Cryptocurrency: Get Rich Quick – or the biggest quasi-Ponzi scheme ever?

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  • Author : Bill Vasilieff
  • Date : 23 Mar 2021

Bill Vasilieff discusses the legitimacy and longevity of cryptocurrency, laying out plainly the risks for potential investors.

I will put my cards on the table. Bitcoin (I include all cryptocurrencies actually) is the biggest quasi-Ponzi scheme ever and an awful lot of people are going to lose an awful lot of money. Some already are, as scams involving cryptocurrency are already widespread. On the other side of the coin the snake-oil salesmen who get out while the going is good are going to make a killing. It is always the case with situations like this.

 

‘What is Bitcoin – is it a currency or an asset?’

I am always amazed when I ask fans of cryptocurrency very simple and basic questions like ‘What is Bitcoin – is it a currency or an asset?’ and I get met with utter confusion. ‘Who issues Bitcoin?’. The response is always ‘I don’t know’. So, these crypto fans are buying something that they can’t work out what it actually is they are buying or who they are buying it from – smart! Criminals and terrorists, however, have quickly worked out that it is a currency that works for them as an effective way of money laundering.

As Jamie Dymon, CEO of J P Morgan once said, when you bought Bitcoin all you were buying was the hope that someone else would pay you more than you paid, and he is right, there is no intrinsic value. The problem is that when confidence in Bitcoin crashes and there are no buyers it will crash spectacularly, and the suckers left at the end will be carrying the losses. Although I wouldn’t touch cryptocurrency with a bargepole, from a personal point of view I really worry that these losses don’t end up on the FSCS as many of the losses from the London and Capital Finance mini-bond losses are doing. The latest figures I have seen state that 2,878 LCF bondholders have been compensated to the tune of £56m, 864 bondholders have had their claims turned down and there are another 7,858 to go. By simple extrapolation that means another £118m in compensation and a total of £174m to be paid by the good guys. I don’t have any figures, but my impression is that Bitcoin is much more widespread than the LCF bonds so the potential impact on the FSCS is potentially mind-boggling and very worrying.

 

Create extraordinary wealth out of nothing…

Leaving  that aside I thought I would read up on cryptocurrency as I worry that just maybe I am missing something so I have tuned in to some of the self-styled gurus telling us all about cryptocurrency and how it is just going to keep going up; these gurus  are normally from the US! One such guru I watched recently started with explaining how money itself actually worked, which is interesting as I think few people can actually explain it. But he missed out some fundamental points which just proved to me that he didn’t know what he was talking about and was just another peddler of snake-oil or simply a dreamer who thought he could see what others, like me, just couldn’t, and that it was actually possible to create extraordinary wealth out of nothing. His disciples were going to be extraordinarily rich while luddites like me were just going to miss out because we couldn’t see the light. There is no shortage of such people on the internet

You will also have noticed that there have recently been some high profile ‘investors’ (there, it’s catching!) jumping on the Bitcoin bandwagon but you might want to reflect that some are just trading them and not carrying them or simply engaging in the good old ‘pump and dump’ scam. Both groups are just looking to make money while the going is good.

 

With cryptocurrency you end up with what you bought – absolutely nothing

Finally, the old analogy of the Dutch Tulip Bubble of 1636 which I am sure everyone has heard a lot about. As prices of tulip bulbs rose, people got swept up in a speculative fever, spending a year’s salary or more on rare bulbs in the hope of reselling them for a profit (ring any bells?). And then, as with any financial bubble, the tulip market imploded, sending traders and speculators into ruin. The good news then was at least at the end of it you had a tulip bulb whereas with cryptocurrency you end up with what you bought – absolutely nothing.  Recent comments from US Treasury Secretary Janet Yellen amongst others make it clear that regulation is on its way but a lot of damage will have been done by then and the message is stay clear for now as you could lose your shirt.

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