Bitcoin’s Inconvenient Truths: The Silence Is Deafening

Gold is instantly and optically recognizable as money. You don’t have to explain it. Bitcoin and Special Drawing Rights (SDR), like a bad joke, have to be explained. Many “cryptologitsts” from the start gave up trying to explain Bitcoin and just sell it as virtual gold, which is de facto fake gold. – Dan Popescu, investment consultant

Numerous inconvenient truths are conveniently ignored by Bitcoin/crypto-currency promoters. Not the least of which is that the fact that the original concept for cryptographic currency was envisioned by the NSA. I guess it’s convenient to assume the NSA developed this concept and then put it out there for the private sector to develop. Sure, that makes sense.

A rapid rise in price does not validate an investment concept. Dozens of dot.com stocks went from simple websites to multi-billion dollar market caps and back to zero in the late 1990’s. Until proven otherwise by the long test of time, Bitcoin could be another product of a fiat money printing bubble that is 100x the size of the money bubble that fueled the dot.com bubble. Gold and silver have withstood the test of 5,000 years. Bitcoin has less than 3,000 days of time-testing.

Be leery of the serial promoters who have dropped their previous advocacy of gold and silver like a hot potato to become religiously zealous salesmen of Bitcoin. These were often among the most raucously vocal in their protest of the use of Comex gold and silver futures to manipulate the market price. Yet, their silence on the introduction of Bitcoin futures hurts my ears.

The bulwark promotion of Bitcoin is that it is a de-centralized form of money that exists outside of Government control. But is it really? I dare say the roll-out of CME Bitcoin futures, as “regulated” by the CFTC, certainly smells like the implementation of official intervention. Those who previously protested gold/silver futures must not deny this fact. Perhaps more troublesome is the embedded forms of counter-party risk endemic to the system which creates Bitcoin.

Anything that exists in cyberspace is vulnerable to hacking. This is a fact that has yet to be invalidated. Circling back to the NSA white paper referenced above, can anyone out there truly claim the expertise required to deny that the NSA, or any other major sovereign intelligence agency, does not have the ability to corrupt the block-chain? To be sure, cryptocurrencies are subject to network or infrastructure risk during a crisis. Unequivocally, crypos are subject to government regulation.

Speaking of which, if I were a Bitcoin advocate, it would bother me that western governments go out of their way to hide their interest in gold as a monetary asset, yet they openly embrace cryptocurrencies. Perhaps when the BIS declares Bitcoin or Ethereum to be a Basel 3 Tier 1 Central Bank asset like gold, I’ll have a change of heart.

The price of Bitcoin has experienced a remarkable run in price this year. Of course, the same could have been said for Dutch tulip bulbs from late 1636 to late 1637. Most of the traders are chasing the price higher, with little to no understanding of the object they are chasing with their money, in hopes that someone at a later point in time will come along and pay a higher price to them. Even worse, these price-chasers have placed undying faith in the analysis of Bitcoin coming from the same con artists with whom they placed religious faith in the analysis of precious metals.

Also, up to this point there’s been an absence of two-way price discovery for Bitcoin. Once the CME futures are rolled out, it will introduce – albeit in an unwelcome format – a provocative method to sell Bitcoin on margin. The use of margin is the hallmark of a fiat currency-based fractional banking system – the very nature of which Bitcoin supposedly repudiates. The Bitcoin longs will face the same unlimited supply potential of paper Bitcoin that precious metals investors have endured for decades.

Make no mistake, I’m not trying to derail anyone’s interest in Bitcoin or cryptocurrencies. And I’ll be the first to admit that it’s likely the price will go a lot higher from here. But if the issues I raise here are indeed legitimate, how do you know when it will be the right time to sell? That is to say, while the parabolic rise in Bitcoin has been largely continuous, any number of events could occur that would force the price re-discovery to be a step-function. It’s all wine and roses on the way up, but at what price will there be a bid for you relieve yourself of your position?