MoneyWeek's roundtable: the experts debate bitcoin
MoneyWeek’s experts debate the pros and cons of bitcoin – is it really an independent means of exchange, store of value and unit of account, or just the latest digital fad?
This is an edited excerpt from a roundtable discussion held at the MoneyWeek offices on December 13 (at which point bitcoin was trading at around $16,000 to $17,000, ahead of peaking in mid-December at just under $20,000 or so).
You can read the rest of the roundtable here. And if you're not already a subscriber to MoneyWeek magazine, you can read our future roundtables as soon as they're published by signing up for your first four issues free here now.
John Stepek: Obviously the most important question right now is what do you make of bitcoin?
Jim Mellon: I know someone who put a lot of money into bitcoin at the start of the year (2016). He's now sitting on $60m-worth of the stuff. Every week, I say "please take the money off the table". But he thinks it's going to go stratospheric and so far he's been right.
But the big problem is not getting out of it it's very liquid. The big problem is getting a bank that will accept the proceeds of the sale of bitcoin. If you sell out, you get a credit in one of the exchanges, CoinBase or whatever. But when you try to transfer the money to a high street bank, they say no. So you can only sell in lots of $25,000 or so. This guy is sitting on a lot of them and it's not easy to get out of it.
Jim Leaviss: You could hedge nowadays though, via the futures market.
Jim M: But you have to put down a hefty margin as collateral.
Charlie Morris: It is a problem. There's a lack of selling pressure in the bitcoin space because of this. But at the same time, bitcoin has created $500bn of value with the banking system against it. Now, imagine where it would be if the banking system was assisting it?
John: How much of that, though, is precisely because it's outside the banking system?
Charlie: Do you think liquidity would have kept the price down? I think it would have led to more participation.
John: But bitcoin is not really a currency, is it?
Charlie: It never has been.
Lucy MacDonald: Well, we're not sure exactly what it is yet, are we? It's got some characteristics of a currency, some characteristics of an asset, a bit of commodity as well. What do people think it is?
Jim M: There's a lot of tax evasion going on in this world, and a lot of dark activity on the web. Apparently, 30% of all the drugs in the US are now bought on the dark web and paid for with bitcoin. But it's not a unit of exchange because it's far too volatile. So if we wanted to buy a coffee here, for example, we wouldn't really know what the price was.
Charlie: And the fee would exceed the price of the coffee.
John: Yes it's almost as difficult to buy stuff with bitcoin as it is to buy stuff in Tesco's with a pot of gold. So I guess the question is what's it going to turn out to be?
Charlie: Well, it was a highly efficient barter instrument, and it's now an inefficient barter instrument. But the real story here is that the space is not going to go away. Remember the internet we knew that something was coming out of it, we just weren't sure what it was. But the internet has discovered how to exchange value; you know, don't bet against that.
Lucy: But it's the blockchain technology isn't it? I mean, that's what's going to be used by most financial institutions for a start, and already is.
Charlie: Yes, but what you must not say in this space is I love blockchain and I see great potential but I don't like bitcoin. That's a clich now.
Jim L: What do you think about the energy consumption element of bitcoin? I just think it's mindboggling that we're burning a small town's worth of electric lights just to maintain the blockchain.
Jim M: But that's why some people are moving across to ether, where there isn't a restriction on the number of coins, and you don't mine them. And there are a lot of these currencies now it's not just bitcoin. I'll give you an example of a crypto that I've heard about which looks quite useful and could be a good example of how they could work in the future.
We've all got health data that people want to get their hands on, because once you aggregate health data, it becomes very valuable. What if I could persuade you to share your health data by issuing you with tokens which you can then use to buy health services? That's what a friend of mine is doing. I think it's a very clever idea. That's a use of a quasi-bitcoin currency that actually has some validity.
John: That whole area of data broking is interesting what's it called?
Jim M: It's called Longenesis. And the currency unit is LifePound.
Lucy: You see health, I can see the value of that. But for other concepts like paying for travel, say it's hard to see the use case. You just pay with Visa.
Tim Price: But some of these concepts, you can't see. Or at least someone ignorant like me can't see what they are at inception. And then they develop value over time. Twitter is a great example. I could never see what the point of Twitter was at first it was for people who want to know what XYZ personality puts on their toast in the morning. But then it gets to a critical mass of users, and you start to see the value. Twitter is now basically a personalised news and information feed. It's a terrific service. I'd probably never buy shares in it, but none of the value in it today was visible back when it was first launched. It's taken time to find a niche.
