Opinion: Buying bitcoin or any other crypto is a huge leap of faith and you don’t want to be the biggest fool

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Cryptocurrency investors exhibit a mind-boggling faith that makes it seem like buyers of stocks never take risks.

That’s not to say that acts of faith aren’t necessary to believe companies won’t cheat on shareholders. Enron and Worldcom, for example, are a strong reminder that trust in listed companies must be verified.

Let’s also not forget the level of confidence required to believe that the Federal Reserve will not depreciate the US dollar DXY, -0.05%. The fundamental value of the dollar has suffered over the past 15 years at the hands of multiple rounds of quantitative easing and the Fed’s efforts to keep interest rates low. In the process, the Fed’s balance sheet rose from $ 800 billion in 2006 to more than $ 8 trillion.

Cryptocurrencies were supposed to be better than this. Bitcoin BTCUSD, + 0.21%, ethereum ETHUSD, + 0.17% and other cryptos arose out of resistance to blind trust in business and monetary authorities, built instead on an anonymous and decentralized trust foundation. How ironic that the crypto world has, in the process, developed in a way that requires even more blind faith.

This doesn’t mean that you should automatically avoid cryptocurrencies. But don’t think that you don’t rely heavily on the honesty of others. You should also remember that, unlike publicly traded stocks and the Fed, cryptos are unregulated, although there has been plenty of speculation that the SEC will impose such regulations.

Tether reserves

An example of this need for faith is the lingering mystery of whether Tether USDTUSD, -0.02% of the coins are all their creators claim they are. Tether coins are a special type of cryptocurrency known as a stable coin, which are designed to be redeemed at any time for US $ 1 per coin. Tether says it fully backs coins with reserves, which the company defines as currencies, cash equivalents and other assets, which cover every stable coin it issues.

But foreigners find this difficult to verify. I am by no means the first to report this and have no new information one way or the other. Rather, my point is to marvel at the confidence crypto enthusiasts have in Tethers.

How is this claim essentially different, or more credible, than the legal mandate codified in the Federal Reserve Act that the Fed must keep prices stable? I don’t want to take sides in the crypto debate, which has become as polarized and heated as our current politics. Rather, my point is to disabuse you of the myth that it doesn’t take blind faith to own cryptocurrencies.

Bitcoin and other cryptos

Are you sure you understand how bitcoin and other cryptocurrencies work, as well as their protections against vulnerabilities and risks from known and unknown sources? Most likely, very few of those who have bought crypto have such a precise and complete understanding.

There is no shame in admitting that it is not. If there is anything to be ashamed of, it is insisting that you circumvent blind faith by avoiding Federal Reserve bills (i.e. dollars) and holding crypto. . You are not.

Hear from Joachim Klement, director of the CFA Institute Research Foundation and former head of equity strategy for UBS Wealth Management. In an email, Klement conceded that despite having degrees in theoretical and particle physics, math, economics, and finance, every time I try to figure out cryptocurrencies, I get lost. Either I manage to translate the jargon into something in simple English, in which case I often end up with trivial conclusions, or I am unable to translate the jargon and technical terms into something meaningful.

Still, investors don’t seem to be lacking with seemingly limitless reserves of blind faith. Dogecoin DOGEUSD, + 0.64%, originally created as a joke, now has a market cap of $ 32 billion. The market cap of Shiba Inu, another crypto coin, jumped to $ 14 billion after Tesla CEO Elon Musk tweeted a photo of his dog Shiba Inu.

Claude Erb, former commodity portfolio manager at TCW Group, characterizes the crypto worlds’ dependence on blind faith in religious terms: In an interview, he pointed out that no one has actually seen the Bitcoin blockchain, and yet we have faith-knowing and benevolent. Is it so different from a belief in a crypto god? He asks. Many acts of faith are needed.

Why is this important?

You might think of all of this as little more than much ado about nothing, involving the gambling activities of investors whose investment currency seems to boil down to You Only Live Once. But in fact, only Tether got so big that its collapse would have a huge impact on the rest of the financial system, not to mention your own net worth. There would be ripple effects that could lead to the collapse of significant parts of the global credit and equity markets.

Most of the discussions I have had with crypto enthusiasts are reminiscent of the Biggest Fool Theory. According to him, it doesn’t matter whether Tether is telling the truth about its reservations, whether someone has seen a blockchain before, or whether you really understand how cryptos work. The only thing that matters is whether there is someone who will buy a bigger fool from you at a higher price.

To illustrate the Biggest Fool Theory, Warren Buffett recounted the following joke, which he said was told to him by his mentor Benjamin Graham:

An oil prospector, moving towards his heavenly reward, was greeted by St. Peter with bad news. You are qualified for the residency, says Saint Peter, but, as you can see, the enclosure reserved for the oil men is crowded. There’s no way to get you in. After thinking for a moment, the prospector asked if he could say just four words to the current occupants. It seemed harmless to St. Peter, so the prospector cupped his hands and shouted, Oil found in hell.

Immediately the gate to the compound opened and all the oil men walked towards the lower regions. Impressed, Saint Peter invited the prospector to move in and make himself comfortable. The prospector stopped. No, he said, I think I’ll go with the rest of the boys. There may be some truth to this rumor after all.

Before investing in cryptos, don’t you want to be sure that you aren’t the butt of a similar joke?

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment bulletins that pay a fixed fee to be audited. He can be contacted at [email protected]

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