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Haters gonna hate, but the “Bitcoin bubble” meme has become the financial equivalent of a viral online cat video – wildly popular but pretty vacuous. In an effort to separate fact from fiction, ConvergEx's Nick Colas reviews 11 bitcoin myths (and dispels them). Still, there’s no doubt that the public is entranced: there are now 3x more Google searches for “bitcoin” than “Western Union”, and 33x more than for “Gold coins”. We started writing about bitcoin back in February because it was – and still is – a fascinating invention (for better or worse). How it plays out, we will just have to wait and see.
Via ConvergEx's Nick Colas,
In the spirit of the old high school essay question about the Holy Roman Empire, consider the following query: bitcoin is often described as an online crypto-currency, even though it is none of these things – discuss. The Cliff Notes suggested essay outline might go something like this:
We’ve been writing about bitcoin since February 2013 because we thought it was a remarkable and intellectually elegant solution to one key social problem: it simply costs too much money to move money. Want to send $100 to a friend in Argentina by Western Union? That will set you back $12. How about paying for a $1 bag of chips with a credit card in the US? Good luck with that – you’ll likely have to buy a 10 pack to meet the card minimum at the store. We had no idea the value of a bitcoin would skyrocket from our first report at $31 to about $900 today. We just thought it was cool.
Still, with all that capital appreciation comes a lot of misinformation. Part of that is understandable – bitcoin is new and very different from traditional notions of “Money”. Still, in the rush to understand what bitcoin is – and isn’t – the public discussion on the topic has gotten a bit muddy.
Today we offer up 11 bitcoin myths and our interpretation of the reality under the hype and confusion.
Myth #1: Bitcoin is huge
Reality: By any objective measure, bitcoin is tiny at a total value of $10.8 billion. Since one of the complaints about bitcoin is that it can enable hard-to-trace criminal activity, let’s compare that amount to the real enabler of drug sales, tax evasion, and even more heinous crimes the world over: the U.S. $100 bill. There are about $400 billion of those floating around the world. Total stock of cash money in the U.S.: about $800 billion. And when you look at total cash around the world, the number is about $3.8 trillion. Bottom line: bitcoin at current valuation is 0.3% of the world’s cash money. That is not huge.
Myth #2: Bitcoin is a major problem in dealing with drugs and terrorism
Reality: Bitcoin is way too volatile at the moment for any serious criminal element. These are not people that take capital risks where they don’t have to. Seriously – go try to steal 10% of a dealer’s cash and tell him it is frictional losses due to an illiquid market. I have heard enough Biggie Smalls raps to tell you how that story ends… Yes, some enterprising dealers clearly use bitcoin. But a serious problem? Bitcoin would be $10,000 or higher if it had any real share of the global drug trade. Consider that the UN Office on Drugs and Crime estimates the heroin trade into Europe is worth $20 billion on its own.
Now, it is entirely true that bitcoin businesses will have to develop the same anti-money laundering and know-your-customer rules as any other money transfer enterprise. And, as we will discuss briefly, that is very good for bitcoin.
Myth #3: Bitcoin is a currency.
Reality: Bitcoin really is a cross between a mutually held company or large partnership and a money transfer business. Its utility is that the bitcoin miners – those trying to solve the puzzles to get the 25 bitcoin reward – manage the transaction stack (blockchain, in bitcoin-speak) essentially for free. You want to be part of the partnership? Great – buy some bitcoins and hold on. But if you just want to send that friend in Buenos Aires money cheaply, you and she might both own bitcoins for a fraction of a second. You drop dollars in, she gets pesos out. Bitcoin is a system much more than it is a “Currency”. Maybe one day she will buy a beer with bitcoins, but the entire system has tremendous utility even without that functionality.
Myth #4: Bitcoin has never been more volatile than now, with all the attention it is getting.
Reality: Check out the two charts we’ve included after this note. They show trailing one month returns for bitcoin back to August 2010 as well as the standard deviation of those returns. May 2011 was the peak for trailing 28 day returns at 853%. The last peak was 11/30/2013 at 479%.
Myth #5: Chinese citizens are shut out of buying bitcoins by government regulation of the banking system.
