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One of the most misleading statements, if not an outright lie, about cryptocurrency is that people invest in it.
No one has ever invested in BTCUSD bitcoin, -1.79%. They speculate. It’s a distinction Gary Gensler, chairman of the Securities and Exchange Commission, should keep in mind when the SEC rules on a pending application for a bitcoin exchange-traded fund proposed by VanEck.
An SEC decision could be made in June. If the regulator gives VanEck the green light, bitcoin will be much more available to retailers.
Specifically, people with self-directed 401 (k), as well as individual retirement accounts (IRA), will be able to put funds tax-sheltered in crypto. Six companies have applied to list crypto ETFs, including Fidelity, the largest retail investment brand. It’s easy to imagine that the speculative craze could turn into a rush. In this case, the government would encourage no, subsidizing the most blatant bubble of modern times.
You might be wondering if people shouldn’t be free to choose their own investments, quotes?
Yes they should. But citizenship does not give the right to a tax deferral. Tax deferrals are a matter of public policy.
The government defers taxes on pension funds for two good reasons. Society benefits when people accumulate savings because they are less likely to become destitute. And it benefits when people invest rather than consume, because the country accumulates capital in this way.
Bitcoin and other cryptos do not meet any of these conditions. It is clearly not an investment. If you think it doesn’t matter, try telling your spouse that you are putting the family nest egg in lottery tickets.
Money spent on lottery tickets is not saved, it is simply consumed. Likewise with crypto.
“Crypto does not deserve Uncle Sam’s blessing.”
Benjamin Graham, a Wall Street sage, has already defined investing as an operation which, after careful analysis, promises security of capital and a satisfactory return. Cryptocurrencies, which fell 20% on a May day and 50% on a single moon cycle, do not promise security.
Since legitimate investments also fluctuate, what distinguishes a speculation? According to economist John Maynard Keynes, speculation is mostly about investor psychology. No: how much is something worth? but, what do other people think? Conversely, a true investor may ignore psychology. He values his investment according to its intrinsic value. Its value is usually derived from the income it generates, not from market noise.
Bitcoin does not produce any income; that’s all the noise.
VanEck, on his website, alleges an investment case for Bitcoin. This suggests that Bitcoin is increasingly being used as an asset with monetary value.
The statement is reductive: it has value because it has value. In truth, bitcoin is not used as a currency. Nobody asks for the price of a washing machine denominated in bitcoin.
People speculate on bitcoin to make money in dollars, which is a currency.
VanEck’s second rationale, Bitcoin adoption continues, does not advance an investment case. This is in accordance with the explanation offered by Charlie Munger, someone else trades poop and you decide to trade it as well.
VanEck also argues that bitcoin is digital gold. But GC00, + 0.17% gold is not an investment either. It does not produce any income and there is no rational way to assess it.
There is a notable difference between bitcoin and precious metals, but not in favor of bitcoin. Gold has an industrial function, and it has a monetary equivalence that dates back thousands of years. Gold is precious, but the inability to calculate its value accurately makes it a speculation.
Bitcoin is a speculation with no intrinsic value other than the value of secrecy which primarily interests drug lords.
It is not a currency and it is not equipped to serve as currency. It is much slower than the systems used to process Mastercard and Visa (Bitcoin processes 4.6 transactions per second, compared to 1,700 for Visa). It is far too volatile to be used as a measure of payments.
The most publicized provider and virtually the only one to accept bitcoin was Tesla TSLA, -0.08%, who also invested in bitcoin. After garnering public interest (and raising the price), Tesla then informed Wall Street (and its supporters) that it had cashed in $ 272 million from its so-called investment.
Self-proclaimed Tesla CEO Elon Musk then decided that Tesla would ultimately not sell cars for bitcoin. Rebel he is, Musk now demands payment in legal tender.
Read: Musk says Tesla sold around 10% of bitcoin to test the market and will resume authorization of crypto transactions when 50% of miners use clean energy
And: ARKs Cathie Wood Blames Elon Musk, ESG Investors For Recent Crypto Crash
Bitcoin promoters often spring from the blockchain technology the coins are based on. The blockchain has generated tangible gains in logistics, however, bitcoin does not confer any rights on the technology. For investment purposes, they are not linked.
VanEck also claims a rarity value. Rare? There are over 1,300 cryptocurrencies and no limit for news. And scarcity is not enough as an investment argument. Rare droppings are always droppings.
VanEck’s next rationale is that bitcoin adds to portfolio diversification. Keynes said it best: one good deed is safer than 10 bad ones. Buying a collection of assets, each of which has no value, cannot add value or security to the whole.
VanEcks Final Rationale: Growing Demand: More and more investors are buying bitcoin, including institutional investors. This is the biggest fool theory.
Securities regulators would be advised to consider VanEcks’ statement. If increasing demand is the rationale, what might be the outcome if demand collapses?
Neither the press nor Wall Street has been sufficiently skeptical of crypto. Everyone has succumbed to the dismal stupidity that because bitcoin is volatile, it should only include a small portion (rather than zero) of investor accounts. But volatility is not the main problem. It is a symptom of the problem, which is underlying uselessness.
Read: Suze Orman Says Bitcoin Is A Place To Put Money And Leave It
Washington should note that the median retirement account is only $ 65,000. It’s easy to imagine that some savers, if allowed to do so, would put a huge stake in crypto and possibly explode their pensions.
The SEC’s fee is to examine whether the offered ETFs operate in a fair and liquid market. It usually does not examine the merits of the investment.
In this case, it should. Congress has specified certain assets as unsuitable for retirement funds, including collectibles such as stamps and rare (tangible) coins. One of the reasons is that these assets are not likely to be accurately valued. This is certainly true with crypto. The SEC should seek to clarify the legislation on this point.
Further, the SEC might reasonably conclude that no guarantee can be made regarding liquidity, as there can never be assurance of investor demand for an asset with no intrinsic value.
Gensler taught crypto at MIT and is said to be sympathetic to the industry. The SEC is also under pressure to act as Canada has approved several crypto ETFs. The industry is exerting gentle pressure by throwing money at the old regulators. (Two former SEC chairmen are industry shillings.)
Gensler should take inspiration from Andrew Bailey, the Governor of the Bank of England, who said crypto has no intrinsic value. Buy them only if you are willing to waste all your money.
After the 2008 crash, Gensler named CFTC chairman told Congress he would work to ensure another financial failure does not occur. Neither he nor anyone can stop the crypto from exploding. But it can make it a lot less painful. Crypto doesn’t deserve Uncle Sam’s blessing.
Roger Lowenstein, former Wall Street Journal reporter, is the author of six books on finance and economic history. He writes the Intrinsic Value column on Substack, where this was first posted SEC Memo: Don’t Activate the Bitcoin Bubble. Follow him on Twitter @RogerLowenstein.
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