Tuesday, January 9, 2018

Bitcoin is bullshit, Part XI: When will the bitcoin bubble burst?

When I left off with Part X (damn, this thing just keeps going...), I pointed out the basic problem of pricing bitcoin.  How much of the economy is bitcoin supposed to cover, and given the value of those assets, what is the conversion rate between bitcoin and dollars?  I used this as a lead-in question for the future of bitcoin, and it is actually the perfect question for the issue of when the bubble bursts because the answer is... when people start seriously asking that question.

Look, bitcoin is in a bubble.  Period.  Do you know what "Dogecoin" is?  It's a fucking joke.  Literally, a joke.  Some creative prankster created it to make fun of bitcoin.  And people are fucking buying it!  Companies see their stock prices go up when they put the word, "blockchain," in their titles.  This is nuts.

Here's the thing about a bubble, though.  It is possible to make a shitload of money within a bubble.  Ponzi schemes work for everyone except that last level, where people get screwed, and yes, bitcoin is a Ponzi scheme.

Here's how a Ponzi scheme works.  You join my organization, and pay a fee to me.  Then you bring in a couple more people, who pay fees to you, some of which get kicked back up to me.  Those people find more people to pay fees to them, portions of which get kicked back up at each level.  That's a pyramid scheme.  There is usually some product theoretically being sold by whoever is at the bottom level, but that's not how you make any money because of the fee structure.  If you are at the bottom level, you are paying so much in fees and required purchases that whatever you sell can't compensate for the fees you are paying.  Instead, what you need to do is bring in more people to pay fees to you.  Of course, there is a limit to how many levels of people can be brought it.  Just do the math on that.  If everyone brings in three people, then if I'm at the top, the next level has three, then nine, then 27, then 81, then 243, then 729...  At six levels, you're over 1000 people.  I'm rich, and the bottom level is fucked.

The problem with the Ponzi scheme is that the product is pointless.  It's all about the membership fees that get kicked up to the top.  Bitcoin doesn't work as currency.  Why?  Like I keep saying, it is intrinsically inefficient.  Since you will never be able to pay your taxes with it, any legal transaction involving bitcoin involves unnecessary transaction costs because of pointless currency conversions.  People buying bitcoin aren't buying it to use as currency.  They are buying it to sell it to someone else, at a higher price.  That's how market speculation works.  That can't keep going forever any more than multi-level marketing schemes can keep bringing in more "marketers" forever.  In the pyramid scheme, whoever is caught at the bottom level goes broke paying fees to everyone at the higher levels.  That's how the people at the higher levels get rich.

In a bubble, the people who get rich are the ones who sell worthless assets to dupes who think they are going to be able to do the same, but find themselves the last ones to buy at the inflated prices.

How can you tell if you are the one who is going to get screwed?

You... can't.

That's why you shouldn't do it.  You should assume that you are going to get screwed.  Never participate in a "multi-level marketing" thing because you should assume you are going to be at the bottom.  Statistically, that is the level with the highest number of people, so ceteris paribus, you should assume you are most likely to find yourself there.

Also, it's a fucking scam.

Should you buy an asset that has no clear value, hoping to turn around and sell it?

What, are you stupid?

No.  You might get lucky.  You might also get royally fucked.  You should invest in a diversified portfolio, like an S&P index fund, which will grow at around 8-10% per year, long term average.

Yes, people make money in a pyramid scheme.  People also lose money in a pyramid scheme.  People make money in an asset bubble.  People also lose money in an asset bubble.

During the tech boom/tech bubble of the late 1990s/early 2000s, there were some tech companies that did absolutely jack fucking shit.  People bought their stock anyway.  The relatively-smarter ones sold that worthless stock as soon as possible, took the money and ran.  The thing is... those companies actually had some assets.  They had some, like, computers 'n shit.  Business plans?  Not so much.  But, at least they had something.  Then, people looked at what they did.  Stock prices eventually started to reflect valuation, and they collapsed.

This is a bubble.  Eventually, bitcoin prices will reflect whatever portion of the economy bitcoin transactions will cover.  At that point... Pop!

Predicting when bubbles burst?  Nobody knows how to do that.  The odd thing about bitcoin is that every time bitcoin drops rapidly in price, losing half of its value in a week or so, it comes back.

Why?  What separates bitcoin from the tech bubble or the housing bubble or any other stupid asset bubble, or any conventional Ponzi scheme?

Ideology.  I've written a lot about this so far, and I will keep writing about this.  There is a core of people ideologically committed to the concept of a cryptocurrency in a way that there wasn't for any specific tech company that just had no reason for existing back in the late 1990s/early 2000s.  Cryptocurrencies aren't going to die.  Whether bitcoin is replaced, or what... I won't hazard a guess, but the extent to which this asset bubble is attached to ideology makes it unique.  And that deserves more elaboration...

More to come, I guess...

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