Crime and speculation

On October 31, 2008, an entity named Satoshi Nakamoto published a white paper titled 'Bitcoin: A Peer-to-Peer Electronic Cash System'. I say entity because no one knows who this Satoshi Nakamoto is or was - it could be a man, a woman, a group of people, an organisation, a national government, anything at all. Here is the beginning of the abstract from the paper:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.

The rest of the paper describes the working of this digital cash system in detail. If your interest in cryptocurrencies goes beyond momentum chasing, then you should download it and read it - it's just eight pages and except for section 11 (calculations), it is quite understandable for a layperson. You might have to google a few terms and read a few Wikipedia pages but if you make that small effort you will gain a better understanding of this digital cash system than 99.9 per cent of the people who are talking about it all over the place.

If you read this paper, you will realise that the only design goal of this digital cash system is literally that - to provide an equivalent for physical cash that is digitally transferable while providing the anonymity and privacy that physical cash provides. I must say that in this goal, Bitcoin has succeeded very well. The global crime wave of ransomware that we are seeing today is proof of that. This is an enormous bonanza for the global digital crime gangs that are coming up.

A global crime wave facilitated by Bitcoin is hardly a surprise. After all, crime needs large-scale use of physical cash and if you create digital cash, then entirely new types of crime become feasible and that too on a global scale because now you can move cash over the internet. No surprises here. If you look around and see what Bitcoin is actually used for, you will see nothing but crime. Except for that, there's only the trading. People buy it because they hope the price will go up. It goes up because more people are willing to buy it at an even higher price. In other words, a Ponzi scheme. Bitcoin devotees are fond of using the word 'distributed' and they're right - this is probably the world's first distributed Ponzi scheme.

As a sideshow to this crime-enabling innovation that is wrapped in a global Ponzi scheme, Bitcoin pushers like to throw around the idea that this is a currency of the future which is independent of central bank control and inherently inflation-proof, etc. This is just a smokescreen, there is no currency here. Bitcoin and others of its ilk have no characteristics of a currency. They were designed as a via media for exchanging real currencies anonymously and that they have succeeded at that role. After 13 years, they have fitted no role other than crime and blind speculation.

Speculation and momentum trading is there in every kind of investment, most of all in stocks. I'm sure many of the readers here speculate, some of them regularly. However, these are on assets which represent potential for real economic value creation. A particular stock may or may not come from a company where this value creation is meaningful, but as a class, stocks represent economic activity, as do bonds and deposits. Bitcoin and other cryptocurrencies do nothing of the kind. Investors should steer clear of them.