Tuesday, 20 September 2022 — Gold Coast, Australia

By Vern Gowdie Editor, The Daily Reckoning Australia

[9 min read]

Dear Reader,

Opinions are divided.

Are cryptos the future or a fraud?

Do cryptos have a genuine financial value?

The answer to that questions is…‘it depends’.

If you are into porn, illicit drugs, ransomware, money laundering, and/or running Ponzi schemes, then cryptos are an extremely valuable tool of trade.

However, if you think this is an investment in the future of money, you’re likely to be disappointed…and a lot poorer.

This is an extract from a refreshingly honest CoinGeek article on (the now bankrupt) Three Arrows Capital operating as a Ponzi scheme (emphasis added):

‘In reality, serious institutions aren’t interested in buying and holding tokens like BTC and ETH that have no utility and are attached to blockchains that will never scale…serious institutions have had ample time to acquire digital currencies on their books, but few of them have taken up the offer.

‘Why? The reason is simple; banks, investment firms, and professional investors understand that the entire premise of the digital currency industry as we know it is unsustainable. The only way to drive token prices up is to lure in new buyers or greater fools. When combined with the fact the industry is rife with scams and fraud and is held together by an offshore stablecoin (Tether) that refuses to prove real dollar assets back it.’

Yes, Bitcoin [BTC] and Ethereum [ETH] have had ample time to prove they offer more than being a haven for fraudsters and drug dealers.

But they haven’t.

So why did bitcoin soar to US$67k in November 2022?

By luring in new buyers (or greater fools) to drive token prices up. And CoinGeek isn’t the only one expressing that view.

But we’ll get to that shortly.

No magic or hidden value in this stuff

Folks, there’s no magic or hidden value in this stuff. Sometimes things are just what they are. This is nothing more than an old con dressed up in 21^st century technobabble.

Some big players in the investment business beg to differ.

One of those is US billionaire investor Marc Andreessen (net worth of US$1.6 billion).

In 2014, he said ‘bitcoin is like the internet in 1994’.

Earlier this year, he was on record again saying ‘bitcoin is like the internet in 1995’.

Boy, that’s glacial progress. Human years eight and internet years one…could this be…doge years? Sorry, couldn’t resist.

Marc Andreessen is one of the poster boys the crypto faithful worship. Here’s a seriously wealthy guy who ‘gets it’.

But there’s someone — with a fortune of US$104.6 billion — who could buy-and-sell Marc Andreessen many times over, and they see things a whole lot differently.

As reported by CNBC on 15 June 2022 (emphasis added):

‘Bill Gates is not a fan of cryptocurrencies or non-fungible tokens.

‘Speaking at a TechCrunch talk...the billionaire Microsoft co-founder described the [cryptocurrency] phenomenon as something that’s “100% based on greater fool theory,” referring to the idea that overvalued assets will go up in price when there are enough investors willing to pay more for them.’

Recruiting new converts is NOT easy

There’s that greater fool pricing mechanism again.

Who’s correct?

OK, for me, that’s a rhetorical question.

The stench around cryptos is putrid…‘pump-and-dump’ schemes, the New York Attorney General successfully prosecuting Tether for lying, the collapse of TerraUSD, Voyager, Celsius, and 3AC…and the list of shams and scams goes on and on.

Yet, the believers still believe. However, getting new converts into the cult is proving difficult.

If the aim of the game is to find greater fools drive prices up, then the findings of a recent survey by Pew Research isn’t good news for the crypto faithful.

As reported by The Washington Post on 24 August 2022 (emphasis added):

‘Over the past year, crypto companies like FTX, Coinbase and Crypto.com have shelled out tens of millions of dollars to attract new customers. “Fortune favors the brave,” Matt Damon famously said in a Crypto.com TV spot as he tried to induce Americans to open their digital wallets.

‘Now a core metric of how successful they were has been returned, and experts say it’s an eye-opening one: not successful at all. The number of people who invested in crypto has not expanded since last September before the push began, according to a new study led by Pew Research Center.’

The industry’s concerted and very costly marketing efforts to recruit more fools, sorry, investors, have been a dismal failure.

Perhaps the crypto promoters should have read a little history about fooling people…

‘You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.’

Abraham Lincoln

Here’s a screenshot from the Pew Research survey…the percentage of investors is stuck at 16:

Without an ever-expanding base of new money, pyramid schemes collapse. 

And that should be a concern for naïve, starry-eyed crypto investors.

The ones who actually believe they are part of something exciting and revolutionary.

Newsflash…you ain’t.

You’re an unsuspecting victim of a massive con.

Without a greater number of fools to buy into this false narrative, it’s game over.

