Bitcoin, Meet Gandalf: Kolanovic Says Cryptocurrencies May Be Pyramid Schemes

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…

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14 thoughts on “Bitcoin, Meet Gandalf: Kolanovic Says Cryptocurrencies May Be Pyramid Schemes

  1. These crypto discussions are at a very elementary level. Yes if BitCoin started becoming the reserve, you bet there would be resistance. Kindergarten stuff.

    • Just as there are varying degrees among countries of restricting internet access, so there shall be varying degrees of crypto resistance among countries. In both cases, the more the resistance the worse off those countries end up.

    • Numero uno..Show some freaking guts and stop using “anonymous..” You might as well use “I am A Wimp..”.
      Second..it’s irrelevant whether Bitcoin “becomes” a reserve..It is acting as one..and the powers that be will slam it..and all like it…

  2. One of the many cryto-C fan boys posted that there was no real bonafide source for the most recent news that China is cracking down on BitCoin. However, that isn’t quite true.

    The news on ICOs came from the People’s Bank of China – the official monetary policy regulator of China. (http://www.businessinsider.com/r-china-bans-initial-coin-offerings-as-illegal-fundraising-2017-9?r=UK&IR=T)

    The information regarding closing Bitcoin exchanges came from the Chinese financial news paper Caixin. (https://en.wikipedia.org/wiki/Caixin). While Caixin isn’t the state news agency outlet for China – it can’t stay in business if not reporting news that the central gov. doesn’t approve – remember it’s authoritarian China. (https://www.cnbc.com/2017/09/08/bitcoins-price-tanks-after-report-china-plans-further-crackdown.html)

    To make matters worse for Bitcoin, the Chinese central gov. has been telegraphing their intent to shut down Bitcoin for over a year now. Consequently, these actions should come as no surprise to anyone serious about Bitcoin’s future valuations. Last fall Bitcoin had 92% of it transactions in China. A couple of weeks ago that rate had fallen to less than 60%. There is far too much information available and observable affects here to doubt that the limiting of – if not shutting down of Bitcoin in China is not now the official Chinese government policy. The next shoe to fall probably will be the public announcement of Bitcoin miners or transactors prosecution in China. The only real question is how fast other developed economies will follow suit.

    When you consider that private cryptocurrency has the same or greater economic threat as counterfeit currency to national economies and their central bank – gate keeper parasites, you can see why this is only the beginning of the global limiting private cryptocurrency. You should also examine the history of private currency’s in the US and around the world – in which national treasuries’ enforcement very consistently lead to all private currency’s – non-existence. Private cryptocurrency necessarily has the same future.

    This doesn’t mean blockchain cryptocurrency transaction process technology applications are dead. The common mistake here is to confuse private cryptocurrency and blockchain technology – as being one unified entity. It is not. The non-proprietary uses of blockchain applications is flourishing and not just in financial applications. This all just means that blockchain technology will eventually be adopted by national economies, but not as private company based cryptocurrency like Bitcoin and others.

    The more logical investment strategy here should be to research novel blockchain application developments that can be made proprietary and whose products are not threats to national economic interests. Numerous banks, credit card companies – even food companies (source tracing applications) are already working on blockchain applications for their systems and some have already applied for process patents (blockchain technology itself is public) for their uses.

    My investment take is that all private cryptocurrencies will be extinct market artifacts with in a few years. Sure, their may be some dead-cat bounces in Bitcoin to trade/gamble on, but no private cryptocurrency that warrants investing in.

  3. Well it’s just another opinion. Like assholes,we all have one.

    Just watched an hour-long interview on RealVision with Kyle Bass in which he discussed at length two things:

    1) China headed for a crippling debt crisis (nothing new there) sometime between Nov and June.

    2) Crypto is a valid asset class that will transform society with an impact comparable to the internet.

    Well that’s what makes a market. Kyle has no position and never owned BTC but intends to buy large, although he never disclosed his target bid.

    • “Asshole..” that pretty ,much describes your half wit response…Crypto is only a “valid asset class” as long as the powers that be say so. What do YOU think China and other Nation States will do when a Crypto Currency threatens them????

      • Read again, it’s the opinion of the celebrated trader Kyle Bass, not mine. I don’t always agree with Kyle, he’s been wrong before (who hasn’t?), but I’ve never heard anyone call Kyle a “half wit” until a half wit like you.

      • Before dismissing his response as a half-wit, maybe you should first listen to his argument about why it’s a valid asset class? Then constructively criticize it if you’re still unpersuaded.

        Thousands of years of history shows that nation states come and go. Ultimately they have repeatedly failed to ban or control except temporarily. Someone already mentioned drugs for example. So perhaps the issue isn’t what gov’t may try to do (and ultimately fail as usual), but rather whether crypto has any genuine value?

