attach immense value. Maths, language, logic, ideas, love… You can already think of a dozen more, I’m sure.
“The fact that bitcoin is intangible is, perhaps counter intuitively, considered by many to be one of its most appealing characteristics. It virtually eliminates storage costs, for one. Same for transport costs. And transport time. And, despite what the Feds say, it is more or less impossible to outlaw (unlike, say, private ownership of gold). They could write the rule, of course, but enforcing it would be like enforcing a ban on the English language, or algebra, or naughty thoughts about your neighbour’s wife.
“In some ways, bitcoin is very much the ‘language of money’: it is egalitarian in that it is available to anyone and everyone equally. (There is no central authority first issuing bitcoins to a preferred few, unlike, say, every fiat currency on earth.) It can evolve and adapt (the ‘open source protocol’ allows for this.) It is democratic, in that its price is set by millions of freely associating individuals – the market – who each ‘vote’ with their btc wallet. (This is a refreshing contrast to the phony price of money as determined by the over-degreed blowhards at the Fed.) It is entirely transparent, as anyone who downloads the btc client can view the entire transaction history, but it is also private, as users can fairly easily shield their identity from prying eyes.
“It performs much like a language, communicating information both from individual to individual, and from discrete transaction to the entire, distributed network. It is a digital currency for the digital age.
“Of course, nobody knows where we go from here, except into uncharted waters. As someone said recently, bitcoin will either go to zero or many, many zeros.”
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