Column: The latest bitcoin plunge is making its fans loopy
Back in September 2017, when the price of bitcoin first broke the $5,000 barrier, I declared the cryptocurrency “still a dumb investment.” Ever since then, as the price moved past $10,000 and approached $20,000, bitcoin fanboyz dredged up the piece as a reproach to my powers of prediction.
“It’s one thing to be a naysayer on bitcoin … and say it once in a major publication. It’s another to get called out and double down on your opinion … in the LA Times,” wrote a critic in Reddit’s r/bitcoin community. (Warning: Link includes profanity.) “Just stay away from all those LA Times readers who took your advice and didn’t buy bitcoin at $830 or $5,000.” That was on Jan. 5, when bitcoin was trading, according to Coinbase, at about $15,000.
Now the price of bitcoin has fallen below $3,700. So what about it, guys?
This isn’t to say that bitcoin might not move back up, even retest the peak it reached last December, or go even higher. But bitcoin’s recent plunge, which has shaved nearly 80% from its peak price, does provide another opportunity to remind readers what this thing is, and isn’t.
It’s one thing to be a naysayer on bitcoin ... and say it once in a major publication. It’s another to get called out and double down on your opinion.
— Member of social media site Reddit’s r/bitcoin community, January 2017
Let me start by saying that if you bought bitcoin at $830 and hung on tight, congratulations — you’ve more than quadrupled your money. (That price was hit in December 2013 and again in December 2016.) But you’re a member of a very small cadre, probably a bitcoin insider, since both dates preceded the frenzied period, starting in late 2017.
My sympathies are entirely with those who got sucked in, buying at $10,000 or higher because they heard that bitcoin was the coming thing, the elevator doors were closing at the ground floor and the only direction from here was up.
In that era, we started to hear reports of grandmas and grandpas looking to cash in on the action and families debating bitcoin over the Thanksgiving turkey and people mortgaging their homes and maxing out their credit cards to take a flier on bitcoin. Manias like that always end in tears.
As we’ve written before, bitcoin is pitched by its promoters as both an alternative currency — alternative to the “fiat” currencies backed by governments and their central banks, like dollars and euros and Chinese yuan — and as an investment vehicle. The truth is that it hasn’t worked well in either guise.
A functioning monetary system must comprise three features — a unit of account that allows price comparisons for goods and services, a medium of exchange accepted as payment by buyers and sellers alike, and a store of value that remains stable over time. To put it another way, the money in your bank account, wallet or mattress shouldn’t fluctuate widely or unpredictably.
In a paper issued in June, the Swiss-based Bank for International Settlements (often considered the central bank for all central banks) asserted that bitcoin and other such virtual currencies couldn’t deliver on any of those features. The decentralized bitcoin trading systems couldn’t enforce their ostensible safeguards against counterfeiting. No trusted counter-party stood behind bitcoin transactions — the parties essentially were on their own.
Bitcoins possess value only as long as the expectation exists “that they will continue to be accepted by others,” BIS said. In this they resemble “commodity money” such as salt or rice, except that unlike those commodities bitcoin has no intrinsic value — you can’t cook or eat it. Unlike gold, bitcoin isn’t widely accepted as a store of value, and doesn’t even possess gold’s underlying value as an industrial metal or a component of jewelry.
Bitcoin faithful describe it as a frictionless currency that can be traded without interference from bankers or government regulators. In truth, bitcoin trading is a cumbersome process. For bitcoin to verify transactions on the scale of Visa or Mastercard systems today would require supercomputers and “communication volumes [that] could bring the internet to a halt,” BIS observed. Visa handled 3,526 transactions per second and Mastercard handled 2,061 in 2017, BIS calculated. Bitcoin trading firms struggled to handle 3.3. The result was longer delays in completing a bitcoin trade, and ever larger fees to get it done.
When it comes to bitcoin’s virtues as an investment asset, the recent charts tell the story. The price has come down by roughly 80% from its peak in just under a year, disemboweling anyone who bought during the frenzy. It’s true that plunges on that scale aren’t unheard of in other investment markets, but they tend to be once-a-lifetime events that leave a lasting pall. The worst crash in the U.S. stock market was the roughly 90% plunge registered by the Dow Jones industrial average in 1929-1932; the Dow didn’t return to its pre-crash level until late 1954.
By that standard, the bitcoin crash should all but exterminate the currency. That won’t happen, because its promoters are still finding rationales for its survival. Some say, sure it’s done badly, but it’s still better than other cryptocurrencies and in fact has even increased its share of that market — which is a bit like claiming the largest wedge of an inedible pie.
For others, the intrinsic value of bitcoin has been ideological, in that they see it as a counterweight against government-backed currencies and the eventual victor in that battle, as national boundaries and their economic power wither away. If you’re a believer in that narrative, nothing as paltry as an 80% crash will shake your confidence.
And some point to the lively interest by investment banks and commodity exchanges in offering bitcoin instruments to the public. What’s missed in this argument is that these offerings typically are designed to allow their backers to profit from the volume of cryptocurrency trading, independent of the currencies’ value.
That’s the old Wall Street game — position yourself at the point where an asset changes hands, and skim a bit off the top of every transaction. It’s a reminder of the old joke in which a stockbroker shows a friend all the luxuries he’s accumulated from his clients’ commissions over his career — houses, cars, yachts — until the friend asks, “But where are the customers’ yachts?”