UBS: Bitcoin Selloff Was Worse Than Weimar, Crypto Will ‘Never’ Be True Currency

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 speculating investing.

Bitcoin

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.

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21 thoughts on “UBS: Bitcoin Selloff Was Worse Than Weimar, Crypto Will ‘Never’ Be True Currency

  1. stay mad, no-coiner. It’ll be a bubble at 6k, 10k, 20k, 50k, and 100k also. It’ll be a bubble when people realize they don’t have to lose money to inflation every year by letting it sit in a bank.

    You can invest in your index funds of companies that you believe in. I’ll invest in blockchain technology. We’ll see who wins and who ends up crying about how it’s not fair.

  2. Pure bartering would be total chaos and impossible in many situations…..one person may think his donkey is worth twice the other guy’s…..and the transaction would not take place….
    Evaluating the store of value to everyone’s satisfaction needs a common denominator…..expediency is necessary….

    The perceived value of “Faith “in each currency “floats” everyday…..as does Bitcoin’s
    I personally have more faith in the US govt than the creators of Bitcoin……

  3. If you aren’t aware that most investors are cognitvely impared you are an idiot. If you aren’t riding along on house money right now you are a bigger idiot.

  4. Good article. Agree with your perspectives. I keep waiting for China or Russia to execute its first Bitcoin or other cryptocurrency users. Cryptocurrency users that they have been “convicted” of “attempting to destabilize and or overthrow the respective countries central government.” Its one thing to pay lip service to cryptocurrency regulation as a threat to central banks, it’s quite another to imprison and or execute cryptocurrency users – and its impacts on cryptocurrency exchanges.

    I also think it is worth noting that all digital assets and especially cryptocurrencies are based on an absolute assumption that the internet is forever. That assumption lies on a collision course with daily events. For example – almost daily claims by N. Korea that they will make high altitude nuclear tests. The global Internet’s (and cryptocurrencies’ greatest physical/electronic vulnerability) comes from massive EMP events – either natural (From cyclical solar coronal discharges – solar flares.) and or man made EMP weapons (Weapons created with… wait for it… high altitude nuclear detonations.) – you know, just like the ones N. Korea is working on now.

    In the modern world – EMP weapons are particularly attractive to aggressors because they don’t destroy physical assets (buildings, roads, food, water, work force etc.) of the country attacked, just their mostly unshielded digitally controlled electrical equipment, critical communications, unshielded weapon guidance systems and resource distributions systems and making a subsequent takeover/invasion that much easier than previous warfare strategies that involve massive infrastructure and population destruction in order to conquer (i.e. WWII).

    Storing digital assets in digital record (blockchain or otherwise) systems that have no corresponding immutable physical record, or durable and utilitarian physical collateral assets – almost guarantees their future loss and the annihilation of those digital assets. An EMP initiated collapse of the Internet (regional or global) and related digital server and databases means digital assets – even if digital records remain intact – they would be difficult to impossible to access.

    All that said, Bitcoin and perhaps other cryptocurrencies will continue to attract the fleece-able sheep traders – because it has BitCoin undeniably has been a hell’va trend trade – but that is all that it was. IMO – investing in non-crypto currency applications of blockchain technology such as materials and food source record and tracking applications is a far more probable, durable and successful long term crypto tech investment – though far less volatile than Bitcoin.

  5. Bla-bla-bla. Winners just trade the charts and don’t care about the BS “fundamentals” that the suits spin.

    But keep believing in the invincibility of government (even though history proves nothing could be more wrong). I say great because we need a sucker on the other, losing side of the believe-in-government trade!

    The distributed guys (blockchain currency) will win the currency war over big centralized government, just like the distributed guys (mobile cloud computing) won the I/T war over big centralized computing. As it should be (unless you’re authoritarian).

    • IRB – if the flimsy government(s) (that you seem to think crypto currency protects you from) actually go down – how long does the internet continue to operate and be maintained by people being paid under that government’s fiat currency. Do they stay up and running on their faith in cryptocurrency? How long does a cryptocurrency stay up and accessible after a national economy collapses and local cryptocurrency markets have no fiat currency base to exchange and convert to and or to have and continue limited payment options with cryptocurrency?

      Do Bitcoin employees get paid in Bitcoin? If they did they would have to immediately convert it into fiat currency to have broad product market access. While I agree that governments may well adopt blockchain technology based digital fiat currencies in the near future, how does that make your Bitcoin or Litecoin, Ethereum – or another cryptocurrency – more valuable? In fact, if national treasuries and central banks adopt a national blockchain fiat currency – who needs the private ones? There are no patents for blockchain technology and certainly none belonging to any cryptocurrency. What little IP asset value there is – is based on patentable applications of blockchain technology, but not block chain itself. Consequently, the better and more proximate and scalable applications for block chain are – not likely to be private cryptocurrencies, but rather by those applications that have the ability to scale to far greater levels and without competition from treasuries and central bank – who will win any battle against cryptocurrency – even if it is simply to join them (thereby eliminate legal cryptocurrency demand) and employ blockchain in national currency evolution.

      • First, when I posted “bla bla bla”, that was in reference to the article, not your post which just happened to immediately precede my post.

