Bitcoin Mania Continues

[ecosophia]

You know that a speculative mania has entered its final stages, and bodies will start plummeting from windows in the measurably near future, when people begin doing the most obviously idiotic things to pile into the bubble. 

With Bitcoin, that moment has arrived. According to this recent article, people are using their credit cards to buy Bitcoin and carrying the balance. So -- ahem -- they're taking out loans, in effect, at whatever rate their credit card happens to charge, to buy a speculative investment, and paying the interest in the fond hope that their Bitcoins are going to make them rich anyway. 

In the immortal words of Keith Brand, "Dear God, this is going to end so badly." 

Any of my readers who have money in Bitcoin, or any other cryptocurrency, in any other spirit than the one that leads people to blow lots of money on slot machines in Vegas, will want to be ready to wave goodbye to their investment...

Comments

[auntlili]

The trouble with greed is that it overrides common sense. It affects even those whose business is to see beyond an appealing offer and examine the underlying merits. About 30 years ago, a series of prestigious universities, museums, charitable foundations and individuals were relieved of $500 million in total by a Ponzi scheme called Foundation for New Era Philanthropies. They included Harvard, Princeton, the University of Pennsylvania, and a former US Treasury Secretary. One institution that did not become embroiled, despite considerable pressure, was the Philadelphia Museum of Art, That was because the President of the Board, a lawyer called Robert Montgomery Scott, stood up to his board and said "I'm too stupid to understand it, so we're not doing it." I met him when he was an old man, long retired. He was the scion of a great Philadelphia fortune, viewed the luxury of his surroundings with detachment, was indifferent to the blandishments of promoters, and was basically greed-proof. For me, his leadership provided an important lesson: if I'm too stupid to understand it, I don't do it.

[ecosophia]

Many thanks for this story! The name of the scam should have been a dead giveaway -- John Kenneth Galbraith pointed out a long time ago that whenever people start gabbling about a new economic era, what that always means -- always -- is that somebody's rediscovered one of a handful of old, bad ideas that inevitably crash and burn. But Mr. Scott's rule is a very good one: if you don't understand it, that's probably because it doesn't make sense, and that in turn suggests very strongly that either it's a matter of honest idiocy or someone's trying to hide a scam inside it.

[peristaltor]

Let's see. According to Minsky (via Keen), there were four stages of speculative investment. IIRC, the Ponzi phase, where investors had to roll over the borrowed financing while hoping for the asset to appreciate, was the final stage before a speculative collapse.

I did enjoy this passage from the Wiki entry on Minsky:

"…his theories have not been incorporated into mainstream economic models, which do not include private debt as a factor."

That explains so much.

[ecosophia]

Don't...include...private...debt.

Okay, I knew that mainstream economics was living in a set of delusional fantasies at which florid schizophrenics can only gaze in envy, but I didn't think it went that far.

I'm reminded of one of those rules for evil overlords: "I will have as one of my advisers an average eight-year-old child. Any flaw he detects in my plans will be fixed before implementation."

[peristaltor]

Not only debt, but profit! In mainstream econ, all money a company collects goes to pay wages and costs; therefore all prices are "fair."

Keen's book was quite clear about how bad this debt blindness is. Once you include the debt-based monetary system (which is 97% of our currency), any debt deflation means actual money disappears from circulation.

Even eight-year-olds can understand that a debt disappears when it is repayed or defaulted on. Not a difficult concept. Yet it's only understood, as you say, by evil overlords….

[ecosophia]

That's fascinating, in much the same way that a really well-developed schizoid delusion is fascinating.

Physicality

[ferngladefarm.blogspot.com.au]

Hi John Michael,

The problem that I have with these crypto currency things is that I can not touch them or see them. Now I would be comfortable with those two problems if I could exercise some level of control, but no, can't do that either. The question I have about these things is: what are they?

Cheers

Chris

Re: Physicality

[ecosophia]

Well, the same thing is true with most money these days -- and even the money that takes the form of pieces of paper or lumps of metal is just a set of abstract tokens. Giambattista Vico pointed out centuries ago that that's what happens as civilizations age: they get further and further into abstraction, until the abstractions become completely detached from the underlying realities and down the whole thing goes.

