World Bank Economist vs. Bitcoin
I’m an economic historian who’s spent a lifetime working with the World Bank, United Nations and in countries like South Africa.
Now, I’m finally setting my sights on the hottest new investment in a generation (and sharing my controversial UNEDITED opinion). Check below for part one of a two-part series where I take on the red-hot cryptocurrency Bitcoin…
Click here to watch this week’s video or click on the image below:
This is Ted Bauman here, editor of Big Picture, Big Profits and of The Bauman Letter.
Today is the first part of a two-part series on why I think cryptocurrencies are a scam.
I get lots of people writing into me asking about cryptocurrencies and I decided, well, now’s the time to let my freak flag fly! Other people may be content to try to make money by promising the moon from the crypto movement, but I’m not one of them. I’m going to tell you exactly what I think. Before I do, however, click on the little “I” above my left shoulder, up in the screen there, you can see the sales pitch for the Bauman Letter. We’re doing very well this year, relative to the market because I’m focusing on real assets that provide real return.
Now let’s start today’s video with a quote:
“Bitcoin would not be a trillion dollar asset if the European union and the United States were doing their jobs of maintaining sound money. That’s the real reason they don’t like it, it exposes their underperforming.”
Now, encapsulated in that quote, I think, is a lot about the theoretical or shall I say ideological underpinnings of Bitcoin and cryptocurrencies, and that is that they are a response to what is supposed to be the undisciplined approach of governments who create new money in order to address economic problems.
Now I’m going to come back to why that’s a bunch of poppycock just now, but I want you to think about that. From what I’m going to tell you, do you think this is really about trying to replace the existing monetary system? I hope to convince you that it’s not.
Now, before I start, I’m going to simplify things by referring to Bitcoin rather than to cryptocurrencies in general. And that’s because Bitcoin is the most familiar to everyone. And also because the vast majority of alternative cryptocurrencies are actually Ponzi schemes designed to take money out of your pocket and put them into the pockets of the people who create them.
The second thing is, most discussions of Bitcoin and cryptocurrency start with a discussion on blockchain. Now, I’m not going to do that. That’s because it’s a distraction.
The fact that blockchain is a technology that does certain things doesn’t change anything about the role or the status of cryptocurrencies like Bitcoin. It’s kind of like talking about the social effects of air travel, and then focusing on how the wings of an airplane work. You don’t really need to know how the wings work in order to travel. You don’t need to understand blockchain to understand what I’m going to talk about with cryptocurrencies and Bitcoin. So I’m going to ignore it today.
The third thing is, here’s a video I’m going to flash a screen grab from this guy’s website. It’s a guy named Dan Olson. He’s Canadian. He released this video at the beginning of the year, at the end of January. It’s called, “Line Goes Up, The Problem With NFTs.” It’s got over seven million views. I would strongly recommend that you watch this video because it’s one of the most powerful indictments of crypto that I’ve ever heard and I think it’s something everybody should listen to and watch.
Now, before we start, let’s talk about the characteristics of money, because Bitcoin is claiming to be an alternative to money.
Now, what does money have? Well, money has a couple of different characteristics. One, it’s reliable and a widely accepted unit of account and means of exchange. Number two, it’s a stable store of value against a basket of commodities that people use on a regular basis. In other words, you want the price of a dollar to be relatively stable. You see, what happens when it isn’t with inflation like we’re experiencing now, people freak out.
Now both of these conditions require that a currency have low volatility and be uncorrelated to other asset prices, right? There’s no point in having a currency that keeps going up and down in value constantly because you won’t want to spend it, because you don’t know what it’s going to be worth tomorrow. And if it’s correlated closely to other asset prices, then again, it’s going to vary not in relation to things you want to buy or the things that you sell, it’s going to vary in relation to something else over which you have no control.
The next characteristic of money is that it should be cheap and easy to use. And a last one, which a lot of people ignore, is that it should be able to be stored in physical form if needed to reduce your dependence on external systems like electricity or the internet. Try spending your Bitcoin without both of those.
Now, the reason I mention that is because people talk about Bitcoin as though it were a currency. I’m going to show you why it’s absolutely not a currency and never will be. The second thing they often talk about is that it’s an asset and that it’s something that you want to hold because it’s going to become more valuable in the future. Now, Bitcoin is not an asset and that’s because assets have to satisfy one of the two following conditions, assets create value either because A, they are intrinsically useful and solve the need or solves a problem that many people have and recognize that it solves that problem and therefore want it, or number two, it produces a yield in and of itself and doesn’t depend on price appreciation to do that.
For example, a real estate investment trust that pays a yield of 8% a year is an asset that provides a yield, whether the price of their shares go up or down, you still get 8% dividends. That’s an asset. Bitcoin isn’t.
Now, here’s why cryptocurrencies are no good and why I don’t recommend them to anybody.
Number one, Bitcoin fails on every definition of a currency.