  4. One of the many cryto-C fan boys posted that there was no real bonafide source for the most recent news that China is cracking down on BitCoin. However, that isn’t quite true.

    The news on ICOs came from the People’s Bank of China – the official monetary policy regulator of China. (http://www.businessinsider.com/r-china-bans-initial-coin-offerings-as-illegal-fundraising-2017-9?r=UK&IR=T)

    The information regarding closing Bitcoin exchanges came from the Chinese financial news paper Caixin. (https://en.wikipedia.org/wiki/Caixin). While Caixin isn’t the state news agency outlet for China – it can’t stay in business if not reporting news that the central gov. doesn’t approve – remember it’s authoritarian China. (https://www.cnbc.com/2017/09/08/bitcoins-price-tanks-after-report-china-plans-further-crackdown.html)

    To make matters worse for Bitcoin, the Chinese central gov. has been telegraphing their intent to shut down Bitcoin for over a year now. Consequently, these actions should come as no surprise to anyone serious about Bitcoin’s future valuations. Last fall Bitcoin had 92% of it transactions in China. A couple of weeks ago that rate had fallen to less than 60%. There is far too much information available and observable affects here to doubt that the limiting of – if not shutting down of Bitcoin in China is not now the official Chinese government policy. The next shoe to fall probably will be the public announcement of Bitcoin miners or transactors prosecution in China. The only real question is how fast other developed economies will follow suit.

    When you consider that private cryptocurrency has the same or greater economic threat as counterfeit currency to national economies and their central bank – gate keeper parasites, you can see why this is only the beginning of the global limiting private cryptocurrency. You should also examine the history of private currency’s in the US and around the world – in which national treasuries’ enforcement very consistently lead to all private currency’s – non-existence. Private cryptocurrency necessarily has the same future.

    This doesn’t mean blockchain cryptocurrency transaction process technology applications are dead. The common mistake here is to confuse private cryptocurrency and blockchain technology – as being one unified entity. It is not. The non-proprietary uses of blockchain applications is flourishing and not just in financial applications. This all just means that blockchain technology will eventually be adopted by national economies, but not as private company based cryptocurrency like Bitcoin and others.

    The more logical investment strategy here should be to research novel blockchain application developments that can be made proprietary and whose products are not threats to national economic interests. Numerous banks, credit card companies – even food companies (source tracing applications) are already working on blockchain applications for their systems and some have already applied for process patents (blockchain technology itself is public) for their uses.

    My personal investment take is that all private cryptocurrencies will be extinct market artifacts with in a few years – if not sooner. Sure, their may be some dead-cat bounces in Bitcoin to trade/gamble on, but no private cryptocurrency that warrants investing in.

  5. By this loose definition… an IPO of a stock that doesn’t pay dividends is a pyramid scheme. I mean you just started a company and now you think you can ask people to buy shares of it? What kind of scam is this? You start with all the shares?! Scam!!

    What makes an IPO a valid investment and Bernie Madoff’s structure a Pyramid scheme is that one presents a real ongoing utility which has value and the other is just a way to rob people under the guise of an investment. What makes it not a scam is that there is utility. If blockchain has no utility at all then yes it is a scam but if it has utility then it is not.

    I have not seen any valid arguments that Bitcoin provides no utility. The fact governments may ban it regardless of utility is no more relevant than calling investment in tobacco companies a scam because governments might outright ban tobacco. Yes, both are possible and when you invest you run that risk but that doesn’t make it a scam.

    • According to Charlie Shrem, JPM has had an internal “Blockchain Working Group” for over two years

      JPM has built its own blockchain platform on Ethereum. The bank has even filed a patent for its own crypto.

      So while Dimon is going all Alec Baldwin on BTC, JPM is actually full-throttle on blockchain…LOL

      As I said before, Dimon’s public meltdown reeks of fear and desperation. As he should be. Banks are just middlemen between the suppliers and consumers of capital. BTC and blockchain technology have the potential to largely diminish our need for banks. Methinks Dimon is actually shakin in his boots and disingenuously dissing the competitive coin.

      • yeah but the problem is, Dimon and China have together sent Bitcoin down by 27% in 5 days. so you know, you can say they’re scared all you want, but the people who should be scared are the people holding Bitcoin who are subject to these tape bombs that send the damn thing tumbling.

        imagine a Bitcoin advocate moving JPM’s shares just by saying something bad about them. couldn’t happen.

        and that’s the difference.

        • You are confusing the issue of volatility with the issue of viability. BTC is indeed volatile but nevertheless viable. In contrast, JPM is neither volatile nor viable. Wait to see which gets the last laugh in the long run.

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