Tuesday, November 21, 2017

'Bitcoin is for, White Powder Under the Nose, High School Drop Outs'

“It looks and smells like all the bubbles I have seen throughout history,” Jim Rogers says of Bitcoin, reports MarketWatch.

"True, bubbly assets can continue to march higher than any rational person imagines possible. So there could be further gains. But messing around with bubbles is risky. Better to just stay away,"  adds MarketWatch columnist Michael Brush.

Dr. Constantin Gurdgiev, a professor of finance at Middlebury Institute of International Studies at Monterey and continues as adjunct assistant professor of finance at Trinity College, Dublin adds:
[A]s an investor, I do not have the stomach for bitcoin’s valuations and volatility, as well as for its higher moments behavior (in particular worrying are kurtosis, co-skews and co-kurtosis, which severely complicate empirical dynamics analysis, see Note 3 below). And I have even less enthusiasm for the crypto
market that is sustained increasingly by undertakings, like BitMEX — a purely speculative platform trading some $35 billion in bitcoin derivatives with leverage up to 100 times to the amateur speculators who, put frankly, have zero idea what they are buying and at what price. The vast majority of bitcoin investors have no clue what a butterfly option looks like and how it can be valued. And the vast majority of financial markets analysts and professionals won’t be able to price a butterfly strategy for bitcoin, given its painfully twisted moments. Yet, within a month of starting trading, BitMEX reached one-third of the market capitalization of bitcoin. This is not just a shoe-shine-boy moment, folks. It is white-powder-under-the-nose-and--empty-bottles-of-vodka-on-the-floor hour for high school dropouts with cash to burn.

Another worrying issue with bitcoin is the argumentation of its main supporters.

This ranges from the cognitively biased “you don’t know anything about the bitcoin” to “bitcoin is scarce & limited in supply” to “bitcoin is a promise of liberating the masses from the oppression of the central bankers.”

The first sort of argument exhibits not just Jurassic ignorance of logic, but also a gargantuan dose of arrogance. Repeated sufficiently enough, it signifies the absurd degree of exuberance of investors’ expectations.

The second argument is patently false. Bitcoin has undergone splits, and engendered dozens of other cryptos, with unlimited supply of such into the future. Bitcoin itself is divisible ad infinitum and, with forks, its supply is potentially unlimited. Worse, bitcoin rests on man-made mathematical foundations. Which means it has no physical bound or constraint. Anything man-made (and even more so, anything mathematically derived) is, by definition, fungible and axiomatic. Just because to-date no one cracked the code to alter bitcoin mid-stream or drain blockchain-held information does not mean that in the future such a code cannot be written. So hold your horses: gold is physically limited in quantity (even though in the Universe, it is not as scarce as it is on Earth, which makes long term supply constraint on gold potentially non-binding). Bitcoin is limited by our capacity to alter the underlying code defining it. Anyone thinking of an algorithm as a ‘law’ needs to go back to Godel’s mathematics.



  1. Lol. With tens of thousands now working full time with Bitcoin, adoption by numerous mainstream vendors (including realtors) and 8 major banks including UBS and Barclays, denial ain't just a river in Egypt to you. But you keep pretending all you want.

    1. Were you alive and sober in 2008 during the bursting of the housing bubble?

  2. Do a search for "UBS bitcoin." UBS is exploring the blockchain. They are not adopting bitcoin.

  3. bitcoin is right up there with climate change and religion ... its validity cannot be argued with its believers

  4. I am starting a new Cryptocurrency, TulipCoin, which will be combined with a sales method whereby owners who bring in new owners will win shares in the increased revenue. TulipCoin will be administered by TupperCoin LTD, a division of Madeoff Quickly International. Better hurry, "CyberBeds" (where TulipCoins can be organo-algorithmically "grown") are in limited supply. You don't want to miss this one.

  5. Without defending Bitcoin's current valuation and much of the hype, I'm not sure I follow the logic of some of the professor's arguments in the last paragraph above.

    The fact that Bitcoin is divisible into smaller units doesn't mean that its total supply is economically infinite; for any version of Bitcoin, all of those smaller units add up to a finite whole, and each whole will have a particular value at any point in time. So if someone believes 1 BTC = 1 pack of cigarettes, dividing BTC into a million sub-units doesn't mean that one BTC could buy more or less than one pack of cigarettes.

    As to the forks, it is conceivable that at some point one version of Bitcoin will prevail as a form of payment in terms of having the best mix of processing speed and fees, and when that happens the other versions may fall away in use, leaving the winner with a finite supply (21 million). Or perhaps each version of Bitcoin will prevail over the others for a specific use, but again for each use there will be a finite supply.

    The code alteration point is a good one. But if someone alters the code to increase the supply, leaving aside some built-in constraints (e.g., if the value declines too much due to increased supply, miners won't want to process transactions because there is a real cost to doing this, so the code-alterer(s) may not benefit as much as hoped), this would simply bring it down to the level of today's fiat currency, and it may still have advantages over fiat currency.

    Personally, I applaud crypto-currencies for three reasons: (a) raising the level of societal awareness about the issues with fiat currencies, (b) as a form of peaceful civil disobedience, creating more monsters for the state to chase, thus diluting its efforts elsewhere, and (c) as a private sector alternative to state currencies. If you want to be short the USD and other fiat currencies, you now have more options than just gold. But certainly, caveat emptor.

  6. Bitcoin is just part of the block chain invention. People always point to the coin part of the block chain and say "Why is it worth anything" while missing the fact a two party exchange took place without guns involved.

  7. Actually, if you use a little rationality in an irrational system, it's a huge comparative advantage. If it comes crashing down, I've pulled enough of my winnings out into US Dollars that I'm ahead of my original bets. It's just trading Bitcoin, a fiat currency, for another form of fiat. Means I have more capital to invest in Robert Wenzel's recommendations in his daily alert!