Even as the world was still desperately trying to figure out what it is, Bitcoin was inducted into the Wall Street hype factory today when a Bank of America analyst touted it – albeit couched in terms like “believe,” “can,” “may,” or “potential,” – as the best thing since sliced bread:
“We believe Bitcoin can become a major means of payment for e-commerce and may emerge as serious competitor to traditional money transfer providers. As a medium of exchange, Bitcoin has clear potential for growth, in our view.”
And hedge funds have jumped into the fray. Not because there is any kind of underlying value – who cares, these days – but because the upper limit on price is infinity, unrestrained by any metric of reality. Getting there, if enough big money is chasing it, might just be possible. Bailing out might be somewhat of a problemita, but surely, there’d be a throng of retail investors who suddenly see the light and don’t want to miss out on the Bitcoin bubble. It would be their big chance to make up for what they’d missed out on by not investing years ago in what has become a phenomenal stock market bubble.
How do we know Bitcoin is a bubble? Alan Greenspan, the architect of the greatest stock market bubble in history and, after it collapsed, the greatest credit bubble in history along with its various sub-bubbles, like housing, all of which collapsed, he who denied the existence of these bubbles even as he was inflating them, and who later said that you can’t see bubbles, though everyone had seen them, and that the Fed couldn’t do anything about them, he who’d inexplicably been called “maestro,” said, “It’s a bubble.”
“You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is,” he told Bloomberg TV; and he admitted he didn’t understand who or what was “backing” it. Both of which are of course the crucial benefits of Bitcoin, that it has no intrinsic value, and that no one and nothing are backing it.
There was however, once, a moment of truth in Greenspan’s pronouncement: in 1996, seventeen years ago exactly to the day, when stock markets were running red hot, but hadn’t yet reached the insane levels of 1999 and early 2000, Greenspan as Fed Chairman, uttered the two infamous words, “irrational exuberance,” musing about “unduly escalated asset values, which then become subject to unexpected and prolonged contractions.”
He quickly learned a couple of lessons: One, people hate you when you poke holes in their sacred bubbles; and two, bubbles can last a lot longer than anyone expects, and can become far more irrationally exuberant than anyone can rationally explain, and throughout that time, you will be dead wrong, and you will be ridiculed by everyone and his dog. When it all blew up from 2000 to 2002, Greenspan was proven correct, for once, but by that time he was already busy engineering the next bubble.
After Greenspan failed to shake up the Bitcoin world, the Bank of France gave it a shot. Once upon a time, when it could still do so, it excelled in outright monetization of government debt and deficits, without breaking a sweat. When devaluation and inflation made the numbers on bank notes awkwardly large, it would revalue the franc, most recently in 1960, when 100 old francs become 1 new franc, like a 100-to-1 reverse stock split. In the 40 years until the euro took over, that one new franc lost another 86% of its value.
So today, that former guardian of the franc swatted, albeit ineffectually, at Bitcoin. It did not meet “the definition of a means of payment under the Monetary and Financial Code, and more particularly the definition of electronic money,” the Bank of France explained in its report, in part because it “is not accompanied by a legal guarantee of repayment at any time at par value.”
Whatever Bitcoin is, it’s of “highly speculative nature” and posed “a clear financial risk for those that hold it.” Much like Greenspan, it couldn’t see the “underlying asset.” Plus, speculators could lose everything due to theft and hackers, without having any legal recourse, and the entire “system” could “collapse at any moment if investors want to unwind their positions but find themselves holding portfolios that have become illiquid.”
Simultaneously, in a coordinated double-pronged attack, or by sheer coincidence, the People’s Bank of China and various ministries and agencies issued a notice that fretted about protecting “financial stability” and “the status of the renminbi as the statutory currency,” and about the “risks of money laundering.” Or more likely, the risks of capital flight as people might use Bitcoin to get around China’s capital controls. Hence, financial institutions and payment companies could not price anything in Bitcoin, buy and sell it, or insure Bitcoin-linked products.
Bitcoin was “not a currency in the real meaning of the word,” the notice said, but was rather a “virtual commodity” that didn’t have the “same legal status of a currency.” It could not, and should not, be circulated or used in the marketplace as a currency, the notice said.
Virtual commodity! Um, a commodity that doesn’t exist. Within a couple of hours of these propitious words, Bitcoin had plunged over 25% from $1,220 to below $900.
In the midst of all this mayhem, someone used that virtual commodity that doesn’t exist to buy another super-hyped entity, though a more functional one, a Tesla S. If a deal was struck for $120,000 for a loaded model when the Bitcoin traded for $1,200, the buyer would have agreed to pay 100 Bitcoins. Unbeknownst to those shaking hands, the PBOC was posting its notice. A couple of hours later – the time required to do the paperwork, wait around, drink dealership coffee, talk to F&I, meet the manager, etc. – the deal would have been executed and these Bitcoins would have been transferred. By then, they’d be worth $900 each – with the buyer in effect paying $90,000. One heck of a deal for a loaded Tesla S!
And for the dealership? A $30,000 loss. Well-spent money for an amazingly effective publicity stunt. But for crying out loud, you can’t do business that way on a daily basis; it turns every purchase and every sale into a hair-raising gamble.
So, four years after its creation, folks are still arguing over what bitcoin is: “investment opportunity of the millennium,” “part of a societal revolution,” a security, a currency, a casino token? Whatever. But US regulators now have strategy for killing it as a currency. Read…. Use Bitcoin As A Currency, Get Wiped Out (The Government Likes It That Way)
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Many experts agree that metal roofs are a great defense against wildfires. Click here or call 1-800-543-8938 for details from our sponsor, the Classic Metal Roofing folks.
Classic Metal Roofing Systems, the leader in fire safe roofing for residential applications, manufactures products that are 1/20 the weight of most tile products and eligible for Class A, B, or C fire ratings as determined by roof preparation.