        I don’t feel like responding but I will briefly because your typically sensible, thoughtful posts (like on obamacare and above) deserve that courtesy.

        Anyway I merely contend that crypto won’t go to zero like H always does (and I contended previously that the charts were saying new highs were coming). I never asserted that BTC will become a common medium of exchange; I don’t know about that (possibly, eventually?); obviously that’s a long way off and it’s far too volatile yet.

        But no doubt the payments environment will evolve to a different framework than it is today, though I’ve no idea what. History shows that people long transacted before without fiat and they shall again. Historically, governments have routinely canceled or replaced fiat. History also shows that people in even great civilizations have eventually had to refuse their failing sovereign currency and turned to other things like rice, seashells, coins issued elsewhere, private banknotes, or commodities including gold & silver as money to transact. Even when government decrees against it, as typically happens during its final desperate throes. And that’s the likely future of USD, which will probably go to zero while bitcoin persists, IMHO and in the opinion of Bill Gates (reference his assertion in February about bitcoin’s bright future and decision to move a portion of his wealth into it).

        • I think your perception of the USD going to zero and the resulting economy – including to operate utilities, basic telecommunications – and the internet without US currency isn’t well considered. This is the ongoing weakness for all cryptocurrency – they are even more dependent on a stable economy and currency than other forms of exchange (assuming use and acceptance rates for cryptocurrency is at the current or even near current minimal levels). If a country loses its economic ability to pay employees, operating costs, etc. the entire system crashes – indefinitely. We just haven’t seen this in modern times. Again, how do you think BitCoin mining and transactions are doing right now in Puerto Rico – or even in lots of E. Texas. The physical disaster of a hurricane is not less damaging to a national utility and communication system – than the inability of companies to pay salaries for a prolonged period.

          • USD will go to zero as all government-issued currencies have gone to zero throughout history given enough time, usually within some decades (or less) but occasionally not for a few centuries. From an historical perspective, the dollar ‘s life cycle is now quite mature.

            So I’d bet anyone (in bitcoin, not dollars, of couse) that USD will go to zero in my lifetime. The cool thing is if I lose the bet, I will be dead HA-HA.

            Regarding your examples of crypto being vulnerable to a natural disaster or other catastrophe, in fact it’s quite the opposite. Because crypto is a *distributed* system, it does not have a single point of failure like the USD and other gov’t fiat. The entire US could go offline in a disaster or a Kim EMP strike or something, and although crypto could be non-functional in the US as a result, crypto would continue to be operational and usable somewhere else. An American could get out of the US with his crypto wealth intact, unencumbered and useable elsewhere in the world (provided the entire world didn’t go off). In contrast, the dollar has a single point of failure, namely the US government, which is far more vulnerable to failure than is the entirety of the whole.

            Further, because fiat is increasingly an electronic currency (like 99% of dollar value is transacted electronically now, and physical cash is only a tiny fraction of the money supply), USD is almost as vulnerable as crypto to a massive electronic failure. If the gird fails catastrophically, the crypto won’t work in the affected area but neither will the ATM’s, banks, or credit/debit cards. Cash will, but very little cash exists anymore, and governments are moving toward cashless as a matter of policy in their hunt for taxes etc. Should the grid go out across the US, both your electronic USD and crypto won’t help you in the US, but the difference is, your crypto will save your ass abroad where the dollar won’t. Fiat is not legal tender outside its country of issue, and all fiat transactions/transfers must clear through its home country. Not so with crypto!.. So the distributed guys WIN again!

            Finally, the claim by some that government is going to shutdown crypto rings hollow. Its distributed architecture is similar, but better, than bit torrent, which government has been trying to shutdown for 15 years without success… lol.

          • i do wish you the best of luck with it. sincerely. i just think you are underestimating what government can and can’t do. it is never – ever – a good idea to dare the government to do something. it is even less of a good idea to dare the government to do something and then bet money that they won’t call your bluff.

          • No dares and no underestimating what the government fascists will try to do. It’s just that to send BTC to zero, I think that government will need the cooperation of every other government to kill it, including an agreement among all governments globally to ban it and then actually spend scare resources to enforce that ban. Not going to happen. Or not going to happen effectively enough… and if they try, BTC will continue under the radar as most things do that people want, until the worm eventually turns as it always does, the government mood shifts and the stuff comes back strong again. It’s called a “cycle”.

          • By the way, me saying USD will go to zero isn’t the same as saying there won’t be any US currency. Historically, currencies come and go. Could be a result of debt repudiation, hyperinflation, revolution, war, etc.

            You know that the IMF and much of the Davos elite fancy replacing national currencies with one world currency? It’s actually gaining some traction and also a number of fools in the US are sympathetic to it too as they’re apparently blind to how the Euro is (not) working out. Anything can happen in a big crisis like the one that lies ahead, the crisis that “printing press” Powell and Yellen say won’t happen in our lifetime and are ill-prepared & incapable of handling. So, BRACE!

      • They’re different animals, at least to a market technician. But don’t believe me, instead see Jim Simons, who ran about the most successful fund of all time. Renaissance completely disregarded all fundamental considerations and went 100% systematic technical. He explains why and the difference in his talk about his life’s experience.

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