It seems in the past week, as bitcoin plunged below $US10,000, that cryptocurrency punters finally realised they have been buying absolutely nothing. Nothing as in zip, zero, nada!
Cryptocurrency trading is just simply wild speculative bets that even more punters commanding an even greater pool of fools will be prepared to buy nothing.
It’s like playing pass the parcel. But instead you pass on 15 grand in the hope someone will pass you 30 or 50 grand.
Let’s face it, people aren’t in it for a 5 or 10 per cent gain, are they?
No, they want mega bucks.
The crypto-craze is a high-stakes game born of desperate hope that relies on a level of naive trust the world has never seen before.
There is no collateral backing bitcoin or other cryptocurrencies.
There is no future income stream attached to them like stocks and bonds.
There is nothing physical you can hold, like gold, silver, stamps, artwork or even the tulips that powered huge speculative bets in the 18th century.
Bitcoin pundits have tried to concoct some sort of utility for them, such as their supposedly being a better way to store income and wealth or their being away to stop greedy bankers taking a clip out of every transaction.
But bitcoin’s price is so wild it can’t possibly be viewed as a relatively safe store of wealth or a stable means to make sizeable transactions. As far as transacting goes, cryptocurrencies are a joke.
Who really wants to sell their house priced at say, 100 bitcoins, for a notional real-world amount of $US1.57 million, as per a purchase contract, only to wake up a week later and find it’s still worth 100 bitcoins, but now only $US1.1 million in currency 99.99 per cent of the world accepts?
Only idiots, of course.
No, bitcoins are just electronic bits and bytes stored on some fandangled computerised ledger called a blockchain. That’s it.
“Ah, but there will only ever be 21 million created,” they yell. “That’s it, no more, and there are 7 billion people chasing them, so get in now or you’ll regret it.”
But little do crypto-nuts realise that their nothing-holding is being eroded each and every day.
People are selling bits of bitcoins all the time. Now that the price has hit the thousands, $US11,000 at last count, not too many people have that kind of spare cash around to punt on, um, nothing.
So instead they are buying less than nothing. A quarter, or a tenth of a bitcoin, or even maybe one-hundredth share in a bit of computer code.
It’s a foot on the crypto-ladder.
Not being too greedy, and the fact they can’t actually afford more, they rationalise their tiny share as being happy to make 10 or 25 per cent of a million US dollars.
Or a billion US dollars, I mean, who knows how high it can go when billions of others catch on and the global banking system collapses?
But if daily small fractions are being sold to meet the speculative aspirations of a few hundred thousand people, pretty soon the buying interest of the greater pool of fools will be diluted.
Then as price momentum wanes, as it eerily has this week, the original bitcoin punters, about 1000 people who hold an estimated 40 per cent of all bitcoins, could start to try and get out.
That’s when the panic starts and the crash comes.
Some, like Platinum Asset Management founder Kerr Neilson, are warning a bitcoin crash could trigger a bust in other bubbly assets.
From a sentiment point of view it is possible, but from a real monetary point of view it shouldn’t. That’s because cryptocurrencies don’t create or destroy traditional “fiat” money in and of themselves.
A buyer withdraws say $US13,000 to buy one bitcoin and the seller receives it in another account, leaving the banking system still in balance.
The same holds in reverse with the seller at a higher price profiting at the expense buyers.
As Mr Neilson said, the risk is greater if people are using debt to buy bitcoins. But it would require more than half of all bitcoin’s $US150 billion to $US200 billion market value to be backing debt to have any real impact unless it were highly concentrated in one country or just a few banks, which seems highly unlikely.
BLOCKCHAIN: A ledger on linked computers around the world with sophisticated mechanisms to authenticate transactions.
CRYPTOCURRENCIES: Entries recorded on a ledger kept on a blockchain. They include bitcoin, litecoin, petro, electroneum, ubiq and zcash.
BLOCK: A series of transactions involving a group of crypto coins added to the blockchain to create a sequential record.
MINERS: Operate computers linked to blockchains and collect fees, often in parts of the processed coin, for processing transactions.
CRYPTO WALLET: Programs and apps on which cryptocurrencies buyers and traders store their purchases.
FIAT MONEY: Conventional currency, such as our dollar.
CRYPTO BITS: Due to crypto being a bit of computer code, a person can buy a tiny fraction of a coin.
EXCHANGES: You can swap fiat currencies for crypto on crypto exchanges.
CRYPTO ATMS: Will take your fiat and give you back full or part-ownership of a crypto coin. Some allow you to also sell crypto in exchange for fiat.