Broken promises and the Bitcoin Tumour

There’s been ample time to deliver on promises…but when it doesn’t happen, the story changes.

1. Blockchain is NOT scalable.
2. Bitcoin is an abject FAILURE as a commercially viable alternative currency…just look at El Salvador.
3. Cryptos are most definitely NOT a hedge against inflation.
4. Bitcoin is NOT an uncorrelated asset acting independently of other markets…we’ll get to that in a minute.
5. Cryptos are NOT the internet…if we switched off the internet tomorrow, would it impact our lives? Hell yeah. If all cryptos were taken off the market tomorrow, would the broader population be any worse off? Hell no. In fact, they would be better off. One less scam to be suckered into.

On 16 September 2022, Nassim Nicholas Taleb, the author of Skin in the Game, Antifragile, The Black Swan, Fooled by Randomness, and The Bed of Procrustes, was as a guest on CNBC’s Squawk Box.

Here’s the condensed version of what he said:

The tired and all-too-predictable retort by crypto cult members to crypto cynics is ‘they just don’t get it’.

This banal response implies a person of Taleb’s obvious investment intellect is…financially illiterate?

Seriously?

If that’s the best the believers have, then we know who the ignorant party is in this debate.

Taleb quite rightly expresses concern over the Disneyland investment environment created by the Fed’s reckless stimulus policies…and the tumour-like investments this make-believe world of investing has spawned.

Anyone under 40 years old has never invested in a world where markets were largely left to their own devices on price discovery.

Since late 2007/early 2008, the Fed has overstimulated and actively manipulated the cost and supply of money.

Intervention on this scale unleashed the animal spirits.

Speculation took hold.

How can 190% PER ANNUM compound return for 12 years not be a bubble?

For a little context on the following charts, the long-term growth rate of equity markets is around 5–6% per annum.

Since March 2009, the tech-laden NASDAQ Index — chock-full of loss-making start-ups and overindebted zombies — soared in value…returning an oversized 21% PER ANNUM over a nearly 13-year period:

Anyone who think this is normal, doesn’t know market history.

Here’s another period when the US market pumped out 24%-plus PER ANNUM over an eight-year period:

This sort of rampant speculation ALWAYS has consequences. The ledger has to be squared up. Excesses in one direction need to be corrected with an equal and opposite force.

Only the brave or foolish would bet against this natural order of life and markets happening to the NASDAQ (and other major indices) in the near future.

The Piper ALWAYS gets paid.

I’ve read and heard a lot about how Bitcoin is nothing like Tulip Mania or the South Sea Bubble or the Roaring Twenties or the dotcom bubble.

And I agree…it is far, far worse.

Over the past 12 years, bitcoin has compounded at the rate of…190% PER ANNUM.

No, it’s not a misprint.

Nothing in history compares to this…nothing.

And the 190% PER ANNUM compound return is to the current price of around US$20k.

If we calculated the return to bitcoin’s peak price of US$67k, the number would be more than 200% per annum.

All this nonsense about the worst of bitcoin’s price fall — from US$67k to US$20k — being almost over is just ridiculous.

There’s a lot of space — between US$20k and 6 US cents — the price can fall into.

Oh, that’s right, bitcoin is a stand-alone asset…not correlated to other markets.

Therefore, it must be pure coincidence the greatest speculative bubble in history just happened to record peaks in bitcoin and the NASDAQ within a week of each other in November 2021.

Since that unbelievable fluke in timing, this is how the much-hyped uncorrelated bitcoin has performed compared to the NASDAQ:

Well, what do you know, Disneyland’s two most speculative assets have taken their investors on a wild ride.

And if the Dow Jones’s experience after the Roaring Twenties is any guide, there’s a lot more downside to come for the NASDAQ.

Which means bitcoin and others in the cryptoverse are in for a torrid time.

If the price continues to fall and with greater fools in short supply, it’s going to be interesting to watch which of the crypto ‘whales’ blink first.

What’s the bitcoin price point of panic?

US$15k or lower?

Maybe…but if everyone is thinking around the same number, then you can be assured someone will jump sooner and not risk being trapped in the rubble of this crumbling pyramid.

Crypto investors should listen to Bill Gates and find yourself a greater fool while you still can.

Talking of greater fools, there’s ANOTHER form of crypto in town. This one is programmed by the central banks themselves. That’s right; I’m talking about central bank digital currencies (CBDCs).

Today, I’ve discussed my views on bitcoin. Here’s a fascinating (and scary) view on CBDCs from my friend and colleague Greg Canavan.

Check it out here.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

What are we doing in Blenheim, readers might wonder? We wonder too.

