Crypto currencies and the missed point

As the bitcoin price crash continues, investors must not take their minds off the blockchain opportunity.

Article updated: 7 February 2018 10:00am Author: Michael Baxter

I finally came off the fence regarding bitcoin back in October. I was not the first to warn that it was a bubble, but since then a trickle of warnings has become an avalanche.

Dr Doom

And now the governor himself has joined the ‘bitcoin is a bubble’ craze: Nouriel Roubini, the economics professor from New York University's Stern School of Business, who predicted the 2008 crisis more accurately than anyone - at least anyone I have heard of, has spoken.

Earning himself the moniker, Dr Doom, for his warnings about sub-prime mortgage securitisation, the Professor said: “Clearly, bitcoin and other cryptocurrencies represent the mother of all bubbles, which explains why every human being I met between Thanksgiving and Christmas of 2017 asked me if they should buy them. Scammers, swindlers, charlatans, and carnival barkers (all conflicted insiders) have tapped into clueless retail investors’ FOMO (fear of missing out) and taken them for a ride.”

Actually, I don’t disagree. Roubini said that the bitcoin bubble is worse than the Tulip bubble seen in Holland in the 17th century. I too drew a comparison with the Tulip bubble here, in my October article.

The view of an expert

What convinced me about bitcoin being a bubble was words uttered to me by Tom Blomfelt - the founder of Monzo Bank. Unlike Roubini, myself and the majority of people who make up the bitcoin cynics fraternity, he is an expert on finance in the digital era. The founder of Monzo Bank - not yet listed, I am afraid - Mr Blomfelt is a Fintech wizard. He told me that bitcoin “doesn’t actually solve problems that real people have. In fact, the overriding problem it solves is being able to buy drugs and various forms of pornography on the dark web, because it is an anonymous currency. If you take an anarchic view, it is great, if you trust central banks and want to prevent things like money laundering and terrorism, a traditional currency works just fine."

As for professor Roubini, he said: “Worse, cryptocurrencies in general are based on a false premise. According to its promoters, Bitcoin has a steady-state supply of 21 million units, so it cannot be debased like fiat currencies. But that claim is clearly fraudulent, considering that it has already forked off into three branches: Bitcoin Cash, Litecoin, and Bitcoin Gold.

Paranoia

Actually, I think the core idea behind bitcoin is based on paranoia. Libertarians love it because of their extreme distrust of central bankers, fiat money and quantitative easing. Whereas I believe that QE stopped the developed world from experiencing a 1930s style Great Depression.

Memories of dotcom boom

I recall, back in the late 1990s, attending an internet show at either Earls Court or Olympia - can’t remember which. I thought I understood technology, but as I drifted from one stand to another I realised I didn’t understand a word I was being told. Then I bumped into a friend, who happened to be the most technically literate person I knew. I asked him to explain, alas he could not: “I don’t have a clue what people are saying” he said.

I suspect that no one knew, including the people doing the talking. I see a parallel with bitcoin today.

But it is not just bitcoin. I read that someone launched something called a ponzicoin, as a joke, and it soared in value.
I see this as being more like a pyramid scheme than an investment.

Opportunity

And yet this does not mean blockchain or distributed ledger is a bad idea. Blockchain has the potential to remove the middleman from any asset transfer - creating so called smart contracts.

Let me give an example, the Uber founder, Travis Kalanick, has been in court over a dispute between Alphabet and Uber. In court he described the ride-hailing business as a ‘winner-takes-all’ business. But blockchain could change that, allowing distributed ledger to replace the Ubers or Lyfts from the equation.

During the dotcom crash, shares in Apple and Amazon got caught up, an investor who bought in them would now be sitting on a massive profit.

Watch Ethereum - it is falling in price with bitcoin, but I think the technology is truly ground shaking, there will come a moment when a buying opportunity emerges.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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