Fun’s over for the crypto crowd. On March 19, 2021, Bitcoin came crashing down from all time highs of $64,829 to $30,202 in the matter of months–a drop of 53.4%. That’s a number that rivals the stock market crash in 1929 that started the Great Depression.
Non-coiners will be quick to point this out.
“Haha, I told you Bitcoin was a scam.”
“That’s why you don’t gamble on computer programs.”
Some points I agree with. I also disagree with some points. Here are some of the talking points about Bitcoin. I’ll let you decide if they’re good or bad.
Point #1. They are “decentralized”
The main point of Bitcoin was to escape from the necessity of banks. No longer would we need a middle man to manage payments and take money off the top. We could just do the transactions directly without meeting or knowing who the other person was.
Enter the IRS.
They made capital gains on cryptocurrency taxable. The IRS also requires crypto exchanges to collect your Social Security number when buying or selling above a certain threshold.
There are still decentralized wallets and ways to “DeFi” yourself (don’t forget your password), but there will always be a readable record of every transaction that ever happened.
Point #2. Unlimited supply
The call of Bitcoin enthusiasts is that there’s a limited supply of Bitcoin–which is true. There will only ever be 21 million Bitcoin.
But what about the other cryptocurrencies?
Ethereum has an unlimited supply, and it arguably has more use cases than Bitcoin. For all we know, it may take over as the flagship cryptocurrency.
Or it could be some other coin that hasn’t even been invented yet.
Or we could find ourselves in a world where many different cryptocurrencies are accepted.
If that’s the case, it doesn’t matter if Bitcoin is capped at 21 million. If you can literally create a new cryptocurrency out of thin air and it is adopted, there’s unlimited supply.
Dogecoin was created as a joke, and it currently has a market cap of $41 billion. Doge isn’t a unique case either.
Point #3. No defined way of pricing
As I mentioned in a previous post, there’s no viable way to value cryptocurrencies. It’s an asset class we’ve never seen before, and there’s really nothing we can compare it to.
Stocks can be valued using price to income methods.
Bonds are valued on their coupon payments.
Even houses can be valued on how much you’re likely to receive in rent payments.
Without cash flow, cryptocurrencies are like gold. Not even. Cryptocurrency is more like investing in art. A painting doesn’t provide any value other than being nice to look at.
Bitcoin is the same way. It’s only worth as much as people are willing to pay.
Point #4. The biggest crypto pumpers have stakes in crypto exchanges
Fans of “The Social Network” movie know this first one: the Winklevoss twins. After being famously cucked by Mark Zuckerberg, they got into the crypto game.
They founded Gemini, an app that lets you trade cryptocurrencies and even pays you interest on the crypto you HODL.
And anybody who knows Bitcoin knows the Pompliano family.
Anthony Pompliano is a co-founder of Morgan Creek Digital, a hedge fund which specializes in blockchain technologies and digital assets.
One of the assets they own is BlockFi, an app, much like Gemini, that will pay you interest for having diamond hands.
Both Gemini and BlockFi run on the same network.
They also make their money in a very sneaky way.
Much like Robinhood, they make money every time you make a transaction. There are no fees per se, but there is a spread.
These screenshots were taken seconds apart. One is a buy order and one is a sell order.
Notice the conversion rate on the button at the bottom. I could buy Bitcoin for $36,804, but I would have to sell it for $35,989. That’s a spread of $815 or 2.3%.
If a buyer and seller transact for the same amount at the same time, the extra 2.3% goes straight into the crypto exchange’s pockets. Pomp and the Winklevii make their money by arbitrage.
The Final Point
Any one of these points could be good or bad.
If the network is fully decentralized, we’re able to realize more individual freedoms with our money. It also opens up the possibility for more fraud.
Supply doesn’t have to be limited to be successful. Many major reserve currencies are able to print more money if needed. There’s also the possibility that unlimited supply without a centralized governor could lead to the downfall of crypto altogether.
Having no defined way of pricing could render Bitcoin useless. On the other hand, people have been investing in art for thousands of years. If there’s demand, it has value.
Maybe the Pomplianos and Winklevosses are snake oil salesmen. Maybe they believe in the true mission of cryptocurrencies, and they just found a way to capitalize on it.
In the end
Regardless, people have been hating on Bitcoin and cryptocurrency since it first became popular. It’s understandable to be skeptical about an asset that you can’t see or feel.
I was one of these people once–in a way I still am. I have a tough time envisioning a world where crypto takes over fiat currencies.
I’m also the person that’s been buying crypto like crazy recently.
The reason is simple. I don’t want to be left out.
Perhaps that’s FOMO speaking. I like to think of it as hedging my bets. I use the BlockFi app to invest in a handful of crypto coins. It pays me interest for placing these bets–good luck getting that deal at a casino–and my total bet is a small percentage of my total net worth.
If cryptocurrencies fizzle out forever, it will suck losing that money. At least I’ll be able to make it back quickly.
If cryptocurrencies take over the world, I’m going to be damn glad to have a stake in them.
Low risk, high reward.
I don’t know what’s next for Bitcoin, but I know that I’ll be a part of it. For better or worse.
Signed, Diamond Hands Drams.
Thanks for reading!