Make-believe space money skyrocketed above $5,800 overnight in a continuation of a rally based on God only knows what and underpinned by absolutely nothing other than FOMO and the “Greater Fool” theory of
If anyone tells you they can “explain” that chart and their explanation doesn’t have the word “tulip” in it somewhere, they are lying to you. It’s just that simple.
There’s an argument to be made that the big banks will effectively be forced to get in on this nonsense simply because with volatility on assets that are some semblance of real glued to the flatline, everyone needs to find something that actually moves in order to generate revenue.
And that’s the irony here. Suppressed cross-asset vol. can be traced back to central banks printing paper money that by all rights shouldn’t be anymore “real” than cryptocurrencies and now, by virtue of the environment policymakers have created, the Goldmans and JPMorgans of the world are going to have to turn to Bitcoin in order to make trading great again. The second layer of irony is that cryptocurrencies will ultimately collapse precisely because the people who have a monopoly on printing fake stores of value will be loathe to give up that monopoly.
In the meantime, fortunes will be made by those who ride the crypto wave and tears will be shed by the last idiots left holding the bag when the whole thing collapses on itself. Virtually all of the ICOs will go bust (that should go without saying).
All of this has put banks in the weird position of having to explain why this can never work in the end, even as upper management tries to figure out how to profit from it between now and whenever the end finally comes. Last month JPMorgan’s own “Gandalf” weighed in with the following:
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.
On Friday, it’s UBS’ turn. Here are the two reasons why UBS says cryptocurrencies will never become true currencies:
The first and most important role of a currency is to act as a widely accepted medium of exchange. Currencies only have value when they can buy things that are useful. In this regard, government backed currencies carry a huge advantage. Governments set taxes, and tax is the largest single payment in almost any economy. In developed economies over a third of all economic activity that takes place in a year is paid to the government as tax. As such, people will always demand government-backed currencies because they are useful for paying taxes.
The second role of a currency is to act as a store of value. People need to believe that what their cash can buy today, their cash will buy tomorrow. In order to maintain the store of value, central banks take a lot of trouble to keep a currency’s value roughly stable (i.e. control inflation). This is done by making sure that the supply of currency generally matches the demand for a currency. If the balance is maintained the currency will broadly keep its store of value. An individual crypto-currency cannot achieve this balance, which explains their volatility. Crypto-currency supply cannot go down. A fall in demand for a specific crypto-currency will therefore cause that crypto-currency’s value to collapse as supply outstrips demand. For context, Bitcoin’s collapse in value in early September was worse than the collapse in the value of the German mark at the start of the Weimar hyperinflation.
But the real punchline comes when UBS says precisely what we’ve been arguing for months about the difference between Bitcoin, cryptocurrencies and gold on one hand and government-backed printing press money on the other hand. To wit:
Currencies in themselves have no natural value – gold, for instance, is naturally as worthless as paper, sea shells, or wooden sticks (all of which have been used as currencies). Currencies only have value when they can buy things that are useful.
Exactly. And on that note, we’ll leave you with an excerpt from a piece we ran last month on this:
There’s a reason why gold fanatics and Bitcoin cheerleaders tend to demonstrate an aversion to governments and central banks and I’ll tell you what that reason is. The reason is because it grates on those folks’ nerves that a centralized authority can print pieces of paper that have value simply because the government says they have value. It’s true that printing pieces of paper out of thin air is nonsense and that it should, in the end, lead to hyperinflation. It’s also true that when the Treasury prints I.O.U.s and sells them to the people across the street at the Fed (with one degree of separation), that the government is engaged in a massive, circular, self-referential ponzi scheme that should by all accounts be doomed to collapse on itself. The reason this nonsense “works” is precisely because the government says it’s going to work and that drives some people absolutely crazy.
The more money gets printed out of thin air without causing hyperinflation and the longer the ponzi scheme persists without triggering an epic collapse of the system, the crazier the gold fanatics and, more recently, the Bitcoin crowd gets. The government’s power to legitimize something profoundly illegitimate is an affront to a lot of people and so they cling to myths about the “inherent” value of a yellow metal or the “revolutionary” characteristics of a make-believe electronic payment system.
It’s true that eventually currencies fail. It’s true that empires eventually collapse. But in the meantime, railing against the system by regaling yourself and others with fairy tales about the magical properties of what, in the final analysis, are just twinkling paperweights and digital exchanges that will eventually be shuttered by government decree, is tantamount to tilting at windmills.
On top of that, it’s by no means clear that human beings will always be entranced by gold. It could very well be that when society plunges into the next dark age, people won’t be fascinated by gold anymore. Maybe people decide “yellow” isn’t their thing and instead choose a different colored scarce object as a store of value .
So my message to you on Monday goes something like this. If your plans for this evening include riding a horse to a local farm and transacting with the farmer for produce using golden nuggets pulled from your deer-hide pouch or else by promising to send him a fraction of a Bitcoin in exchange for some bushels of corn, then by all means, tell us all about the virtues of the barter system and about how governments are on the verge of collapsing under the weight of their own fiat fantasies.
But if your evening plans involve buying your corn from Jeff Bezos at Whole Foods and paying with your debit card, then please, spare me your disingenuous lecture about globalism and worthless dollars.