Gold Coin vs Bitcoin – just go on a crypto blog and invite a fatwah by criticizing it

The Bitcoin debate rages again. I’ve been asked more times by friends about whether to buy Bitcoin in the last 3 months than I care to remember. This video is about as telling as it gets about understanding raw value. At the moment Bitcoin pricing is as random as a Lotto ball dispenser although only higher numbers are being drawn for now (despite the 20% flash crash yesterday, shows panic is a server outage away). My answer to them is I wouldn’t touch it with a barge pole but everyone’s risk is their own. I answered along the lines below.

As a contrarian investor, this video warms my heart. When everyone seems to love something it tends to be a sign that ‘greater fool theory’ is alive and kicking. The video shows a woman unwilling to trade a stick of gum for a 1oz gold coin. If there was ever a better example of mean reversion, this must be it. Mark Dice did a similar video with people asking if they wanted a Hershey’s chocolate bar or a silver bar. Everyone chose the Hershey’s! While I am sure the response on Wall Street would elicit a different response it shows how few people understand the value of barbarous old relics.

The biggest issue with Bitcoin or any other crypto is that it is mined in cyber space. Do you ever wonder why you need to update your Norton anti-virus software every other day? Yes because some criminals are phishing/hacking your data trying to rob you blind. That’s just the amateur cowboy stuff by the way.

Gold needs to be dug out of the ground with considerable effort. The thing that spooks me about crypto (without trying to sound conspiracy theorist) is that state actors (most top end computer science grads in China end up working in the country’s cyber warfare teams), hackers or criminal minds (did you know 70% of top end computer science grads in Russia end up working for the mob (directly or indirectly) the value of coins in the system could be instantaneously wiped out at the stroke of a key. We’ve had small hiccups ($280m) only last week. So as much as the ‘security’ of these crypto currencies is often sold as bulletproof, none of them are ‘cyberproof’. Just like your home software, crypto at every stage has to constantly update its protection to prevent vulnerabilities and it is naive to think it can keep a 100% safety record.

It only takes one serious hack to bring most if not all the crypto down as vulnerable. In order for Auric Goldfinger to crush prices in Gold he’d need to smelt lead bars and paint them, were any left over from the pail and brush used on Jill Masterson. Gold is one currency that governments often threaten to confiscate (India springs to mind). Imagine if North Korea turns Bitcoin into the state currency?

I have just been on a Bitcoin forum and the insults being hurled at disbelievers has all the hallmarks of Tesla share ownership. It is a religion. Not an investment. I was accused of having no idea on crypto to which I argued 90%+ of those that own it probably don’t either. So having owners in Bitcoin or other cryptos knowing a tiny fraction of the risks means they’ll stampede faster than the servers can process data should ‘bit hit the fan’. One crypto ‘expert’ tried to tell me that artwork has no value as it is not tradable. It is tradable, just illiquid. I argued that the latest sale of DaVinci’s artwork fetched $450mn or 45,000 bitcoin. Storage costs aside over the long run I’ll have a Leonardo thank you!

As Mark Twain said, ”It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

My assessment is that the fascination of those around me about Bitcoin suggests that many of the fan base are punters trading on the greed of others. It has no underlying core value other than those prepared to pay more for it. That indeed is the tenet of all investment but like most manias, the risk/reward ratio can turn on a dime (no pun intended). At some stage the fall out from crypto will be ugly. As financial pundits know

the market can stay irrational longer than you can stay solvent”

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