As for what cryptocurrencies are -- well, that again begs the whole question of what money is, and that probably deserves a blog post.

Re: Physicality

[(Anonymous)]

Have you taken a look at Debt: The First 5000 Years?

Re: Physicality

[ferngladefarm.blogspot.com.au]

Absolutely! People appear to have lost track of the concept. Interestingly, I read about the recent Consumer Electronics Show over in casino land. What interested me about the stories were the size of the budgets being thrown around by companies. We are talking billions. All that says to me is that money ain't worth what it used to be! My thinking on the matter is that policies expanding the money supply are subject to diminishing returns. Oh well...

[exalhel]

I thought it was bad when I saw a guy buy $30K worth of shares on his credit card. At least with shares it is theoretically possible (although unlikely) they may in the long run have a return greater than the rate of interest on the card.

[(Anonymous)]

I'm under the impression that there are people doing perfectly legal activities out there that I can't pay with anything else (possibly because PayPal booted them). (Haven't started paying anyone in bitcoins yet. Might in the future.)

But I do hope *they* convert any bitcoins to something vaguely similar to money as soon as received, because "investing" that is crazy.

[(Anonymous)]

Ah, but why should private individuals be the only ones doing really stupid things?

KFC Canada will let you buy their chicken-in-a-casket with Bitcoin (https://twitter.com/kfc_canada/status/951550065411313664).
Chicken pieces don't self-assemble in the fryers; they were bought on revolving lines of credit from suppliers. If any of those suppliers suddenly gets a Bitcoin brainwave...

Now pump and dump happening on other Crypto Currencies

[chaosadventurer]

While crypto currencies have their place (which is a whole other discussion), what we are seeing happening now is pure currency speculation. The most recent thing I've seen are adds advocating the penny stocks of crypto currencies as the next big wave, complete with how to buy the complete plan of how to make millions in the process. I imagine we will be seeing(or already seeing?!) pump and dump scams of some of various crypto currencies, especially including the weak ones.
Crypto Currencies' challenges are the power requirements just for maintaining your wallet, never mind mining, and the threat of quantum computing that may well wipe out the integrity of crypto currency by allowing double spending (where I can 'spend' one unit of currency more than once)

Found a nice and useful write up about crypto currency at https://blockgeeks.com/guides/what-is-cryptocurrency/


On another note, found you are an author we can track on BookBub, but your write up is a bit messed up with bits of html in it but missing the closing greater than signs.
It is also a bit out of date. It might be worth your while to claim it as yours and at least do a quick cleanup and update of it.
https://www.bookbub.com/authors/john-michael-greer

[(Anonymous)]

That article has some major math problems. If you read the article in detail.

33% of people (in the survey) are buying crypto with DEBIT cards.

18.1% of people (in the survey) are buying crypto with CREDIT cards

Of those 18.1% who used a credit card only 21% did NOT pay off the balance.

That means that 79% of people who bought crypto with credit cards DID pay off their balance right away.

21% of 18% of investors who used credit cards = 4% of crypto buyers are buying on credit cards and carrying a balance.

The article doesn't even catch this flaw in their numbers stating that "22.13 percent of Bitcoin investors did not pay off their credit card balance after purchasing Bitcoin.".

This is flat out wrong using their own data. The number is 4% of investors.

They also lump debit cards and credit cards into the came catagory of "conserning". People buy crypto with credit and debit cards because it's fast. Bank transfers take 5-10 days.

If only 4% of a market is buying on margin that's a pretty healthy market from a leverage perspective.

Also. The vast majority of CC transactions are capped at $500/week or below by the exchanges.

Bit coin has a 241 billion market cap. 4% of buyers carrying a max ballance of $500/week. I wish all markets were so lightly leveraged.

I have found this type of article typical of most reporting on crypto in the main stream. A flashy headline and really bad math. There are many good reasons to be skeptical of cryptos but "everyone buying on margin" isn't one of them.

Charles Hugh Smith has a great article called "The Wrong People Are Getting Rich" that looks into this

https://dailyreckoning.com/wrong-people-getting-rich/

The question I have is; can you be in a bubble when the entire financial sector and the main stream media are screaming that you are in a bubble (and they have been for over a year) ?

