Last week, I wrote about the uselessness of bitcoin and as it happens every time I do so, I received a certain amount of attention on social media from people who belong to the bitcoin religion. Readers can guess what the nature of this attention was. This was entirely expected and I can't really complain. In fact, it's fully understandable why bitmaniacs react so sharply when someone points out a few home truths about the deity of their religion. The reason is that there is nothing there except talk.
When you are confident about your investments, you don't mind people trying to talk them down, in fact, it's actually good for you. For example, I have some stock investments that I have considerable confidence that will do well over the next few years. When someone tries to talk them down, I'm happy. Since I'm confident of how well these companies will do, if the prices of these stocks decline, it gives me an opportunity to invest at a better price. This is true for all investors who are driven by the fundamental characteristics of what they are investing in. However, if all you have is momentum and hot air, then you don't like anyone pointing out the obvious.
Over the last few months, almost the entire discussion about bitcoin and cryptocurrencies has gotten hijacked by the rise and volatility in the price of bitcoin. People who have started hearing about crypto now are coming through with an impression that here is a nice new way of investing money and you just have to learn how to do it, just the way you have to learn your way into equity investing or any way of making your saved money grow, from the PPF to bank fixed deposits. This is a harmful mental model and those who understand why it's harmful must make it their job to explain it.
The reason is very simple - there is no underlying economic activity to bitcoin. In every other form of saving or investing, there is some underlying economic activity that is generating wealth. It could be the business that a company does or money that someone borrows and pays interest on or anything else of that nature. You may be mistaken about how much value that activity has but there's something there. This 'something' is simply not there in bitcoin. Bitcoin gains in value because other people buy it. That is a characteristic it shares only with Ponzi schemes, which is what it really is.
Meanwhile, there are a lot of sideshows that are going on surrounding the core technologies that are used for cryptocurrencies. Some of it has interesting uses or may develop into something useful at some point. A prominent example is a system called Ethereum, on which software developers and businesses can base a diverse set of capabilities that have nothing to do with currencies or finance. Such a system may evolve into something that has many uses.
One of the problems is using newer technologies for routine parts of everyday life that then become incomprehensible to a larger and larger proportion of the population. We see this everyday with digital banking transactions. There is a constant stream of people getting ripped off (remotely, unseen) by other people who can use the new tools. It's easy enough to say that people should update their knowledge or they'll get left behind. However, if something is not understandable, then it is not transparent in any meaningful sense of the world. If you are living a life wherein most of the things you use seem to operate through some machinery that is indistinguishable from magic to you, then you cannot really deal with it in any meaningful way.
The entire world of crypto seems to be a solution that is looking for a problem to solve without contributing anything to the real, pre-existing problems in any of the realms where it claims to solve anything.