It’s not widely accepted as a unit of account and means of exchange. And one of the key reasons for that is because it’s wildly volatile. That means it’s not a stable store of value. Here is a chart over the last one year showing Bitcoin’s price.
Look at that. Right now it’s 30% less valuable than it was on this same day one year ago. But look at the volatility, down, up, down.
Now, the reason why that’s so important is because when a currency is so volatile, when it goes up and down, and here I’m not talking about inflation, I’m talking about both up and down, people say to themselves, well, I don’t want to spend this today because tomorrow it may be worth more and I get more if I wait until tomorrow to spend it. Or they say, wow, if this thing falls tomorrow, I want to get rid of it. I don’t want it. So therefore, I’m not going to accept this Bitcoin as purchase from people who want to purchase things from me, because if I accept it, it might be less valuable tomorrow.
So any currency that exhibits this kind of volatility is not going to be used by the general public as a currency. And this is what Bitcoin has showed us all along. It is not a currency.
In fact, paradoxically, if it weren’t volatile, nobody would want it. And I’ll show you why.
The second thing is that Bitcoin is expensive and difficult to use. It’s basically got to be produced by a network of computers that are mindlessly solving problems, hash problems, that are just there in order to try to create the system and make it secure and to try to make the blockchain system work. But in order to do that, people have to charge money when you want to do a transaction. I’m going to talk about that in a moment. But basically, it’s not like a dollar where any dollar you can go, I mean, hold a dollar, go and spend it doesn’t cost you anything to do it. Bitcoin can be very expensive to use.
It’s completely useless without electricity and the internet, as I said before, therefore it’s not safe. It depends on those systems over which we have no control. Something which its supporters tend to argue is a feature. Something that you want, that it’s not subject to the control of states. Well, electricity is subject to the control of the state and so is the internet. So if either one of those are gone, your Bitcoin is gone too.
The third problem is the Bitcoin is strong wrongly correlated with other speculative assets, particularly like growth stocks, which means that it’s not a hedge against anything.
When the price of growth stocks fell earlier this year, so did Bitcoin. That means that holding Bitcoin as a way to preserve value when other assets are losing their value, doesn’t do anything for you. In fact, what it tells you, that it’s being treated as a speculative asset, just like the other assets with which it is correlated. And that means that holding it in the idea that it’s going to be digital gold is pointless because it’s going to go down when the assets that you try to hedge against also go down.
It’s got a major scalability problem. That’s the fourth problem.
Bitcoin’s blockchain system uses what’s called, a “proof of work” protocol. That means that the network can’t handle very many transactions over short periods. The system simply would get overwhelmed if lots of people were trying to transact using Bitcoin to do things like buy pizzas, which is one of the most famous episodes, one of the first things somebody did with a Bitcoin. But it also means that those people who process Bitcoin transactions, the miners, charge transaction fees, because it’s expensive to run those big computer systems. And they’re vastly higher, those fees, than debit or credit cards.
Now, imagine going to Starbucks and saying, I want to buy a $4 cup of coffee and your choice is either, I’m going to have to wait for several hours for a Bitcoin miner to get around to processing my transaction, or I’m going to have to pay $5 for a $4 cup because that’s what the Bitcoin miner charges me for the transaction. That’s not something that anybody’s going to want to deal with.
Now, the problem is that the more people who use Bitcoin, the worse these problems become.
That’s because the higher the volume of transactions, actual buying and selling using Bitcoin, the more the scalability problem arises, the slower the transactions and the more you’re going to get charged to do them. So, for most people, Bitcoin is a non-starter as far as money is concerned. It’s much easier just to use cash or even to use debit or credit cards.
Now, as a result of that, the primary uses of Bitcoin are either for speculation or for illegal activity. Neither one of which contribute any value to society. The paradox here is that if Bitcoin were to stabilize and become less volatile and behave more like a true currency, there wouldn’t be any reason to speculate on it would there. So there’s a contradiction baked right into the basic notion of Bitcoin.
If you think Bitcoin is going to become a currency, then it’s not going to appreciate. In fact, it’s probably going to go down in price.
The key thing is that Bitcoin is not a store of value, it’s not a means of exchange, it’s not something that is ever going to be useful as a real currency. And therefore, it’s only use is for speculation. If it did start to behave like a currency, then it wouldn’t be useful for speculation. So what’s it good for?
Now, there’s a second class of problems that a lot of people actually ignore.
And that is the relationship between Bitcoin and all the other currencies out there in the world. Now in 1972, libertarian economists, Friedrich Hayek, proposed that the United States allow private enterprise to issue their own currencies.
The idea was that this would allow them to compete with one another until the most efficient currency emerged and beat out all the others.
Now, that’s a core argument of Bitcoin supporters, but as the history of United States shows, unregulated competitive currencies cause way more problems than they solve. For example, between 1837 and 1863, the United States experienced what was called, the “Free Banking Era.” Paper currency was not issued by the federal government. It was issued by individual banks with no regulation.
