Tuesday, 14 September 2021 — Gold Coast, Australia

By Vern Gowdie Editor, The Rum Rebellion

[5 min read]

• To be an asset, it must be useful…bitcoin is useless
• What is bitcoin worth?
• El Salvador

I take a week off and Greg cleverly slips in the affirmative side’s opinion on what Bitcoin [BTC] is worth.

Contrary to popular belief, I’m not anti-bitcoin. It’s a clever piece of computer code.

And I am firmly of the belief digital currency/ies are in our near future. They are coming. But will they be of the centralised and/or decentralised variety?

I struggle to see how governments and central banks (with control over the money creation operations of their respective nations) will ever relinquish control without a spirited regulatory counterattack. Which is already happening.

When the crypto bubble blows up (and it will), the legislators and regulators are going to be all over it like a rash.

What I’m against is the overhyping of what’s mistakenly been given the status of an alternative asset class.

According to the Oxford Dictionary, an asset is…

‘A useful or valuable thing or person.’

Bitcoin and cryptos have proved extremely valuable if you are into ransomware, running pump-and-dump schemes, or in the business of promoting UNstablecoins.

But to the average Joe and Josephine — other than trading the stuff — there is next to no value.

Sure, there has been some limited commercial acceptance, but try paying your big-ticket budget expenses with crypto…rent, loan repayments, taxes, insurance premiums, food, rego, etc.

You’ll be laughed at.

Why? The stuff is like sweaty gelignite…way too volatile.

Why is it volatile?

The whales (the few who control the many) behind the pumpers and dumpers use it for their personal enrichment.

The crypto faithful — like 98.5% of cult followers — are just grist for the mill.

Some are smart enough to see this for what it is…an opportunity to capitalise on collective gullibility. But most don’t see it that way. They so desperately want to believe in the greater dream of decentralised finance that they’re blinded to the even greater con.

The faithful buy whatever the cult leaders are selling…no matter how patently ridiculous the message might be.

Even the most cursory of glances at Tether [USDT] and USD Coin [USDC] (the so-called stablecoins) show these offerings aren’t within a bull’s roar of what they claim to be…yet, these frauds sit right smack in the middle of this scam.

What we’re seeing is the classic rush to capitalise that happens before every new innovation goes mainstream.

‘In the decades after the Civil War, the United States witnessed what historian Maury Klein dubbed an “orgy of railroad construction.” During the 1880s, 71,000 miles of rail were constructed — nearly doubling the total. As financiers knit together vast, redundant national networks, they slashed rates furiously, built gigantic stations, engaged in Enron-style accounting tricks, and tried (unsuccessfully) to divide up the market.

‘The boom ended with a bust in 1894, when about one quarter of all railroads were bankrupt.’

‘The bubbles that built America’

In the 1920s, US automobile manufacturers were thick on the ground.

How thick?

Check out this list of defunct US automobile manufacturers. Thousands.

The same with the dotcom boom. Anyone with or without a product and half a brain put ‘dotcom’ on its brand, listed it, and made off like a bandit.

And here we are again.

We get a smart but clunky algorithm around which the narrative of DeFi is created, and a good chunk of millennials and Gen Z have zealously taken the bait.

This is not a criticism of the younger generations. It’s just their rite of passage. Boomers went through it with the entrepreneurial boom, the dotcom story, and margin lending.

We were slow learners. Every generation has its investing war stories to tell.

Like the railway, automobile, and dotcom booms, the crypto boom will bust…spectacularly.

The good news is that on the other side, there will be a handful of survivors. Which ones?

Who knows. Perhaps they have not yet been created.

Ray Dalio (founder of Bridgewater Associates) recently published an article titled ‘What I Really Think of Bitcoin’ (emphasis added):

‘Although Bitcoin is limited in supply, digital currencies are not limited in supply because new ones have come along and will continue to come along to compete so the supply of Bitcoin-like assets should, and competition will, play a role in determining Bitcoin and other cryptocurrency prices. In fact I assume that better ones will come along and displace this one because that is the way the evolution of everything works—i.e., new ways of doing things and new things always have and always will replace old ways of doing things and old things. Since the way Bitcoin works is fixed, it won’t be able to evolve and I presume that a better alternative will be invented and pass it by. I see that as a risk.’

What is bitcoin worth?

Some boomers who have made fortunes from identifying collective madness and betting against the trend have weighed in with their views on what bitcoin is worth.

The New York Post, 30 August 2021 (emphasis added):

‘Hedge fund manager John Paulson made $20 billion predicting the downfall of the US housing market in 2008. Now, he’s predicting cryptocurrencies will “go to zero”.

‘“Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless,” Paulson told Bloomberg in an interview.

‘“Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies.”

‘Ultimately the price fluctuation has to do more with the relative supply of the coins, Paulson added. “There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount.”’

Dr Michael Burry (from The Big Short fame) tweeted:

1. ‘All hype/speculation is doing is drawing in retail [Mum and Dad investors] before the mother of all crashes. #FOMO Parabolas don’t resolve sideways; When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. History ain't changed.
2. ‘The problem with #Crypto, as in most things, is the leverage. If you don't know how much leverage is in crypto, you don't know anything about crypto, no matter how much else you think you know.’

Jeremy Grantham has made billions from his bubble spotting (Japan in late 1980s, dotcom, US housing) expertise. This is from a Bloomberg interview he did earlier this year:

One of the industry’s deepest thinkers is John Hussman. He too made a fortune shorting the dotcom and US housing booms. This is what he thinks (emphasis added):

‘On the subject of Bitcoin, my rather unpopular view hasn’t changed at all: Blockchain is a remarkable algorithm. Bitcoin is a limited-supply token generated by a replicable, low-bandwidth, wildly energy-inefficient blockchain app, with neither government fiat, physical convertibility, nor reserve requirements to compel its use, or to make it something other than an abstract numeraire.

‘The psychological value of these tokens seems to be largely based on the backward-looking sunk-cost of the energy wasted to ‘mine’ them, by producing a validation hash (as ‘proof of work’) for a given block of transactions.

‘There’s also a subtle Ponzi-like aspect in that once you own Bitcoin, you’ve got to participate in a future transaction block to get out, regardless of how much that future block costs to validate.’

Bottom line, cryptos are worthless…Charles Ponzi would be proud of his legacy.

El Salvador

There has been much hype about El Salvador adopting bitcoin as an alternative currency.

In the July 2021 edition of The Gowdie Letter, I wrote:

‘Ironically, President Nayib Bukele’s headline-grabbing, ego-stroking, ill-thought-out decision, rather than being bitcoin’s saviour, could be the very thing that spoils this exercise in blind faith.

‘When that happens, we’ll see what this technology is really worth.’

In tomorrow’s Rum Rebellion, I’ll share with you some excerpts from the July 2021 issue and show you how the faithful have fallen for the oldest trick in the book.

Until tomorrow.

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.