Sunday, January 14, 2018

The Bitcoin Recession

Could the crash of Bitcoin crash the overall economy?

Bitcoin will crash, that much is certain.  Nobody takes it as currency anymore, but rather it has become a virtual investment - basically investing in nothing.  Game site Steam and now Microsoft no longer accept Bitcoin for payments because the currency is too unstable it, it takes too long to process transactions, and the cost of transactions is now staggeringly high.  In other words, it is no longer useful as a currency.  Even the Miami Bitcoin conference will not accept Bitcoin as payment from attendees  When Bitcoin no longer accepts Bitcoin, what does that say?

The Bank of Israel no longer recognizes it as a "currency" but as an investment - one that is not regulated or guaranteed in any manner by any agency.  In other words it's an investment in an idea that has absolutely no practical use whatsoever.  Some Bitcoin proponents are calling it "virtual gold" - which is an interesting analogy as investing in gold has proven to be a bad idea time and time again.

It is clear that once the euphoria wears off, Bitcoin will drop in price, perhaps staggeringly so.  It is a phenomena driven entirely by the laws of supply and demand.  As the news media hypes Bitcoin, small investors bid up the price. The same small investors will go running for the hills as soon as the price decreases by any significant amount.

And these are mostly young people, mostly young men, in their 20's, who have little investment experience, want to get in "on the Next Big Thing!" and want to become fabulously wealthy with no work involved.  These folks weren't even born during the dot-com bust of the 1990's or the real estate market meltdown of 1989.  They were still in Junior High School during the recession of 2008.   To them, the market has always gone up, up, up - a whole generation raised on a bull market.   What could possibly go wrong with Bitcoin?  Like I said, these bubbles seem to pop about every 20 years or so, perhaps as each new generation discovers that the marketplace is no place for patty-cake.

I fell out of my chair the other day when a young man posted online that he wanted to "sell his place in line" for the mythical "Elio Car" and "invest" it in Bitcoin.   Fellow Elio "depositers" had to let him down gently and explain to him that there will never be an Elio car, and likely there was never a real plan to make one.   Again, these are young people, who are full of energy and enthusiasm and naivete. One of the Elio "faithful" admitted he put all his summer job money into an "all-in" deposit on the car.  This is the same sort of braintrust that is investing in "Crypto" - but again, you can't tell in an online forum if you are talking to a 14-year-old or a 40-year-old.

Of course of course to the Bitcoin faithful, nothing can ever possibly go wrong with Bitcoin.  And from their point of view Bitcoin is not that it is unstable, but the U.S. Dollar is.  It is interesting that when we talk about the value of Bitcoin, we compare it to the value of the US Dollar.  Bitcoin is never talked about in the abstract is having a value by itself, but always as compared to the U.S. Dollar or other so-called "fiat currency."

And if you draw a graph plotting the value of Bitcoin in terms of the U.S. Dollar, it shows it to be a very unstable currency, investment, or whatever the hell you want to call it.  But you could flip this graph on its end and plot the value of the US dollar versus Bitcoin instead.  Such a chart would illustrate that Bitcoin has a stable value and the U.S. Dollar is varying widely compared to the value of Bitcoin.  And I am sure that on some Bitcoin Discussion Group some idiot his advancing this argument - that Bitcoin a stable in value but the U.S. Dollar is swinging wildly up and down compared to Bitcoin.

If they haven't thought up this rubric already, I hope I don't give them any ideas.

Of course, to actually buy anything, you need to convert Bitcoin (or any other crypto-currency) to local currency on an "exchange" - and we've heard all the horror stories about exchanges crashing, going bankrupt, or "coins" going missing.  So the value of Bitcoin compared to the dollar is important - you can't spend Bitcoin anywhere.

The problem is, all currencies are sort of based on faithAs I noted before, money is just an idea about the value of things.  And once you assault that idea, you can undermine the value of money. This is why counterfeiters in ages gone by were punished by death.  When you started messing with the currency, you were messing with the King.  And it's not a good idea to mess with the King.

And that's the problem with Bitcoin right there.  It is in nonsensical currency or investment or whatever the hell you want to call it - it's based on the ability of computers to solve meaningless puzzles.  It's basically investing in nothing.  But then again, the Bitcoin faithful will point out that the U.S. Dollar is also supported by . . . nothing.  Well not exactly nothing, it actually is a function of the debt of the US government, as well as the supply of money.

It is a funny thing, however, that in terms of actual physical dollars, more of them exist outside the United States than inside.  Many people have talked about abolishing the $100 bill as it is just mostly used in drugs, weapons, and other illegal transactions overseas.  Very few Americans carry $100 bills and indeed if you try to spend one in America you'll be viewed with suspicion, and many stores outright will refuse to accept them.

(Let me pause here to note that any business has the right to accept payment in whatever form they want.   They can say no to $100 bills.  They can say no to pennies and nickels.   They can say no to cash at all - requiring payment by credit card - or even bitcoin!.    The "good for all debts, public and private" notation on our money does not obligate people to accept cash or certain denominations by law.)

