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Cryptocurrencies have too many risks and no redeeming social value

Posted by John T. Reed on

WSJ yesterday tried to do a sober article on “How to Dip a Toe Into Cryptocurrency.”
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It is a useful starting point for a basic discussion of what investments are. I have spent my life on this since Fall of my senior year in college.
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One super important aspect if you talk to real understanders of investment is diversification. This is bedrock.
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Basically, the are a bunch of different investments and a bunch of different risks. If you have a diverse investments, chances are some of them will do well or better in a downturn of one or more of the risks.
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So get some bitcoin for that purpose? No. Other investments have a history of movement in relation to various risks going south. For example, inflation risk is pretty easy when it comes to assets that suffer and those that do not or even profit from it.
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In inflation, dollar-denominated assets are disastrous; non-dollar denominated assets retain their purchasing power. If you combine dollar-denominated debt that you owe with non-dollar denominated assets, you PROFIT from inflation in real (after adjustment for inflation) terms.
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So what do bitcoin and other cryptocurrencies do in inflation? How would we know. They are twelve years old. There has been no USD inflation in that period. And what recent uptick in USD inflation we HAVE had has been accompanied by bitcoin going up to $64,000 and down to $32,000. WTF?
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Some say it is working great in Venezuela. Apparently not. 20% of the people there fled the country. The average adult there has lost 24 pounds. If bitcoin was working there, neither of those would be true.
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Twelve years starting AFTER the sub-prime crisis has revealed bitcoin value to be essentially a random number. It is only correlated to pop culture like Elon Musk and threatened government action against cryptocurrency.
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So you cannot honestly or logically say “I am better off owning bitcoin” the way you can say that regarding, say, nickels the melt value of which profit from inflation and the face value of which protects you from deflation/depression.
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Then there are the risks. I have identified 14 risks of investing in real estate like your principal residence and rental properties that you own and manage. When you look at stocks you lose some of the 14, but pick up others. Ditto owning your own business, commodities, private equity, and so on. The total number of investment risks for all investments is probably around two dozen.
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One is litigation. In everything but cryptocurrencies, you can see how the common law and statutes and courts have dealt with litigation about stocks, bonds, commodities over CENTURIES. Regarding cryptocurrencies, we have no clue how common law and future legislatures and executives and courts will decide litigated conflicts. That alone totally disqualifies cryptocurrencies as a legitimate investment.
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Another risk is political risk. That is the risk that the government will issue a regulation or law our court decision that causes the value of the asset to plummet.
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Does cryptocurrency have political risk? That is about the only characteristic you can say it DOES have. Governments around the world are going after it in one way or another or considering going after it and talking about going after it.
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Cryptocurrencies are being widely used to commit crimes like tax evasion and extortion. That guarantees negative government reaction.
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Exchange risk is another. You do NOT have this regarding buying your principal residence. But if you buy and sell through an exchange like the NYSE or Binance, there is risk that the exchange may steal or blunder your money away. NYSE has been around since 1792. I have not studied its reliability but it seems pretty solid.
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Binance, which handles trades of cryptocurrencies? It has no headquarters anywhere on earth. The Chinese founder says headquarters are out of date. They require disputes to be resolved in a Hong Kong arbitration operation. It has been around—although we cannot know where—for four years.
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Fidelity and Schwab refuse to handle cryptocurrency trades. You have to go through Muhammed’s Pizza Parlor, Tattooing, and Life Savings Custodial Services or some such.
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The Wall Street Journal article did something that is near universal in investment discussions with those who claim to be ultra experts. I hate it. That is they put the basic decision on the shoulder of the consumer about how much “exposure” they want and how much they can afford to lose and all that bulls***.
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I just discussed some risks. The tight-assed experts refuse to do that. They put that on laymen. That is flat out dishonest. Risk management is a sophisticated, technical academic discipline.
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These financial advisors are like surgeons who put the risk analysis on the patient, if such surgeons existed. As far as I know they do not. Surgeons are supposed to understand the risks and explain them to you, and they do.
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Financial advisors what your fees or order flow revenue, but they do not want to earn them. They will sell you “investments” that could devastate you and then duck all responsibility if they do. It is a BS profession. And cryptocurrency is not ready for prime time and may never be.
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Social purpose is an issue I rarely see discussed. Stocks, bonds, and commodities trades do not exist for the purpose of letting you gamble. Lottery tickets and casino gambling exist for that purpose. They used to be illegal. They are addictive. They have a negative expected value.
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Although trading in stocks, bonds, and commodities feels like gambling, the transactions, at bottom, have economic substance and further legitimate purposes. Stocks exist to let corporations sell equity to raise money for operations and investments. Bonds do the same although they do not give up equity, but are a hard obligation to pay interest and principal, not an optional one like paying dividends.
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Commodities need futures contracts to hedge risks. For example, General Mills needs wheat to make Wheaties. They are rightly concerned about a big increase in wheat prices. Similarly, wheat farmers are concerned about a decline in wheat prices between when they plant the crop and when they harvest it.
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Futures markets let General Mills and the farmers lock in an acceptable-to-each price before the farmer plants the crop.
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Contrast that to cryptocurrencies. They have no economic substance. There are no farmers or factory workers relying on the asset trading. If there is a problem in cryptocurrency, no politician need defend it. Its only purpose is evading laws and gambling. It serves no good purpose.

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