When a man is building his career, his wife and children are often dragooned into service…moving from place to place, keeping his dinner warm when he gets home late, and ironing his shirts so that he will look more presentable in business meetings.

Later in life, after his career has peaked out and he has alienated his family, it is he who follows, and they who lead. He attends weddings and christenings…family gatherings and birthday parties. And, when his wife is an ‘equestrian’, he goes to Blenheim Palace Horse Trials.

More about that later.

Cultivating failure

Oh my…looks like we were wrong about the Kherson offensive.  

It looked like a sure loser to us. But the media now says it is a great success. Some reporters and opinion mongers say it means the war has turned in Ukraine’s direction…and may soon be over.

Which just goes to show — well, we don’t know what it goes to show. But there are so many things to be wrong about; choosing the right ones is the main challenge in life.

We’re not always right. Sentimentally, we favour the lost cause, the diehard, and the underdog —the losing side. But we don’t know in advance which side will lose.

And wars have a way of backfiring…and success has a way of cultivating failure.

How much better it would have been for the young Jerome Powell, fresh out of Georgetown Law Center (in our class!), to have taken up chasing ambulances. He could have put up a billboard along the DC beltway:

‘Stay out of jail…even if you’re guilty. Collect $$$ — even if you have no case. Call Jay today!’

Instead, he made such a success of his career after joining the Federal Reserve that he now feels the weight of the whole world economy on his weak, rounded shoulders.

Humans can survive defeat…and learn from it; victory is a much bigger danger.

And Zelensky…the actor who once amused crowds by pretending to play the piano with his penis? We don’t know, but we suspect that the current narrative by the Western press — describing him as if he had just captured Moscow — is subject to amendment, too.

As for the progress of the war…the effectiveness of the Russian air force…the morale of the troops…or the cleverness of the officer class — we have nothing to say. We are as lost in the fog of war as everyone else…

Time and tide

Money is our beat. And all we can do, still subject to error, is to try to look for the Primary Trend…and see where it leads us.

In our markets, we think we see the beginning of the new trend, circa 2022. Bonds topped out, after a 40-year bull market, in 2020. Stocks topped out a year later. Now — if we’re right — we’re in for a long period of falling real values — for stocks, bonds, and real estate.

The primary financial trend works together with a dark trend in the economy. Growth rates have been falling for the last 20 years. Recently, US growth has been negative…meaning, we are going backwards, and getting poorer.  

Wage gains have been negative (adjusted for inflation) for the last 17 months straight. This calculation probably flatters the situation. In terms of the major costs in a person’s life — food, housing, and transportation — ‘inflation’ is actually worse than the feds say.  

Despite a slight decline in the Consumer Price Index last month, the cost of food is still going up at a double-digit rate.

Houses, too. The average house sold for US$161,000 in 1999. Now, it’s US$428,000. In terms of the years you need to work to buy a house, it was 5.75 in 1999. Now, you’ll have to work for 7.5 years.

And fuel? It took less than two hours of work to fill a 20-gallon gas tank in 1999. Today, it takes two and a half.

We’re measuring these things in time because time doesn’t change. An hour in 1999 was exactly the same as an hour today. And when you need to spend more time to earn life’s necessities, you’re poorer.

Looking at a long-term chart of wages, adjusted for inflation, we see that real US earnings stopped going up in the early ‘70s. Today, an average American worker earns about the same as he did in 1972.  

The road to nowhere

Now, that’s a Long-term Primary Trend!…a trip to nowhere over half a century.

What should you have done, Dear Reader, if you had realised what a zero-sum hand the working class was holding in 1973? You should have joined the capitalists!  

The way to get ahead in the post-70s US was to join the rentiers…you know, the people with capital. Yes, now it is obvious. After Richard Nixon freed the US dollar from its golden shackles, the place to be was where the new footloose dollars were going — to Wall Street.  

The financial trend meant that money went to money…and the money was in Wall Street. And all you had to do was to borrow a lot of money…refinancing every time interest rates went down — which they did (after 1980) for the next 40 years. Borrow US$100,000 in 1980…buy the 30 Dow stocks…refinance…refinance…refinance.

By 2020, you’re paying about US$350 a month on your outstanding balance (still US$100,000…which is now worth only US$28,000 in 1980 money)…but your Dow investment is now worth US$3.5 million.  

What luck! What a success! What a genius you were!

And now? The primary trend that pushed asset prices so high, seems to have turned around. That US$3.5 million of 2020 is already down to US$3.1 million…and it looks like it could go much lower.

What to do now? Tune in tomorrow…

Regards,

Bill Bonner,
For The Daily Reckoning Australia