Now, theoretically, each bank’s dollar notes were backed by assets held by that bank and holders of the notes could exchange them for those assets if they arrived at the bank and said, hey, give me a dollar’s worth of what you got.
But three problems destroyed this system. They’re the same problems that would destroy Bitcoin.
First, there was no way to know whether or not a bank actually had the assets to support the currency that they issued. That led to a situation where the notes from different banks would not trade on a par.
For example, a dollar note issued by a bank in Wyoming could be trading for 60 cents on the dollar, whereas, one in Nebraska could be trading for a $1,20 as opposed to its face value of a dollar. And those values would fluctuate depending on the supply of these notes and the market’s assessment of the bank’s stability.
This is something that we’re already seeing in the crypto space, not so much with Bitcoin, but with other currencies and also in the relationship between Bitcoin and the US dollar and other currencies.
Secondly, all these competing currencies made economic activity incredibly complicated and actually undermined the economy.
Businesses would purchase goods in one bank’s notes, accept payment from customers using another set of notes and potentially give them change in a third set of notes. Because the value of those notes deviated from their face value of a dollar, people were reluctant to use them. And as a result, in many cases, people were forced back into barter. So, the free competition between different currencies actually had the paradoxical effect of undermining economic activity.
The third problem of the free banking era was that insiders who had access to non-public information about the banks, for example, banking officials and so on, who knew how much assets the banks held, could manipulate the system for their own profit at the expense of merchants and everybody else. So the problem that we had with that period was that without a single currency that everybody understood and trusted and used, the system actually became dysfunctional and held back economic activity.
Now today, instead of private banks issuing their own notes, what we now have is private tech platforms doing the same thing with their own cryptocurrencies, with the same results, as we’ll see from my next point.
My third point, and my last one for today, is that Bitcoin’s only function is price appreciation untethered to any economic activity.
Remember, if it’s not a currency, then it’s not being used as a currency, it’s being used as some sort of an asset. But an asset has to provide real use value, irrespective of its face value. In other words, it has to do something that’s actually beneficial for people. And if people aren’t using it as a currency, it’s not doing that.
On the other hand, any real asset provides a yield and Bitcoin and other cryptocurrencies don’t provide any yield. Instead, Bitcoin creates no value. Any money that people make from buying low and selling high in Bitcoin or any other cryptocurrency must come from somebody else who brought in, who bought high and ended up selling low.
In other words, there are as many losers as winners in cryptocurrency. Every cryptocurrency transaction ultimately is a zero-sum game.
No new value is added.
And the whole system depends on the influx of new Fiat currencies into the system in order to increase the value of the cryptocurrency, push up its price and therefore, allow people to sell to the greater fool. In other words, it’s a greater fool system, which is zero sum and depends entirely on a constant influx of fiat currency from the outside in order to be able to make money for those who speculate on it. You can’t make money on a self-contained Bitcoin system because Bitcoin has no value and it depends utterly on the flow of Fiat currency from the outside.
The problem is that because Bitcoin has no value outside of speculation, people have learned to make money by launching new cryptocurrencies.
That’s something that Dan Olson’s video talks about.
They issue on new cryptocurrency, they pump it really hard and they keep a large chunk of that currency themselves. And once they’ve managed to pump it through hype, and once it’s appreciated in value, thanks to that hype, they then sell it in exchange for what, Fiat currency.
That’s because they want the Fiat currency, because they know that that’s where the real value is, that’s where the money is, that’s where, despite inflation, the stability is. And so, the people who issue new cryptocurrencies aren’t doing them because they want to change the world, they’re doing them because they want to take money out of your pocket. That’s why there are thousands of cryptocurrencies.
Now, if you don’t believe me, if you don’t believe that this system is really based on hype, here’s a chart that shows basically sales of non-fungible tokens, which is really a derivative of the Bitcoin and cryptocurrency movement.
Look at what happened, the beginning of, or rather the middle of 2021. You began to see a huge spike in the number and value of sales of NFTs, things like Bored Apes and all that kind of stuff.
But look what’s happened since then. The market has collapsed. The other day, a guy actually said he wanted to sell Jack Dorsey’s very first tweet, an NFT from Jack Dorsey, basically, the very first tweet that he ever made. He bought it for several million dollars. And the other day when he tried to sell it, his offers were in the neighborhood over around $750. Nobody wanted to buy it from him because they realized that these things are essentially valueless.
It’s just a bunch of hype.
So, my final message for today and be sure to tune in next week, is that this is what’s going to happen to you if you get caught up in Bitcoin hype, you’re going to lose it all, just like the kid at South Park.
I’ll talk to you again next week and explain to you why the system is not only potentially going to take your money away, but that it actually creates more problems than it solves. And the problem that it’s creating are exactly the same problems that Bitcoin and other cryptocurrencies were designed to try to solve. It’s simply recreating them in a digital format.
Anyway, that’s all for me this week. I will talk to you again next week. Take care.