Sunday, November 20, 2022

The Market Value of Bitcoin

On June 12, 2022, the crypto lender Celcius Network froze all assets for which it was custodian. On July 13, 2022, it declared Chapter 11 bankruptcy. After another flash crash of crypto, Celcius was left with millions more in liabilities than assets. It couldn't pay back it's customers what was owed. This also broke the Luna synthetic stable coin and it'w own tokens. It was the biggest crypto firm to crash at the time and caused a lot of collateral damage. Bitcoin had already been in a bear market, and after Celcius, traded in a range between $20,000 and $23,000. Down from a high over $64,317 in November, 2021.

It's important to understand that the entire crypto space, and every single firm built around it is unregulated or nearly so. It's wildcat banking. Tulip speculation. Snake oil. Rug pulls. Ponzi schemes. Or, what Warren Buffett calls rat poison. Even Coinbase, the most respected and well run company I am aware of, has a business based on a trash heap of scams.

In November, 2022, we got to witness the massive failure of FTX. FTX was considered the stable rock in crypto-land, having bailed out several companies in the aftermath of Celcius. It was all a facade. Turns out it was being run like Enron with no internal controls and was gambling customer assets with it's sister company Alameda Research. Even though it was an unregulated company based in the Bahamas, the executives involved might be facing criminal charges and there may be a million creditors as part of it's bankruptcy. In the aftermath, bitcoin traded in a range between $16,000 and $17,000. This was a true curiousity to me. How could bitcoin maintain some semblence of liquidity and value after FTX? Were people really paying $16,000 to buy it and keep it propped up? Was institutional money that was torched in FTX still pumping naive fiat into bitcoin?

Then, I had an epiphany. Bitcoin has failed at every level as a currency. It's too slow. It's expensive. It requires a fantastical amount of energy (and growing) simply to maintain it's existence. It's a blight on the world due to climate impact. It's been duplicated (hard forked) more than 20 times. Yes, bitcoins can be copied like you copy/paste text. What defines which fork is the "true" bitcoin is decided by an informal consensus of developers and miners. But, it has a real market value. The rise of bitcoin has enabled a very profitable industry of ransomware, money laundering, and extortion scams. While bitcoin wallets can be tracked after receiving ransomware/extortion payments, or buying bitcoins with dirty money, the crypto can be spun through washing services like Tornado Cash (now under US sanction). The mix of coins coming out the other end of Tornado can be converted back to fiat somewhere in the world and ... profit!

While the instrinsic value of bitcoin turned out to be zero, like the other ten thousand crypto projects so far, there is a market for illegal activity that is more attractive at the moment than using traditional global banks with their own tainted history. If all crypto disappeared tomorrow, money laudering would continue at some level in the banks but under the scrutiny of regulators. And the ransomware problem would be greatly diminished if not eliminated. It wouldn't be an ideal world but it would be an improvement.

A reasonable person could argue that anonymous cash can, and is, used for illegal activity. But, the purpose, the value of fiat cash is not based on ransonware or money laundering. The scale is not even close. Bitcoin has value because crime pays. If, at some point in the future, the cost of laundering money with bitcoins/crypto exceeds the energy cost of minting it, I think it would collapse to it's intrinsic value of zero.

Update: 11/23/2022
The Wall Street Journal came to many of the same conclusions I did in this article...
Traditional finance had little incentive to build connections to crypto because, unlike government bonds or mortgages or commercial loans or even derivatives, crypto played no role in the real economy. It’s largely been shunned as a means of payment except where untraceability is paramount, such as money laundering and ransomware. Much-hyped crypto innovations such as stablecoins and DeFi, a sort of automated exchange, mostly facilitate speculation in crypto rather than useful economic activity.

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