On Tuesday, Jamie Dimon decided to launch an unprovoked salvo at bitcoin, calling it a “fraud,” likening it to tulip bulbs, saying he’d fire any trader “stupid” enough to trade it, and generally staking out exactly the position on cryptocurrency disruption you’d expect from the boss of the biggest bank in the country.
Perhaps it was just Dimon’s comments, perhaps it was also Bank of America Merrill Lynch the same day calling long-bitcoin is the most crowded trade in the market, but something gave way under the crypto market and prices plunged. Though it’s hard to imagine anyone being truly surprised at Dimon resenting a technology designed to (somehow) make him irrelevant, there was something novel in Dimon’s attack. Up until now most major Wall Street execs have just shrugged at bitcoin, reserving any disdain they might have for a private audience. So the acid in Dimon’s words really stung.
Evidently JPMorgan isn’t done shitting on bitcoin. On Wednesday the bank’s closely watched quantitative analyst Marko Kolanovic – whose doomsaying around volatility targeting strategies caused a market-wide convulsion in July – launched himself into the bitcoin conversation with a note that asks: “Are Cryptocurrencies a New Asset Class or a Pyramid Scheme?” It’s not hard to tell where Kolanovic stands on the question.
Are they currencies? Currently there are few legitimate reasons to use cryptocurrencies apart from speculation…. The claim that cryptocurrencies have lower transaction costs is inaccurate as an asset’s transaction cost is almost always driven by its volatility rather than processing fees (e.g. bitcoin volatility is ~100%, or ~15 times the average currency volatility). Valueing cryptocurrencies as traditional currency is not possible as there [is] no underlying ‘economy’ to assess supply /demand for its goods and services, there is no fundamentally driven inflation, there are no ‘rate differentials’, etc. Perhaps more importantly, there is no organized power behind this currency to e.g. ensure its long term viability, secure trade, enforce its convertibility into other goods and services, or provide investor fraud protection.
To bitcoin enthusiasts, the last point is one of bitcoin’s draws, not a drawback. “No organized power” means no bailouts, no wanton money creation, none of the reckless stuff that has in recent years led the economy into
hyperinflation and disaster steady, continuous growth. No, bitcoin is the quintessential, the unadulterated platonic ideal of money, as long as your definition of money refers to a purely apolitical and robotic exchange system that has never actually existed in human history.
Are they commodities? … Unlike gold, cryptocurrencies are not engrained in human psychology and backed up by the longest possible backtest. The claim of scarcity of cryptocurrencies via specific code implementation that limits their production is bogus as well. There is no scarcity as virtually anyone can create a new cryptocurrency, and existing algorithms can be modified (e.g. hard forks) to increase the amount of cryptocurrencies.
That “hard fork” Kolanovic mentions refers to bitcoin’s recent mitosis/revamp, which gave us a near-clone called Bitcoin Cash in addition to a newly rejiggered bitcoin classic. Though necessary for bitcoin’s survival, the event doesn’t help the argument that bitcoin is an inviolable constant akin to precious metals. There is no analogous instance of gold investors democratically opting to alter gold’s atomic structure.
Now we get to the good stuff:
Are they Pyramid Schemes? Another worrying aspect of cryptocurrencies are some parallels to fraudulent pyramid schemes. Initiator of a pyramid scheme often ensures ownership of a disproportionally large share of future profits. For instance, in the case of bitcoin, it is believed that an unknown person (or persons) known as ‘Satoshi Nakamoto’, before disappearing, mined the first 1-2M coins, or ~10% of the coins that will ever exist ($4-$8bn USD current value). While initial mining requires a negligible effort, the benefits for subsequent participants start diminishing. Mining becomes progressively more difficult, and eventually unprofitable, marking the likely end of a scheme. A way around this in Pyramid schemes is to bypass the original chain and start a new one of your own. The cryptocurrency analogy would be to start a new coin if it is more profitable than mining the existing one. This can work as long as there are enough willing and uninformed buyers.
There it is. Pyramid scheme isn’t a perfect descriptor, but it gets the basics right. What matters isn’t so much the structure of the institution itself, but the assurance that there will come along a greater fool to buy into it at a higher price than you did.
Here’s the part where we have to include the mandatory blockchain proviso: blockchain, the underlying technology of bitcoin, has numerous promising applications in finance and beyond. This is all true, but it only obscures the real nature of bitcoin. What makes people pay like $4,000 for a bitcoin isn’t the potential for blockchain to one day intermediate voting or prostitution – it’s the fantasy that bitcoin will supplant money (or at least the belief that others feel that way).
The irony here is that as it has come to exist in the real world, bitcoin is less a financial technology that a social technology. It’s a profitable (to some) meme. Which, roughly speaking, a pyramid scheme is, too.
Anyway, here’s Kolanovic’s conclusion:
While we don’t know whether the price of cryptocurrencies will go up or down in the near-term, the history of currencies, governments and financial fraud tells us that the future for cryptocurrencies will likely not be bright.