Bitcoin is turning into the mother of all Ponzi Schemes. Below are the criteria that make Bitcoin a Ponzi Scheme:
– It has no intrinsic value. A few merchants might exchange low priced goods for Bitcoins because when the value crashes, they might only be out a pizza, or a gift card. Few if any are exchanging Bitcoins for big ticket items like computers, cars, or houses. The reason is that when Bitcoin crashes, people can handle being out a pizza or a gift card. But no one wants to accept a 30 year house loan paid with Bitcoins to maturity. If Bitcoin crashes and goes worthless, who wants to be out an entire house? Bitcoin’s main value is that someone, somewhere, chased it higher and is therefore a greater fool than someone else who bought lower. The catalyst for Bitcoin is the greater fool whose rational thinking was overcome by greed.
– Some Bitcoin pumpers will claim that greater fool theory applies to equities too. That’s true but these equities have real companies and real employees with revenue, earnings, and profits to back their intrinsic value. Bitcoin has none of these things.
– How are most people making money in Bitcoin? They are selling when some greater fool comes along to buy. Bitcoin promoters spin this idea that holding this digital currency will protect you from fiat money manipulation but the entire scheme is paying to cash out the first Bitcoin investors from money invested by later Bitcoin investors.
– Bitcoin is being manipulated by private, non-government entities with no Congressional oversight. There is fake “mining” where a computer is used to solve some equation that no one cares about other than to control the speed at which the money supply of Bitcoin grows. People who hold Bitcoin are supposed to just trust anonymous private entities who control the speed at which Bitcoins are produced?
– Bitcoin pumpers claim the value of Bitcoin is in its blockchain technology backbone but blockchain technology is not a store of value. It’s a technology and that technology can be easily replicated and used in other financial transactions too. The Federal Reserve is investigating blockchain technology for using distributed ledger technology (DLT) for an efficient system that can more easily work with the different banks and financial organizations which do business with the government both domestically and internationally. This has nothing to do with Bitcoin. In fact, Bitcoin transactions take days to complete while credit card companies can process a transaction in seconds. Even most ACH (e-check) payments are faster than Bitcoin transactions. Bitcoin is the exact opposite of speeding up transactions and making them more efficient. Blockchain technology has nothing to do with the intrinsic value of Bitcoin. Blockchain technology will just be replicated and used in other financial transactions that have nothing to do with the value of Bitcoin.
Bitcoin Pump From Standpoint Research
Bitcoin Investment Trust (GBTC) had its price target raised by analysts at Standpoint Research from $11,000 to $14,000 which represents 1203.5% upside from GBTC’s current price. Standpoint Research has a Buy rating on the stock.
I made thousands of dollars for GuerillaStockTrading.com readers and myself by trading in and out of GBTC stock when it pulled back in May of 2017. It was a quick swing trade on the hype created by CNBC of how $500 turned into millions of dollars by holding Bitcoin for just a few years. I knew that the story would suck in other greedy people through services like Coinbase and that transactions over Coinbase take days to clear because Bitcoin is slow. By quickly positioning in GBTC I was able to front run the buying wave from new Coinbase accounts I knew would eventual hit. The profit thesis played out perfectly and I made thousands of dollars on a low risk, high reward setup.
The same Bitcoin promoters who claim that Bitcoin is a refuge against a bubble in the stock market never talk about the huge bubble that has formed in Bitcoin. Here is a chart that compares the current Bitcoin bubble to the largest bubbles in recorded history.
According to the chart above from Convoy Investments, the Bitcoin bubble is already the biggest bubble in 395 years, trailing only the Dutch Tulips back in the 1600s. By comparison, the 1990s dot.com boom is barely a blip on the chart.
Bubble and Bi-Polar Sentiment
Bi-polar switcharoos are the hallmark of a bubble. I had a co-worker who was horrified by my Bitcoin swing trade back in May of 2017 even claiming that he was “afraid I would lose it all”. Just last week that same co-worker came to me and said that he setup a Coinbase account and transferred money out of his U.S. based bank account into an offshore bank account used by Coinbase to purchase Bitcoins. This kind of bi-polar like switcharoo psychology is what you should expect to see in an irrational bubble where greed overcomes logic.
A high-profile switcharoo came from Jamie Dimon who just months ago called Bitcoin a “fraud” and said people who invest in it are “stupid.” Now, Jamie Dimon is considering offering Bitcoin futures trading to its clients.
The psychology of what is happening is that sentiment is getting more bullish for Bitcoin the higher it goes. Charlie Bilello has made an excellent example of this with his repeated polls on Twitter where he asks: Is Bitcoin undervalued, fairly valued, overvalued, or a bubble?
When the price of Bitcoin was $2,200, more than half of respondents thought Bitcoin was a bubble and just 15% said it was undervalued. Now that Bitcoin is at $9,495, it’s down to 39% calling bubble, and up to 34% saying undervalued.
Poll Results: higher the price of Bitcoin, less people believe it's a bubble, more people believe it's undervalued. pic.twitter.com/zxYIr6S7kV
— Charlie Bilello (@charliebilello) November 22, 2017
This is a textbook lesson on market psychology and bubbles. Logic dictates that if respondents thought Bitcoin was in a bubble back at $2,200, an even greater number of respondents should think Bitcoin is in a bubble today at $9,495. Instead, greed and the fear of missing out has overpowered logic. Emotions like greed and fear are seldom based in logic.
Bitcoin Has Never Been Battle Tested
Bitcoin is a highly speculative “investment” (not sure you can even call it that). What do you think is going to happen to Bitcoin when the US economy goes into a recession and speculative investments crash?
Bitcoin has not been battled tested in a business cycle. We have not had a recession or a financial crisis since 2009. All other asset classes, we know what happens to their price in a risk off recession and Bear market. Bitcoin has not been tested in that arena. Since Bitcoin’s main value is speculation (greater fool theory), what happens to the price of Bitcoin in a risk off market when speculation stops and money moves into defensive sectors? Right. Bitcoin will crash and the crash will be so big that it will leave deep psychological scars on the public. We have seen this happen with the dotcom bubble, the real-estate bubble, and even the gold bubble. The difference with these asset class bubbles is that they had intrinsic value and so it took about a decade but most came back. Bitcoin has little if any intrinsic value beyond speculation and so it may never come back after the bubble pops.
Coinbase In a Bitcoin Selloff
With a Ponzi Scheme, the scheme always first reveals itself when a large portion of people attempt to withdraw their money at the same time. The reason is that with a Ponzi Scheme, it takes new people buying Bitcoin in order to allow earlier Bitcoin buyers to cash out. If too many people withdraw at the same time, and not enough new buyers come in to the market, withdrawals have to be frozen until enough new money does come in.
Coinbase is not a bank. Coinbase even tells you that they can shut down your account and take your money at any time in their disclosure statement and you must accept that as a condition of using their service. During the big Bitcoin selloffs in 2017, Coinbase froze accounts that were trying to cash out. You can Google “coinbase scam” to see hundreds of such complaints. You can also check out Coinbase’s BBB page here. In the event of a massive panic exodus from Bitcoin in a bubble popping event, Coinbase will freeze your account and may even shut it down. What are you going to do about it? Coinbase is not a bank or financial institution. It has no licensing and is not regulated as such. Coinbase told you that they reserve the right to shut down your account at any time and you agreed to that condition in order to use their service. There’s no SEC, FINRA, or bankruptcy courts to liquidate and distribute what’s left. Coinbase will process their own accounts first and maybe their preferred “high-value” clients. Your account will stay frozen and you may not get anything at all and there’s nothing you can do about it. Who you gonna call? Ghost Busters!