Reality: According to data aggregator bitcoincharts.com, yuan-based bitcoin demand is still greater than dollar based transactions. Over the past 24 hours, 85,588 bitcoins changed hands on BTC China, while only about 56,000 traded on dollar-based exchanges.
Myth #6: Bitcoin is a store of value.
Reality: The phrase “Store of value” should be used very carefully and only with specific historical proof. It implies that when social or political floodwaters come, the asset in question will allow you to buy shelter, clothing and food. Gold has that history, as does silver. Perfect one-carat diamonds also make the grade, albeit only in the last 50-100 years. Bitcoin may one day prove it deserves to sit alongside those assets. It isn’t there yet.
Myth #7: Bitcoin is untraceable.
Reality: Bitcoin transactions flow through an open-source piece of software, so everyone sees every trade. No, there are no name/address identifiers, but Forbes magazine showed how easy it is to trace bitcoins through the system back in September. Methods to “Launder” bitcoins certainly exist, but so do the risks of handing over your coins to an online thief. Bottom line: after hearing about what the NSA can do with your computer and phone records, if you think anything you do online is secret, I can’t help you. OK, if you have mad hacking and crypto-skills, maybe. But chances are pretty good that you’d just screw it up. And get caught.
Myth #8: Loss of anonymity will make bitcoin worthless.
Reality: Remember, as long as banks and money transfer businesses have to maintain expensive data centers to run their businesses, bitcoin will always be a cheaper way to transfer money. Now, how many business build attractive and secure consumer and business offerings on the core bitcoin system – that is an interesting question and is certainly the most important issue regarding its long term price.
Myth #9: It’s a Ponzi scheme!
Reality: A Ponzi scheme is one that has no use other than to defraud later victims into giving money to earlier participants. Again, bitcoin has a potentially significant positive social value. Two regional Federal Reserve papers, published in the last month, agree with that statement. But if you still think bitcoin is a Ponzi scheme, you should probably get rid of your Federal Reserve notes as well. They aren’t “Backed” by anything either. Please remit them directly to: Nick Colas, ConvergEx, 1633 Broadway, NY NY 10019. I will forward them to one of my favorite charities – the USO - where they will do a world of good.
Myth #10: Bitcoin is ready for prime time.
Reality: I don’t own any bitcoin (I lost the 0.10 someone gave me in a demo) and I won’t be using them any time soon. The reason? I am afraid that there is simply no safe place to hold them. Hackers attack bitcoin “Wallets” with disturbing regularity. As the price continues to rise, their incentives to up. Their game goes higher as well. I don’t think I am alone in this sentiment. I want a company I recognize to start a bitcoin storage site. It could be a bank, or Paypal, or Apple. I don’t care which. There are plenty – they call me regularly – bitcoin millionaires out there. How about some of you start reinvesting in the system that has made you so wealthy?
Myth #11: Something better will come along and wipe bitcoin off the map.
Reality: Of course something better will come along. That’s what happens in technology. I personally think a charity-based bitcoin product would be huge. Donate bitcoin in New York, and let the charity redeem them at very close to 100 cents on the dollar where they are needed. Somalia, as one example, is facing almost total isolation as Barclay’s - the last foreign bank in the country - threatens to leave at the end of the year. The $100 million remitted by Somalis working abroad will then have to pay even higher fees to send their money home. What if a famine or other calamity occurs? And how will the economy have a chance with no access to outside capital?
At the same time, I simply do not see why a competing product will wipe out the utility of bitcoin. It has a first mover advantage and a large existing network of miners to support it. There are scores of early adopters with eight and even nine figure net worths to reinvest and build the system. There are other online money transfer products out there, of course, and more to come. The challenges will be the same for all of them: security, utility and legal compliance.
Let me sum up with a final thought: I absolutely understand why there are so many bitcoin haters out there. But don’t hate the player, hate the game. Technology is a tremendously disruptive force in society, and it knows no boundaries. It disturbs every status quo. That’s what is does. Just don’t make the mistake of thinking that you can reverse it by calling it a bubble. Sticks and stones, that…
Now, if someone hacks the entire bitcoin system just to crash it (there’d be no actual value in the effort, since bitcoin would be worthless), then of course will go to zero. But that won’t be the end – something else will come along. Technology doesn’t stop. Get used to it.
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Thursday, December 12, 2013
Fact, Fiction, And 11 Bitcoin Myths
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