Hiltzik: Bitcoin is not a good currency

All eyes in the Bitcoin world and beyond were on Coinbase on April 14th when the company went public as the first cryptocurrency platform.

It was a pretty good day. The stock opened at $ 381 and rose to $ 429.54 before settling at $ 328.28. They were valued at $ 304.54 at the end of trading on Monday as the frenzy subsided, but the company was still valued at a healthy $ 60.6 billion.

Financial experts declared this to be the beginning of a new day. “Coinbase’s direct listing is a turning point for the crypto industry,” said a securities analyst.

Two people around the world can send Bitcoin to each other without the involvement of a bank, government, or other institution.

Coinbase

Another called the company’s Nasdaq a sign of “increasing mainstream adoption of Bitcoin and crypto for years to come”.

Or maybe not. Coinbase’s IPO could mark the road to yet another market frenzy, for investors who buy because they believe others will buy. So why not There is still little evidence that Bitcoin is becoming a “mainstream” financial instrument.

Sure, some banks have started making Bitcoin investments easier: JP Morgan Chase, for example, is preparing to launch a Bitcoin mutual fund. However, whether this is an indication of a desire to offer something that some customers want, rather than an endorsement of the asset in principle, is unclear.

Elon Musk says his Tesla electric vehicle company will accept payments in Bitcoin, but as Coindesk, a crypto messaging service, recently noted, “It’s not easy.”

Customers must make their payments within 30 minutes of closing a deal or the Bitcoin price will expire and they will have to start over. Tesla warns you that this is your problem if you make a mistake – for example, by entering the wrong recipient code into your Bitcoin account and Tesla never receiving the money.

The terms recognize that the value of Bitcoin can change dramatically in the blink of an eye and that Bitcoin transactions are irreversible, even if they are in error. In other words, why not just pay in dollars, dude?

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Bitcoin fans say it’s an alternative to traditional currencies that can be manipulated by the national central banks to manage (or abuse if you prefer) their economies. Bitcoin – a financial instrument developed by a computer algorithm and essentially valued on what anyone is willing to pay for it – is arguably immune to this type of tinkering.

As an investment, Bitcoin has been grossly oversold by its fan base. From time to time someone, often on reddit, dredges up one of the columns I’ve written on Bitcoin over the years and invariably advises readers to be careful about investing in the cause. They’ll point out the recent price hike and laugh at the folly of advising people to avoid Bitcoin at $ 600 when it was now $ 20,000, $ 30,000, or (as recently) $ 50,000.

For sure. For example, if you’ve been dealing with Bitcoin since 2013, when the cryptocurrency first came into the public eye and has been priced at a few hundred dollars per coin to this day (current quote on Coinbase: $ 53,924.99), you have made a mint .

But how many people did that? To stay in the market for those eight or nine years, or even a sizable portion of the time, it would have taken not one, not three, but countless waves of bulls and bears to survive.

From December 18, 2017 to February 10, 2018, Bitcoin value fell 55%. This year alone, there were three downturns of 20% or more in a week or two and an additional 16% downturn over 12 days in March. (All metrics are from Coinbase.)

It is true that the stock market has been no stranger to carrying markets, defined as a decline of 20% or more. But there have been 16 of them since 1926, an average of one every six years – not three in a single year.

Bitcoin fanatics, however, don’t really throw up the cryptocurrency as an investment vehicle. They raise it as currency.

The problem is that as bad as Bitcoin is as an investment, it’s even worse than currency. Blogger Kevin Drum lists five functions a currency should have: It should be difficult to counterfeit, stable in value, easy to transport, widely accepted, and 100% liquid. Bitcoin fails three of these tests – it is not stable in value, widely accepted, or 100% liquid.

As I have written in the past, the key test Bitcoin passes is what we could call the Kenya storefront test. This resulted from my stay as a foreign correspondent in Nairobi in the 1980s, when the official exchange rate was about eight Kenyan shillings to the dollar.

Experienced foreigners would not think of buying shillings at the official rate. They would want the black market rate closer to 16 shillings to the money.

Expatriates wanting the cheaper rate go to an Indian vendor’s grocery store or ice cream parlor and write him a US dollar check at a US bank in exchange for black market shillings. He mailed the check to a relative in the United States or Canada to make deposits, thereby releasing dollars from Kenya in violation of the country’s strict foreign exchange regulations.