Jim L: It's practically disintermediated media. I mean, I'd rarely look at my Bloomberg screens for news anymore.
Tim: Well, Twitter is faster. Some of it is even true!
Charlie: The key is, Twitter is a network. It's a network of 300-and-something million people some very significant, like Trump, and some of them, you know, like me, who's not particularly important. And those people coming together, doing stuff, interacting with each other that's where the value is. And the same is true with an ICO [initial coin offering]. So if you can create a crypto whatsit that moves about and gets people interacting with one another then it's valuable. But there's no intrinsic value in holding the ones and zeros. There's an intrinsic value in the network that brings people together.
Lucy: Yes. I think you need to throw it out there and see what happens. And if it gets engagement, then fine; if it doesn't, then it doesn't work.
Steve Russell: I think the problem is that while bitcoin may be a useful, worthwhile asset, it's become all about the speculation. And with that sort of volatility, it fulfils none of the uses that it could do. So it's difficult. I wouldn't buy bitcoin. But I wouldn't dismiss it as an entity.
Charlie: I think someone here needs to defend bitcoin.
John: Yes. That's why you're here, Charlie.
Charlie: I agree with you, Steve it's speculative, it's crazy, the volatility 100%. But it's been a wonderful experiment in money. And it's all lessons that we've learnt from Adam Smith and Isaac Newton and the gold standard, all these things put together you've seen it play out in the last few years. And bitcoin has become this reserve cryptocurrency. It's fascinating. Now, under the surface, there's an attempt at creating utilities that kicked off in 2017 with thousands of IT projects, all looking at creating networks. And we just don't know where this whole thing is going. But bitcoin has become the funding mechanism.
And we're talking about the internet here. The internet really is this mechanism that brings the world together in a way that's never been previously possible. So if we're going to have a bubble at this stage, it's going to be vastly bigger than what we've got now. Even if there's a correction now of 80%, which has happened three times before bitcoin loves 80% crashes, it's quite normal so what? There could easily be another run. And if it's not bitcoin, it could be a friend of bitcoin within the space. So it's a very dangerous game to bet against the concept of the transfer of value on the internet, even though I entirely agree with you all that it's a crazy thing to buy today, and it's very volatile and very dangerous and all the rest.
Jim M: Well, we're all on the same page in that respect. I mean, we think that it's going to fall very sharply. You wouldn't recommend to MoneyWeek readers that they buy it today. But should it fall by 80%, you might reconsider.
Steve: The problem is, if it does fall by 80%, is that confirmation of the fact that it falls by 80% and then quadruples? Or is the fact that it's fallen by 80% just the start and it'll then fall by another 90%?
Jim M: One thing that is interesting is that gold only went up by about $100 last year. I don't think that's down to a lack of inflation I think it's down to displacement speculation in bitcoin.
Charlie: Do you believe that? Do you believe that the nutters have gone to bitcoin and away from gold?
Tim: Well, I've got a lot of sympathy for the argument that bitcoin is behaving how gold might behave if it didn't have a gigantic paper speculative market attached to it.
Charlie: But bitcoin has been driven by South Korean kids, not by 50-year-old Texan men who think the end of the world is coming. It's a different demographic.
Steve: Bitcoin is a very good potential replacement for gold. But it comes back to this problem that you need some evidence that it is a safe haven before you trust it as a safe haven. Can you trust it to do the job when you need gold? Gold works because people historically have trusted it, and they have no other option.
Tim: There is no event that could immediately just evaporate all gold in the way that an EMP blast could immediately evaporate and reset everyone's digital accounts to zero.
Charlie: I spoke at the London Bullion Metals Association conference in Barcelona the other week. I gave the audience four economic scenarios: socialism, inflation, nuclear war, or growth. Then I asked them which asset they'd prefer in each gold or bitcoin.
Bitcoin only won in the "growth" environment and right now, the world is growing well and we all feel like speculating, so bitcoin is winning. Bitcoin also didn't do too badly on inflation it only just lost to gold. But on socialism and nuclear war, gold came through resoundingly.
Tim: Yes, I'm not sure I agree that it could replace gold. The classic economic definition of money is that it's a store of value; a medium of exchange; and a unit of account. I'm not sure if bitcoin will ever satisfy any of those. And if you look at the characteristics of what makes a good investment, what you're looking for are independence, scarcity and permanence. Bitcoin only caters to the independent part of that. It doesn't cater for the other two.
Charlie: Well, it's scarce.
Tim: Well, it's scarce, except that they keep mysteriously halving it.
John: You're talking about the forks.
Charlie: Well, the mark one original bitcoin is scarce...