Is Bitcoin Just a Distraction?

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I’ve spoken before about some of the terminology that gets thrown around in the Bitcoin space that gets on my nerves. More specifically people talking about “investing” in crypto currency when they are in fact speculating in a high risk market. There are also “traders” coming out of the woodwork who had never traded successfully in any market in the past and in a matter of months are selling courses and speeches on how to be a Bitcoin Baller.

Bitcoin is not an investment

As I’ve said before, Bitcoin is not an investment. Investments are assets that put money in your pocket each month, more specifically dividends from an active business or rental income. Buying bitcoin is no more of an investment than taking a stack of cash out of the bank and keeping it under your mattress is.

If you are buying something in the hopes of price appreciation you are speculating not investing. It is normally recommended that you speculate with no more than 5-7% of your portfolio.

Overnight traders

As for the traders, since we are talking about a currency that has no dividend we would be talking about using metrics that are used in the Forex Market. Forex traders use economic indicators to measure whether they think a currency is under or overvalued.

So what is the GDP, retail sales, industrial production, PMI, CPI and consumer confidence of the people that use Bitcoin? How does it compare to the US Dollar or the Japanese Yen? There are some stats to look at but nowhere near what a professional trader would use. Therefore I would characterize it as a wildly risky speculation or gamble and not in the realm of trading.

It’s easy to make money buying and selling in a frothy market. Remember how easy it was for people to flip homes in 2005-2008 when all you had to do was buy a house, put in a new sink and sell it at a 30% higher price? I do. Those people weren’t making money because they were good at renovation. In fact, most of them knew very little about renovation and after 2008 they went back to doing what they actually knew how to do.

Day trading is something that I have known very few people to actually make a living doing. Now that I think about, it is about the same number of people that I have met that make a living playing poker. In my experience most people in both camps are trust fund kids that use the label to make it appear as if their money had something to do with their own abilities.

Real day traders are glued to their screens every day at least an hour before the market opens until an hour after it closes. They know one or two very specific markets like the back of their hands. They live it, they breathe it and they go to sleep thinking about it. This is because it is one of the most competitive occupations you can have. You are up against some of the smartest people in the world that have been picked out of Ivy League colleges and groomed by the top financial companies to compete against you. They make their living by eating your lunch.

Does this sound like the kind of environment that most of these Crypto-traders operate in?

What are the Uber drivers saying?

Bernard Baruch described the scene before the crash of 1929:

“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”

There is an article that is being shared by many as a testament to the rise of Bitcoin. When I read it I can’t help but think of the quote from Bernard Baruch.

The article is entitled Middle America Is Crazy in Love With Bitcoin and it is chock-full of red-flags that Bitcoin is now in bubble territory.

From the article:

It’s not just bankers and techno-nerds buying up this “digital gold,” hoping to sell them for more later, but flight attendants, ironworkers, and small business owners.

So in other words, every Tom, Dick and Harry is buying Bitcoin, not because they have any intention to use it, but because they are speculating on the price.

Ryan Williams, a 35-year-old school bus driver, admits he doesn’t fully understand how Bitcoin or its rivals work.

He doesn’t know what it is, how it works or even how it is supposed to be used, but what the hell, the price is going up so let’s give it a roll of the dice.

It’s like being in Apple at 10 cents,” said Greg Salerno, a 39-year-old ironworker from Hoboken, New Jersey.

He put $1,600 in Bitcoin. Now they’re worth over $20,000.

“In five to 10 years you could be sitting on something nice,” said Salerno.

After hearing about his success, his coworkers come to him for advice.

So an iron worker got in early and rather than cashing out he’s planning on having the same parabolic price appreciation for 5-10 years. Now all of his iron-worker buddies with no knowledge of the market are pouring in with hopes of similar price appreciation.

The big bucks have also drawn hucksters looking to exploit the naive and greedy.

I have noticed a huge amount of Crypto-currency gurus that are nothing but scam artists. Look into their past and see what they were pitching a year or two ago, probably some other completely unrelated doom-and-gloom or get-rich-quick scheme.

I point this out not to make fun of blue collar workers or middle America. The point is that Bitcoin has nothing to do with their occupation or expertise and that this is indicative of a bubble. Real money is made by consistent returns on investment that you know about or by speculating against conventional wisdom and being correct. No one gets rich by going along with the heard and buying in at the end of bull markets.

A Yuuuge distraction

I would like nothing more than to see Crypto-currencies used worldwide instead of fiat currency. It’s use along with smart contracts do indeed have the potential to revolutionize pretty much every aspect of our lives. However, I do not see that happening anytime soon.

I see Bitcoin currently as a high risk speculation, a money transfer service and a vehicle for illegal activities, not as a currency that can stand by itself. Bitcoin can be considered a currency once it is adopted on a large scale to buy things priced in Bitcoin instead of piggybacking off the value of other currencies.

Many people are being distracted by the Bitcoin market and not learning about real investing. To make constantly good investments you must take the time to learn how to be a good investor. You can make a lot of money but if you don’t know how to keep it, that money will be like water slipping through your fingers.

My other concern is that people are being distracted by the utopian promise of Bitcoin and neglecting life here in the real economy. People are led to think that it is an escape to the debt bondage and Frankenstein economy that every western country is currently living under. These things can be fixed only by a cultural change to recognize and deal with the truth. Until that happens technology will only cater to and reflect the biological and psychological make-up of those that use it. In fact, I would say that much of the technology we use today is exacerbating, rather than improving, psychological problems and authoritarian control. There is no technology that will get the masses to suddenly act more rationally or ethically, those qualities are brought about by proper upbringing and education. Technology like Bitcoin may bring us a more comfortable future but if society continues to hold bad ideas then that same technology could also bring about a worse future.

By all means, speculate with crypto-currencies with money that you can afford to lose. Accept Bitcoin in your businesses. Just please do not let it distract you from learning about and building long term cashflow and don’t get the idea that no hard work is needed in order to bring about a more free and prosperous society.

  • Jay

    “…Day trading is something that I have known very few people to actually make a living doing…”

    I made a small fortune day trading. Of course, I started with a large fortune.

    “… Bitcoin is now in bubble territory…”

    I’m really curious as to just exactly how and when Bitcoin entered bubble territory. Was it in July of 2010 when BTC rose 1000% in 5 days (from $.008 to $.08)? Maybe the next year when it rose to $32? Seems to me price movements in BTC are pretty tame lately compared to the early days. Seems to me BTC has been making complete fools of any naysayer that warns “bubble”.

    Are the comparisons between BTC and stock bubbles valid? A stock is not money, after all. When the last investor piles in to a stock, there is only one direction the stock price can go. On the other hand, if every single state-sponsored currency unit piled into BTC, it would still appreciate because BTC is deflationary money and it is limited in supply in relation to the things it could buy which are always increasing.

  • A characteristic of a bubble is that you can only tell for sure if it is one in hindsight. The market is currently operating exactly as you would expect a bubble would so I don’t see how that’s making fools of anyone. Only time will tell.

  • Another characteristic of a bubble is when people attack with religious vigor talking about “a new paradigm” every time anyone simply looks rationally at the market.

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