The bold prediction you read in the headlines come from Paul Krake, a former hedge fund manager.

Crypto is BS, complete BS. I’m the ultimate skeptic on crypto. China can never ban crypto? China banned crypto. Crypto can’t be regulated? The “store of value” argument? BS. The “comparisons will come as a medium of exchange” argument? BS.

Let’s be really clear here. The fraud that goes on in this space is unacceptable in equity markets, credit markets etc. The only reason it exists is because governments are behind the curve and they haven’t regulated it properly. I personally think that the coins will get regulated out of existence.

I’ve always been a skeptic on crypto. I think the behavior of people like Michael Saylor [CEO of MicroStrategy, pictured] and Elon Musk, those who advocated that young people max out their credit cards to buy crypto currency “that couldn’t go down”, to buy stable coins with 20% yield even though they didn’t know where the yield came from, would be criminal in any other market.

Well, don’t sugarcoat it for us, Paul.  His rant is quite entertaining.  I do enjoy a later comment: “If you don’t know where the yield is coming from, you’re the yield.”

Let’s break down a couple streams of cryptoskepticism.

Camp #1: It’s Too Chaotic

Some people look out at the crypto landscape and see frauds, instability, risk, insanity, and a variety of other lunacies.  They look back at the long, long, long history of financial frauds.  The number of schemes that have “turned to pumpkin and mice” (to borrow a Buffett phrase, referring to Cinderella at midnight) vastly outweighs that number of successes.  If you throw a dart at the financial markets, you’re much more likely to hit bad ideas, sketchy characters, and outright fraud than the next Microsoft.

So this type of cryptoskeptic just looks at the market and says it’s too wild, there’s going to be a massive crash/fallout, the risk/reward is too out of whack to put money into it.  In other words, they’re speculators who just evaluate this crypto market as not a good place to put money.  They might have said the same thing about subprime mortgages in the mid-2000s or baseball cards in the 1990s.

Camp #2: It’s Fool’s Gold

There really are two ways you can invest your money.  The first is to buy a productive asset like the share of a business, an interest in an oil well, a Treasury bond, a savings account, part ownership of a mine, or a McDonald’s franchise.  You invest your money and expect to receive a stream of payments while your money “works”.

This is actually the only real form of investing, but the verb is sometimes used for a competing option: speculating.

If you are buying fine art, Mickey Mantle rookie cards, Detective Comics #27, gold, copper, or anything else where you’re hoping for appreciation, you’re speculating.  This is also known as the “greater fool theory” – you’re hoping a fool with a greater bank roll than you comes along.  You are speculating that the price of an asset will rise, but the asset has no intrinsic value other than what someone will pay for it.

For example, if you buy a copy of Detective Comics #27 (first appearance of Batman) and pay $1m for it, all you can do with it is read it (if you aren’t afraid to damage your million dollar comic book!), show it to your friends, and put it in a safe.  On the other hand, if you have a successful Burger King franchise, it’s going to produce cash on an ongoing basis.  It has an intrinsic value.  A Picasso does not.  Its only value is that someone might pay for it, hopefully more than you paid.

A lot of stock market antics are speculating rather than investing – people buy a ticker and hope it goes up, rather than familiarizing themselves with the businesses they own.

There are some very smart people who have said they won’t own Bitcoin for the same reason they won’t own gold or pork bellies: they prefer productive assets.  And certainly if you look at a couple hundred years of financial history, equities are definitely the place to be.  Over any length of time, productive assets trounce “greater fool” assets.  Warren Buffett has a whole 2-minute spiel I’ve heard him do on several business shows about why gold is a lousy investment and it’s because gold itself doesn’t do anything.  Which would you rather have – a 60-square-foot cube of all the world’s gold, or all the farmland in America + ownership of Apple + ownership of a half-dozen Wal-mart sized companies  + about $1 trillion in walking around money?

So Which Camp is Right?

So what is Bitcoin, Ethereum, et al.?  It’s slightly complicated because it’s a currency.

You can’t invest in currencies.  You can speculate in them, betting that the Yen will become more valuable than the Euro, so you trade a bunch of Euros for Yen.  So you could speculate that BTC will become more valuable versus the USD.  But it’s no real different than putting money into Yen, Euros, or Rupees.  You’re making a currency bet.  Betting is not investing.

Some coins such as BTC have a limited mining life.  Some day all the Bitcoins will be mined and the thinking there is that this could act as a permanent store of value.  In other words, no matter how crazy the Fed or the Europeans or the Bank of Japan go, Bitcoin cannot be inflated.

This is attractive.  History shows that eventually all currencies go to hell, from Caesars shaving coins to Russians shaving orders of magnitude from the ruble.  Traditionally the inflation hedge was gold or other commodities.  Unfortunately with cryptocurrency, to do anything really practical with it – buying a car, buying a house, paying your taxes, paying your hospital bill – you need to convert it to fiat currency, so you have to factor in another currency.  The theory is that Bitcoin will remain stable, but for you personally, you have to state that as “my fiat currency will depreciate relative to BTC”.

And of course there are “stable” coins and the whole galaxy.  19,000.  Will they all turn to “pumpkins and mice”?

Paul Krake things so.  Do you?  Please let us know below!

You might enjoy reading a related poll where we asked “What’s your reaction to the crypto plunge?”

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raindog308

Dread Lord of LowEnd Content at LowEndBox

I'm raindog308, techno polymath and long-time LowEndTalk community Administrator. My technical interests include all things Unix, perl, python, golang, shell scripting, vintage operating systems such as MVS, and relational database systems such as Oracle, PostgreSQL, and MySQL.

I also enjoy using LEBs! I have an empire of little guys for VPNs, larger guys for apps, and big guys for databases and storage. When I'm not in front a screen I'm into German Shepherd dogs, quality knives, target shooting, theology, tabletop roleplaying games, and forest hiking.

I enjoy writing technical articles here on LowEndBox to help people get more out of their systems. You can find me on LowEndTalk @raindog308

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