Ok, if you hadn’t heard enough about why Bitcoin isn’t likely to conquer the universe like all of the speculators who have helped turn it into a world-beating bubble seem to believe it will, then you’re in luck.
Apparently, some folks at JPMorgan were listening when Jamie Dimon threatened to fire anyone caught trading Bitcoin for “being stupid,” because none other than Gandalf himself is out with a new note on cryptocurrencies and he doesn’t paint a particularly flattering picture.
“Gandalf” is of course Marko Kolanovic, the JPMorgan quant whose notes have the power to move markets all by themselves and who has taken on a mythical status befitting of his nickname over the past couple of years.
Generally speaking, Kolanovic covers all of the market’s bogeymen du jour (CTAs, risk parity, vol. control, etc.) and indeed, more than a few folks have blamed Marko for the wary eye investors now cast at systematic strats.
Well now, you can add the crypto crazies to the list of folks who are angry at the white wizard because Kolanovic just likened Bitcoin and its ilk to pyramid schemes. To wit:
Another worrying aspect of cryptocurrencies are some parallels to fraudulent pyramid schemes. Initiator of a pyramid scheme often ensures ownership of a disproportionally large share of future profits. For instance, in the case of bitcoin, it is believed that an unknown person (or persons) known as ‘Satoshi Nakamoto’, before disappearing, mined the first 1-2M coins or ~10% of the coins that will ever exist ($4-8bn USD current value). While initial mining requires a negligible effort, the benefits for subsequent participants start diminishing. Mining becomes progressively more difficult, and eventually unprofitable, marking the likely end of a scheme. A way around this in Pyramid schemes is to bypass the original chain and start a new one of your own. The cryptocurrency analogy would be to start a new coin if it is more profitable than mining the existing one. This can work as long as there are enough willing and uninformed buyers.
Obviously that doesn’t exactly constitute what one might call a “glowing” review.
And there are other jabs. “There is no organized power behind this currency to ensure its long term viability, secure trade, enforce its convertibility into other goods and services, or provide investor fraud protection,” Kolanovic writes, before debunking the transaction cost myth as follows: “the claim that cryptocurrencies have lower transaction costs is inaccurate as an asset’s transaction cost is almost always driven by its volatility rather than processing fees [and] bitcoin volatility is ~100%, or ~15 times the average currency volatility”
But ultimately, Kolanovic comes to the same conclusion as Dimon (which probably isn’t a coincidence) and the same conclusion as we came to long ago. Namely that the government will eventually kill Bitcoin.
“If the use of cryptocurrencies were to increase to an extent that they start competing with traditional ‘country’ currencies they would be quickly regulated or outlawed,” Marko contends.
Now allow us to quote ourselves, from yesterday:
Regular readers (and anyone who subjects themselves to my Twitter feed) know that I think Bitcoin is probably going to zero. And my rationale for asserting that is simple.
Governments simply won’t put up with this forever. Once it gets annoying enough (read: once it becomes a real challenge to monetary authorities), they’ll simply find an excuse to heavily regulate it or, more likely, do away with it altogether. It’s just that simple.
And don’t tell me they can’t do it. They can. Just look at what’s happening in China.
And don’t tell me about how, in the end, the fact that it’s a great idea will save it. No it won’t. History is replete with examples of government intentionally killing good ideas – especially ones that threaten the existing order.
It’s also critical to understand that there’s a veritable laundry list of excuses governments will be able to trot out to justify heavy-handed intervention. They’ll cite flash crashes, they’ll cite the possibility it can be used for illegal transactions, they’ll cite a lack of investor protections, and on, and on, and on.
Finally, for anyone who thinks Kolanovic is late when it comes to weighing in on this most contentious of debates, remember this…