More and more, Americans have gone cashless and use credit cards and debit cards for everyday transactions - even for buying a hamburger at McDonalds.  Micro-transactions are the new thing - even vending machines accept credit cards.  It is possible, in America, to travel across the entire United States without having to pay cash for anything.  In fact it's easier to do that, than to drive an electric car from coast to coast.  Visa and MasterCard terminals are far more plentiful than Tesla recharging stations.

Money in America is thus becoming more of a series of numbers stored on computers than actual physical banknotes that represent anything.  As such, money becomes more and more abstract, and the idea of money is more at risk.  Idiotic things like crypto-currencies and Bitcoin tend to point out to people that money is just an idea - and the idea that people know that money is just an idea is a very scary idea.

A note in the news today that because of the new tax law, most of America's major banks will show enormous losses in the next few weeks for the fourth quarter of 2017.  Apparently by lowering the corporate tax rate, the value of tax deductions for losses incurred during the recession will be decreased to the point where some banks will be posting losses in the tens of millions of dollars.

And while some banks will recoup these losses as early as 2019 - such as Bank of America - other Banks such as Citibank main never recoup these losses. The Trump tax law turns out to have some negative consequences, ironically by lowering tax rates.

Donald Trump recently addressed the Farm Bureau today he will touted his tax law as benefiting American farmers by eliminating the so-called "quote death."  But I'm sure American farmers were smart enough to know that there enough loopholes in the gift and estate tax that they would never have to pay this tax to leave their farms to their children.  In the meantime, the if Trump obliterates NAFTA, could be very hard for America to export food to Mexico and Canada or to other countries overseas.  Trump is poised to start a trade war and that could affect American farmers who are biggest exporters.

And since most of us aren't farmers we don't notice the fact that most farmers are struggling today -seeing a 50% decrease in their income over the last few years.  This is a shocking turn of events but it is rarely reported in the Press, much as it was not reported in the Press prior to 1929 - the last time farm income dropped so precipitously.   The drop in farm income during the 1920s proceeded to 1929 market crash by several years.  But a few people notice because the Roaring Twenties were roaring and everyone was having a good time while the farmers went broke.

You start to put this all together and connect the dots and you see that we may be headed for a recession in the near future.  And the collapse of Bitcoin could be the triggering event that sets off this recession.  Just as folks in the cities were celebrating the stock market (and shoeshine boys and grocery clerks were giving Joe Kennedy stock tips) while the Joads were forced off the family farm, today we see young 20-somethings all agog about "The Next Big Thing!" and crypto-currencies, while ignoring the greater problems in the economy, because they aren't farmers.  Heck, today, there are hardly any farmers - so their plight is even easier to gloss over.

Now, some have noted that other "cryptos" have appeared to solve the problems of Bitcoin - their transaction fees are lower and they process faster.   But still, few outlets are accepting these "coins" as they are volatile and it is generally a hassle to set up payment systems for so few users.   Also, the idea of a payment system being based on a limited currency seems to be a fundamental flaw.   The problem, as Bitcoin has illustrated, is that the currency, being limited, is not stable in value.   No one can control "Big M" or the Money Supply of Bitcoin, to control inflation - or deflation.   The actions of the Fed may be imprecise and dead wrong sometimes, but at least there is a switch for someone to be asleep at.

But even if we assume that this argument is correct, the problem is, if Bitcoin fails, it takes down the other cryptos with it, at least temporarily - much as we saw the market crash of 2008 take town nearly every sector.   When people start losing money, they are often forced to sell other investments, causing a market-wide drop in prices.   We are already seeing the opposite of this effect - where any company that mentions "Blockchain" is seeing its stock soar irrationally - for example, Kodak.

Now, throw into this heady mix a dash of real-estate bubble, particularly in selected markets.   For spice, add the inevitable bankruptcy of Sears/K-Mart and a few other "brick and mortar" store chains that are slowly collapsing under the weight of their massive debt-loads.   For extra zest, add a spike in oil prices and a sag in consumer confidence.  Fold in record levels of corporate debt and personal debt - along with increasing default rates.   Place in a 9 x 12 greased pan.  Bake in a preheated over at 350 for 25 minutes.

You see where this is going.   No one thing will cause the next recession, but a lot of little things just might.   But the spectacular blowup of Bitcoin will be blamed - or at least be used to label the next meltdown.

UPDATE:  Bitcoin and the Tide Pod Challenge.  Has the world lost its collective fucking mind?  I guess people will do anything for a thrill these days.  This will not end well, let me tell you!

1 comment:

  1. "To them, the market has always gone up, up, up - a whole generation raised on a bull market."

    Oh, right. This happened before, in 2008. Back then, a whole generation was raised knowing nothing but a bull market, increasing stock and real estate prices, and nothing but good times. When the party ended in 2009, they wall wanted to blame someone for ending it.

    But the reality is, our reality then was unreal.

    ReplyDelete

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