New Bitcoin Mania Has People Making No Sense Again

We’ve reached the point in the latest Bitcoin upswing that I’m obliged to mention the rally.

I almost used the word “begrudgingly,” but that’s not really an accurate way to describe my sentiments towards Bitcoin.

Regular readers are apprised of my position on cryptocurrencies. They are inherently worthless and, in some respects, don’t really “exist,” as it were.

Read more: Bitcoin Is Nothing

But I have to stop myself from using terms that suggest I don’t “want” to talk about Bitcoin or otherwise harbor some kind of disdain for it, because that’s not actually the case. It’s a lack of interest, not any kind of loathing, that makes me hesitate before spilling any digital ink discussing the crypto universe.

That said, for someone who isn’t inclined to be interested, I have an inexplicable knack for anticipating these run-ups. I covered Bitcoin extensively prior to the mania in late 2017/early 2018, and started nibbling at the story again late last month when it traded through $13,000. I didn’t buy it and never will, under any circumstances.

Fast forward a few weeks and now we’re through $19,000  — again. Bitcoin is fast approaching levels seen during the height of the bubble, and seems destined for new records.

Just days ago, when I last broached the subject, the Bitcoin/gold ratio was still below 10. Now it’s easily through that level.

As usual, you can roll out whatever excuse you want when it comes to explaining the surge. Your would-be explanation is virtually guaranteed to be just as plausible as anyone else’s, precisely because none of them are any semblance of rational.

It’s true that wider acceptance has helped, but “wider” is an extremely relative term, and at the end of the day, Bitcoin is always just a pure play on the greater fool theory.

“Bitcoin continued to rally strongly… challenging our previous assessment that overbought positions by momentum traders such as CTAs could potentially trigger profit taking or mean reversion flows over the near term,” JPMorgan said, in a recent note. The bank cited open interest in futures “which continued to rise steeply over the past two weeks pointing to position build up rather than position unwinding.”

The bank applies a similar methodology to what they use for other futures contracts to derive what they call “a more refined Bitcoin futures proxy.” The result is the same: “Instead of seeing mean reversion, our tactical position proxy based on CME futures contracts spiked to a new record high over the past two weeks, pointing to continued net long position build-up in the futures space.”

JPMorgan admits that this might not be the best way to think about what’s driving Bitcoin prices into the stratosphere again. Momentum traders may not play the same kind of role they do in other asset classes.

Instead, the bank points to “the exponential ascent of the Grayscale Bitcoin Trust in recent weeks” which JPMorgan says “suggests other institutional investors who look at Bitcoin as a long-term investment have been playing perhaps a bigger role… than quantitative funds, such as CTAs.” The bank also says retail investors are probably playing an important part in this most recent tulip run.

But, ultimately, what everyone should keep in mind is that this isn’t an “asset.” And it’s not a “currency” either. And it’s not a store of value, because it’s too volatile. So, when you hear folks say things like “If you’re not paying attention to it, you’re kind of out of the loop” (as one PM told Bloomberg Tuesday) just know that’s nonsense. It makes no more sense than saying that someone who doesn’t keep themselves apprised of surging prices for a given collectible is “out of the loop.”

Can you make money in Bitcoin? Sure. Obviously. You can make money in a lot of things. But even that begs the question. Because Bitcoin is supposed to be money.

Before I veer off into the metaphysical (which I’m prone to doing with Bitcoin discussions) let me just steer this quickly back onto the highway and note that belabored attempts to “forecast” where Bitcoin will be a year from now or set “price targets” for it, suggest the people engaged in such activities are delusional.

There’s nothing to base a “forecast” on. Bitcoin will be where it ends up, based on a confluence of factors that, if we’re all being honest, nobody fully understands — or at least not in the sense that we can understand how they interact with each other in the price discovery process at any given time.

And that’s certainly not to say that analysts are very good at forecasting prices for things like equities or bond yields — they’re often not. Rather, it’s just to say that Bitcoin forecasting is guesswork in the truest sense of the term. It’s one thing to be bad at forecasting things that should theoretically be forecastable. It’s another thing entirely to go out and try to forecast something that isn’t amenable to being forecast. There are no “fundamentals.” Bitcoin has no internal rate of return. And when pressed, nobody (I don’t care how sophisticated or steeped in the crypto world they claim to be) can tell you what it actually is.

On that latter point, I’ve endeavored to extract a succinct definition for the better part of five years, and I’ve never received one. Nor have I been able to derive one myself despite trying very, very hard. Bitcoin is everywhere and always defined by what it’s purpose is, or what it’s going to supplant, or the ideals it represents, or how it’s a manifestation of underlying technology that’s going to change the world. And so on, and so forth.

But just as someone can never claim to truly exist in their own right if they define themselves solely by reference to others or derive happiness only through other people, Bitcoin can’t exist until it can be defined by reference to what it is on its own.


14 thoughts on “New Bitcoin Mania Has People Making No Sense Again

  1. Because people are making sense when TSLA is worth half a trillion dollars and the Fed breaks its own charter to buy AAPL bonds…

  2. I too, am not of the “cult of the coin”. I would prefer to spend that money on a ridiculously overpriced Bourbon. At least if the power goes out I can drink it.

  3. Define bitcoin? As Stephen Colbert said sometime back, “An unregulated, imaginary currency invented by an anonymous hacker, backed by the full faith and credit of YouTube. What could go wrong?” If people will believe that Donald Trump is secretly working to dismantle a world-wide ring of cannibalistic, Satan-worshiping pedophiles led by Hilary Clinton and George Soros, and that a high-level US intelligence source working with him would actually post the play-by-play on some low-level, backwater internet discussion board, then believing in bitcoin almost makes sense.

  4. I am a computer person with a background in cryptography and networking. Let me try:

    Bitcoin is a distributed, public, non-repudiatable ledger whose unit of exchange inflates at a fixed rate as enforced by the laws of information theory.

    That wasn’t so hard, was it? Although I see eye-to-eye with H about cryptocurrency as an investment vehicle or as a currency, setting judgement aside, the technology itself is simple to grasp.

    What trips most people up is that BTC is supposed to “be money,” but tries to achieve that by “being the bank,” only without a central authority (or much of any authority, other than consensus among the participating nodes – and yes, the tyranny of the majority applies here. It’s one of the more well-known attacks on BTC.)

    Blockchains do have a future in applications where those properties (transparency, integrity, non-repudiatability) are required among a large number of parties with minimal trust in each other. Money, however, is not one of those applications.

        1. @Shelden — laws of information theory is a “hand wavy” way of stating that instead of trusting a bank to do a transaction you can trust 1,000,000 randomly selected machines to do the transaction.

    1. I really would like H acknowledging he just got a definition of what Bitcoin is.

      As to the fact that people like me don’t care all that much and just use “liquid gold” as a shorthand? well, it’s b/c what it is is less important than what it does.

      That said, agreed that ‘fundamental’ analysis in the sense of DCF is pointless/nonsensical. You can try supply and demand by taking into account miners and their own costs and what BTC prices/demand do to them. Technical analysis is always possible but… err…

  5. A few people have posted here and explained what bitcoin and blockchain is very well already. I just want to add that bitcoin does exist in the same sense that any software exists. Fundamentally, it’s software, made of lines of code, just like every apps in your smartphone app store. It’s like this website and forum we are using, it’s like mac OS or Windows, or any accounting software or game that you might buy. It does have the additional property of scarcity and allows ownership. What the price should be or whether it has any value at all, is simply up to the market.

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