Cryptic skeptic

In the fifteen years of this blog's existence I have only written about Bitcoin four times. The extraordinary price action over the past few weeks means it's time to take another look. 

I encounter many acquaintances from my years in the financial services sector on social media, and several of them have been commenting on the Bitcoin phenomenon lately.  I should stress that these are all real people, but I am not giving their names or any clues to their identity, for obvious reasons.

• Person #1 is a confirmed Bitcoin skeptic, arguing that the value of one Bitcoin is now and forever equal to one Bitcoin.
• Person #2 is only slightly less of a skeptic, arguing that if you want to understand the intrinsic value of a Bitcoin, give your wife one as a gift for her birthday instead of the gold bracelet she has set her heart on.
• Person #3 has been thinking about taking a small position in Bitcoin as a portfolio hedge against disaster, but seems to be coming around to the view that physical gold might be a preferable option. 
• Person #4 is a full-on Bitcoin advocate, both as an investor and as an investment advisor, and has unknowingly led me to take a closer look at what is going on here.

A quick scroll through what we might call Bitcoin Twitter allows for no doubt that people who love Bitcoin, really love Bitcoin. It's hard to know whether it's closer to a cult or a religion. It sports its own terminology, in which mis-spelling seems to be a key ingredient: "hodl", "rekt".  And it has its articles of faith: "math + code = truth". 

The underlying rationale for the development of Bitcoin and other crypto-currencies is a mistrust of fiat currencies, which is of course something that crypto enthusiasts share with gold bugs. As one of the latter put it recently, "you can't trust governments with money". Given the explosion of fiat money creation that has been spawned by the COVID pandemic, it is no surprise that people holding that point of view have begun to ramp up the alarmist rhetoric about an imminent end to the fiat currency era, which arguably only began about a century ago with the gradual demise of the gold standard.

Interestingly, Wikipedia provides a definition of "fiat money" as "an intrinsically valueless object or record that is accepted widely as a means of payment". That would imply that Bitcoin is simply a newly-created form of fiat money, one whose sole distinction (and main attraction to its adherents) is that it is outside the control of governments. Here's something interesting, though: one of my earlier posts on Bitcoin, back in February 2019, was prompted by the near-collapse of Canada's biggest crypto exchange. And guess what?  There were immediate calls from investors facing financial losses for the government to step in with a rescue package, calls which were thankfully ignored by the government. You may not trust the central bank, but apparently it's nice to know it's there in case you need it.   

The recent price action in Bitcoin may be driven in part by fears over the demise of fiat currencies, but FOMO -- fear of missing out -- seems to be playing a growing role.  A lot of retail investors are getting involved, on a very small scale. A few days ago on Twitter there was an individual celebrating the fact that he had just set up a monthly purchase plan for Bitcoin, to wild applause from the cognoscenti. He or she stated an eventual ambition "to own one whole Bitcoin". The current price of US$ 30,000 is hardly chump change, but if you can't afford to commit that much to this asset class, you may be swimming in waters that are way too deep and shark-infested for you.

If you've read this far you will presumably have figured out that I am not yet ready to get involved in Bitcoin or any of the other cryptos. And that may very well be a mistake on my part, but I always try to stay away from investments I don't understand, and for now Bitcoin remains firmly in that category.