Isn't a feature of a bubble that you can't tell you are in one while it's inflating? Is Bitcoin the first bubble in history that was called correctly by the MSM?

JMG I share your consern with speculative bubbles. I've read the great crash based on your recommendation and have read everything you've ever posted.

What I wonder is this; could crypto be the mechanism through which baby boomer wealth is transferred to the younger generations, not just in dollar terms but the real wealth?

Right now boomers controll 80% of all investable wealth. When 80% try to sell to 20% (who have no money) the everything bubble pops. IF 5% of instructional (baby boomer) money goes into crypto we could see $100,000 bitcoin and all of a sudden there are younger buyers for all the houses/stocks/etc.

At that point is it a bubble or is it a currency revaluation?

All the Gold bugs (who are baby boomers) long believed this would happen with Gold/silver as the revaluation mechanism.

A part of me wonders if the Gold bug story was right but the mechanism was wrong?

We are coming up on a 4th turning and that chaos could drive a ton of money into crypto also. Is it a bubble if wealthy people use it to move wealth. It has some unique utility in those regards. The world would be a very different place economically if crypto had existed in 1930's Europe.

I'm on the gen x/mil cusp and have been very conscious of the coming revaluation/ everything bubble for a long time. To me cryptos seem like a new (and unique and useful) tool in that kind of an environment. That untility could justify a very high price (with an unknown buying power)

I'm aware of how many could's and if's I've used here. And I don't think it's different this time from a business as usual POV. But what if 2019-202? it isn't business as usual? Not end of the world chaos but a Twilights Last Gleaming reshuffling of geopolitical and geoeconomic reality.

That's where I see the value in cryptos. That doesn't mean it isn't in bubble right now ;)

Who's the mining company?

[(Anonymous)]

Since our first discussion of this, I have learned that one "mines" bitcoin [at a very slow rate] by allowing one's computer to be used to work on complicated mathematical problems. Specifically, cryptographic problems. I then wanted to know: Who would your computer be trying to codebreak for? The originator of Bitcoin is not known. Clearly, it's somebody trying to unlock a great deal of private data whose rightful owners don't want them to have it. Might it be the KGB, MSS, or NSA trying to get into dissidents' emails? Criminals trying to break into bank transactions? You can't possibly know. Since you would expect the source to be publicly acknowledged if everything was entirely legit, the odds that they are up to some kind of no good seem fairly high to me.
-Dewey

Re: Who's the mining company?

[ecosophia]

That seems quite likely. Thanks for pointing this out!

Re: Who's the mining company?

[(Anonymous)]

The canon explanation is that those cryptographic processes are what maintains the registers of the transations - so, the miner is paying transaction costs of those already having and trading bitcoins. (It's however, also plausible that the transaction costs are lower than what's spent in mining, and the rest is diverted.)

You'd do quite well to suspect CIA, NSA, or Mossad; after all, those are the enemies of civilization, and Tor (also associated to "privacy" and "anti-statism" activists) was paid for by US military intelligence.

Re: Who's the mining company?

[(Anonymous)]

"so, the miner is paying transaction costs of those already having and trading bitcoins"
- Oh, so you mean a pyramid scheme. ;-)
Dewey

Chickens home to roost

[danielsobieraj]

Well, it finally happened.

Mind you, I expect this to not be the last time. Bitcoin down 27%, and other crypto currencies down even more.

The top post on r/cryptocurrency on reddit are suicide hotline numbers. R/bitcoin is also having trouble coping.

It truly is shocking and sad how many people have been hurt by this so far, and this is a small sample (reddit), and not the only crash to come.

https://i.imgur.com/ZmypTLd.png

Re: Chickens home to roost

[ecosophia]

Thanks for the heads up. I'll head for a financial site shortly and watch the carnage.

Re: Chickens home to roost

[(Anonymous)]

Apparently, this was neither random nor even new:

https://www.reddit.com/r/CryptoCurrency/comments/7qu8t9/18002738255_us_national_suicide_hotline/dss7u4i/ .

(But, of course, a new batch of noobs bought shortly before without checking that.)