Why I’m buying a bigger piece of ‘the greatest scam in history’

From Eric Wade, Analyst, Stansberry Churchouse Research:

“Bitcoin is the greatest scam in history.”

“Bitcoin mania has ‘clear parallels’ to the spread of infectious diseases, according to Barclays.”

“Bitcoin could break the Internet.”

“There’s a ‘decent probability’ bitcoin goes to zero.”

These are just four of the relentlessly downbeat mainstream media headlines about bitcoin over the past four months. Reading them, it’s hard to believe anyone would dream of buying bitcoin.

Indeed, there are so many pundits declaring the death of the cryptocurrency that there’s even a website that tracks the obituaries. Since bitcoin’s launch in 2010, it’s been declared dead more than 300 times in every outlet from The Independent to CNBC.

Each time the media proclaim bitcoin’s death, they generally rely on the same short list of reasons why:

  • Criminals and money launders adore it.
  • Bitcoin isn’t money because you can’t buy anything with it.
  • It’s too volatile to be a store of value.
  • Bitcoin isn’t backed by anything.

Recently, I said even if Warren Buffett calls it “rat poison” I’m still buying. Today, I’m going to tell you why each of these objections are wrong…

1. Criminals and money launders adore bitcoin

Criminals and money launders DO love bitcoin. But you know what else they love? Cash, prepaid gift cards, real estate and shiny gold bars – all assets that are laundered every day.

The fact that it’s easier to launder cryptocurrency than cash isn’t a reason to stay away from bitcoin.

Regulations are catching up. Off the record, some law enforcement agencies say it has become easier for governments to track and stop cryptocurrency laundering than it is for cash. After all, every single bitcoin transaction appears on a ledger that anyone in the world can access. Cash vanishes.

Certainly, some cryptos have inventive ways to make transactions harder to track. But most laundering ultimately requires moving a crypto into another asset – something you can’t do with large sums of money without attracting attention.

2. You can’t buy anything with bitcoin

Overstock, Expedia, Microsoft and thousands of other online retailers and brick-and-mortar shops already accept cryptocurrencies as payment.

Until we get more regulatory clarity, we probably won’t see a truly global retailer like Amazon or Walmart accepting bitcoin. But I’m confident it will happen at some point fairly soon.

Not that it’s necessary. A number of crypto debit cards already and let you spend your bitcoin anywhere that accepts Visa or Mastercard. These cards, such as the one offered by CryptoPay, convert the bitcoin into your local currency without waiting for the stores to accept cryptocurrencies.

In the meantime, networks are speeding up, fees are going down, and cryptocurrency is increasingly being used for cross-border transactions.

This is all a track that’s being laid for a future where digital currency is as common as Mastercard.

3. Bitcoin Is too volatile to be a store of value

This is the most powerful argument against bitcoin. Rapid price changes (swings of 10 percent or more in a single day) are common. That’s enough to scare away even the most risk-hungry investors.

That doesn’t make bitcoin a bad long-term investment, though. Since the cryptocurrency launched early in 2010, its only had a single down year (in 2014 it lost 63 percent of its value). That gives it seven years of positive returns, including four years when it returned over 1,000 percent.

And if the market continues to grow, volatility should decrease. That’s because more participants can blunt the impact of a deep-pocketed trader (or institution) doing a lot of buying or selling.

Think of it like a small-cap stock that trades a few hundred shares a day. If a seller needs to offload 1,000 shares, he could easily destroy the stock’s price because he’ll sell to any buyer at any price.

In contrast, nearly 5,000 shares of Amazon change hands every minute. That deep pool of buyers and sellers helps smooth out volatility.

But it’s important to remember that there’s no such thing as a store of value that’s not volatile. Amazon shares fluctuate. Gold prices have spiked more than 10 percent in a single day (they’ve dropped that much, too). During the global financial crisis, even housing prices weren’t immune to a precipitous fall. Values plunged more than 50 percent between 2009 and 2011 in some areas.

And there will only ever be 21 million bitcoins in the world. We can always mine more gold, build more houses and print more money. But bitcoin is resistant to inflation. And that’s one of the key goals for investors seeking a store of value.

4. Bitcoin isn’t backed by anything

That’s true. But what’s backing most fiat currencies today? The days of being able to redeem your cash for gold or silver are long gone. Instead, U.S. dollars, for example, are “backed” by the “full faith and credit” of the U.S. government.

Bitcoin wasn’t issued by a government or any other centralised authority. It’s a few lines of computer code running on an interconnected network of computers around the world.

In that sense, it’s backed by faith in a network of computers (or miners) that run bitcoin’s code and verify transactions. So as long as the network remains operational and decentralised (i.e. it runs on a broad range of independent computers), you should be able to trust that bitcoin you own today will be here tomorrow.

Bitcoin’s digital element might make the non-techie crowd uncomfortable. But that’s how bitcoin allows you to transfer value across the internet without several layers of middlemen. There are no banks, governments or central clearinghouses required – just the computers that help the network run.

Don’t let crypto bears panic you

If you put yourself in the shoes of middlemen (banks, credit unions, ATM operators and payment processors), you can see why they’re scared. That’s why people like Jamie Dimon, the CEO of JPMorgan Chase, have lashed out (he called bitcoin “stupid” and a “fraud”, among other things).

Central banks are frightened, too. They’ve long used the money supply as a way to control economic activity. If the world switches even a fraction of its economic activity to a decentralised digital currency, they lose some measure of control. Rather than fighting the trend, some central banks, including the Bank of England, are already exploring the hypothetical impact of releasing their digital currencies.

In short, no matter what the crypto bears say, bitcoin is here to stay. More than US$6 billion in bitcoin traded hands in the past 24 hours. Someone’s using it for something. (We recently showed you just some of the ways blockchain – the technology behind bitcoin – is already being used in our daily lives.)

So instead of panicking whenever another financial luminary or central bank declares the death of bitcoin, look at it as another sign that bitcoin is becoming something serious… something our CEOs and political leaders can no longer ignore.

Good investing,

Eric

P.S. If you’ve been thinking about how to get started in cryptos, before they take off again… this is a great way to get started. You’ll learn what you need to know… how to understand cryptos… and the basics of investing. You’ll thank yourself later.

× Subscribe to Crux
Want more posts like these?
Like us on Facebook?
Crux Contributors