The system served everyone except obviously the government. Indian families living in fear of being driven out of the country and their livelihood by the Kenyan regime would build a nest egg overseas and the foreigner would double his shilling.

I have often thought that Bitcoin would serve these traders to the very core – they could convert shillings or dollars to bitcoins where they were and convert them to dollars remotely.

Of course, the black market conversions were illegal, which is just another reminder that one category of users who appreciate the utility of Bitcoin are criminals.

Bitcoin propagandists claim that the properties that make cryptocurrency so useful for underground transactions are their virtues – a feature, not a bug. The great thing about Bitcoin is that it operates outside of the national central banking systems.

As Coinbase explains, “any two people, anywhere in the world, can send Bitcoin to each other without the involvement of a bank, government, or other institution.”

That should be a great thing. “Most traditional liquid asset systems – banks, credit unions, brokers, or even high-tech systems like PayPal – take control of your funds and let you use them,” explains personal finance site Due.com. “If they decide you have violated these terms, they can suspend your account.”

When it comes to suspending an account for violating a financial institution’s terms of service, I’m with Nathan J. Robinson, editor of Current Affairs, who pointed out the above quote to me and says, “This didn’t happen to me , ever. ”

In fact, as Robinson points out, many of Bitcoin’s often ruined benefits – such as solid “security”, anonymity, and convenience – are either detrimental to the user or do not exist at all.

Who benefits from Bitcoin security, which consists in the fact that a Bitcoin transaction cannot be reversed once it is completed? Not the average consumer. Because these transactions take place without a trusted or regulated intermediary, no one can rectify a Bitcoin transaction with a counterparty that turns out to be fraudulent.

I may never have had an account suspended for Terms of Use, but on many occasions I had to dispute a credit card bill or a bank payment because I hadn’t received the goods or services I paid for. I’ve stolen and misused credit and debit cards, and the supposedly untrustworthy bank that stood between me and the thieves has delivered all the legally required compensation. Forget about Bitcoin.

There are two keys to securing financial transactions: oversight and an audit trail. The money in your bank account is going astray, and the bank records almost always show what happened and correct the mistake. With Bitcoin there is no oversight and no audit trail – and should that be a plus?

It is worth noting that “security” in the Bitcoin context does not mean “security from loss”. The most spectacular loss can be that associated with the defunct bitcoin exchange known as Mt. Gox, which misled customer bases, was valued at $ 1 trillion at one point. Losses are almost certainly less, but some customers will never get their full inventory back.

There are many other episodes where Bitcoin accounts have been hacked or lost by cyber thieves when their owners misplaced their access codes that cannot be replicated.

Nothing in the Bitcoin universe resembles the FDIC or Securities Investor Protection Corp., U.S. government agencies that protect banking and brokerage clients from losses of up to $ 250,000 (FDIC) or $ 500,000 (SIPC) if their financial institution fails.

Convenience? The Bitcoin annals are teeming with threads about users who have lost their passcodes or “seeds” – phrases that can be used to restore access to a Bitcoin account – or who have gone to extraordinary lengths to keep those codes safe from thieves.

“Store your seeds safely,” advised one user on reddit. “I punched my seed into a ¼-inch steel plate with a metal stamp. After that I dipped it in plastisol so it couldn’t be read and kept it in my safe with a description on the outside. I also kept another copy of the semen behind a picture in the house of a trusted family member, just in case. “

As Bloomberg’s Matt Levine notes, “Everything I read about Bitcoin storage is extremely stressful.”

Bitcoin is not a mainstream asset. Drum compares it to collectibles like baseball cards, although “a collectible that has gotten a lot of hype”. It has no intrinsic value. For example, it’s not even a theoretical claim about a national gold treasure.

Its value depends on two interrelated factors: the desire of Bitcoin fans to keep buying and holding, and an artificially created scarcity. According to the drafting document, the maximum number of bitcoins that can be “minted” through a process of algorithm solving by powerful computers is 21 million. Around 18.7 million are already in circulation.

So invest in bitcoins if you want. Try buying a Tesla with them if you have the patience. But it’s so difficult to deal with that the smartest way to get some part of the action is by the way smart gold bugs invest in this metal – they don’t buy gold bars, they buy stocks in gold industry companies. Now, thanks to a specific IPO, you can do that with Bitcoin.

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