Steven Hopkins is chief operating officer and general counsel of Medici Ventures, an Overstock.com subsidiary focused on the advancement of blockchain technology.
“Cynicism masquerades as wisdom, but it is the farthest thing from it.”
– Stephen Colbert
The run-up in bitcoin and other crypto assets has offered cynics of all stripes a chance to look smart by condemning cryptocurrency as a “Ponzi scheme” that could “cause a recession.”
These arguments are not new, but they are ignorant.
It is time that we stop allowing people who do not understand (or simply ignore) the truth to comment on this market as if they know something us greater fools simply cannot see.
People who don’t like bitcoin try to call it a Ponzi scheme or a fraud because then they no longer have to discuss its merits. Jamie Dimon does this.
This week, Bert Ely did it too. His opinion piece in The Hill is subtly titled, “Bitcoin is a Ponzi Scheme and Will Collapse like One.”
Unfortunately, these same people have never looked up the definition of “Ponzi scheme” or “fraud” because, even if bitcoin will fail or result in investors losing all their money, it does not meet the definition of either a Ponzi scheme or a fraud.
Ely’s big claim is that bitcoin “will stay afloat only as long as enough people buy the fiction that bitcoin represents real value.” He neglects to say how this is any different than the U.S. dollar or the Venezuelan Bolivar. His central thesis relies on the basic premise of ANY medium of exchange: it only works as long as people will accept it for goods and services.
Even if we let Ely simply change the definition of a Ponzi scheme to fit his argument or ignore the fact that we can buy things like sheets, toasters and tennis shoes with bitcoin, he is simply defining ALL currencies. Nobody accepts dollars because they like green-colored paper, and the idea that government or an army can compel confidence in currency is utterly naïve.
It is also proven false by the Venezuelan bolivar, the German mark and the Zimbabwean dollar. Once we realize this, it is fun to read the rest of Ely’s article.
For example, let’s edit a passage from Ely to fit the analysis above:
“All Ponzi schemes eventually collapse, of course, when sufficient amounts can no longer be raised from new investors to pay off earlier investors. The same will occur with [the U.S. dollar and the Venezuelan bolivar]. …. Investors will pull back from buying [dollars and bolivars] causing their prices to begin a sustained decline. This overdue disaster will occur because all [U.S. dollars and Venezuelan bolivars] have no intrinsic value.”
At this point, I considered adding a BTC/USD price chart over the past couple of years to demonstrate the truth of Ely’s statement (as edited).
However, I nixed that in favor of my second favorite passage: Ely’s conclusion (also edited) where he promises that “[U.S. Dollars and Venezuelan Bolivars] and the like will quickly fade into financial history, just as tulipmania [and the German mark, the Argentinian peso and the Zimbabwean dollar] did, serving solely to remind future generations of the folly of gambling on illusions of value [like fiat currency].”
I am sure that Ely will say I took his argument out of context and I definitely added a lot of commentary in the passages above, but if his baseline premise is really that bitcoin has no intrinsic value, this is exactly what he is saying about dollars, bolivars and every other fiat currency.
Contagion and market collapse
The new argument from the financial establishment this week comes from the start of trading bitcoin futures at the Chicago Board of Exchange (CBOE).
It goes something like this: “We have to care about this crazy bitcoin bubble because, now that futures are trading, a price collapse could trigger a recession.”
In his piece for Business Insider thoughtfully titled “Now There is A Way for Contagion from a Bitcoin Price Collapse to Flow into the Rest of the Markets,” Jim Edwards argues that “An asset’s value comes from the fact that its market is liquid.”
This is smarter than Ely’s “no intrinsic value” argument, but then Edwards stops taking us seriously and notes with alarm that a pub in London and gaming company Steam will no longer accept bitcoin as payment. He goes on to extrapolate from those facts that bitcoin might lose its liquidity and become an asset bubble that could burst.
Now he is beginning to sound more like Ely.
Edwards does not mention that Overstock.com (which owns my company, Medici Ventures) has seen the variety and amount of its bitcoin sales more than double over the past year or that payment processing companies like Bitt, Square and Spera are actively working to allow customers to pay for virtually anything at any merchant in bitcoin without any requirement from the merchant to receive or hold cryptocurrencies.
That kind of liquidity is nearly as good as the liquidity of dollars. In the case of international payments, it may be better.
Edwards also conveniently ignores the incredible variety of crypto assets that any bitcoin holder can purchase on cryptocurrency exchanges. His final point that the bitcoin market has never been tested by futures trading is also true but does not mention the most important aspect of bitcoin futures: There is no direct link between the bitcoin market and the futures market, which is cash-settled.
It is ironic that speculative bets denominated in dollars that will never, ever be settled in bitcoin are now the reason that we must be concerned about the price of bitcoin.
There will never be a short squeeze. There will never be failures to deliver on short sales. This is not even a real futures market as we know it, because no contract will ever be fulfilled or settled in the actual currency/commodity that is subject to the contract.
So, the danger isn’t bitcoin itself or any of the people who use bitcoin. It is the speculators on Wall Street making enormous long and short bets on what will happen to the bitcoin price.
Instead of worrying about how dangerous bitcoin is for the economy, perhaps we should be asking why we want to let Wall Street bet billions every day on whether bitcoin’s price will go up or down and how much they will try to manipulate the bitcoin market to make sure they win in futures trading.
If there is a systemic risk, it is in the derivatives market, not bitcoin.