Bitscam & Money
“As my dear old grandfather Litvak said, just before they swung the trap. He said, ‘You can’t cheat an honest man, never give a sucker an even break, or smarten up a chump.’” - Larson E. Whipsnade
At this point, the big question is how much is the value of bitcoin? Of course the answer is zero. Will it ever be zero? Maybe, maybe not, as large chunks are controlled, despite the marketing, by a relatively small group of people, whose interests, as long at they can help it are not to have a valuation of zero.
What a story this all is about the intersection of contemporary finance and tech. Where limitless liquidity, defined as easy cash, is freely available to be exponentially leveraged, making the money system close to useless for assessing value. Though it seems everyone is fine with this as long as values keep going up. There's no better sector for this equation to be applied than tech, where, like bitcoin, the vast majority of investors have no real clue about the technology and how it operates, facilitating all sorts of fantastical points to speculate.
Bitcoin and its progeny first appeared as answers to a seriously flawed money system. A piece of code could be a new currency. Certainly when one looks historically at what's been used as currency, why not? However, scratching the surface, just biting down on a bitcoin, it was instantly clear its creators didn't understand money, nor were claims of decentralized control true, though maybe they didn't understand that either.
Soon cryptocurrencies proliferated – hey, it's great to print your own money, don't ever let anyone tell you different. However, some of the major proponents started backing off the new money claim instead focusing on “the blockchain,” cast as some sort of magical digital invoicing and bill of lading, with the added value you could speculate on it — I guess. And speculate they did. There are no victims here. Knuckleheaded avarice is a character flaw.
Last week, one of the last big crypto-boys standing, Binance, saw $6 billion in withdrawals, though who really knows. In a too late, but well done piece, Reuters points out,
“Binance declines to say where Binance.com is based. It doesn't disclose basic financial information such as revenue, profit and cash reserves. The company has its own crypto coin, but doesn't reveal what role it plays on its balance sheet. It lends customers money against their crypto assets and lets them trade on margin, with borrowed funds. But it doesn't detail how big those bets are, how exposed Binance is to that risk, or the full extent of its reserves to finance withdrawals.”
Good luck with that! It means real simply, any number you see connected to Binance has necessarily no basis in reality. A couple weeks ago, Binance put out an “audit.” Then a couple days ago, the firm who did the audit pulled it. The FT reports,
“However, the accounting firm (Mazars) said on Friday that it had paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector due to concerns regarding the way these reports are understood by the public.”
No doubt the real concern is they'd be understood all too well. FT adds a statement from Binance,
“We have reached out to multiple large firms, including the Big Four, who are currently unwilling to conduct a proof of reserve for a private crypto company and we are still looking for a firm who will do so, the exchange said.”
Phew! You can't pay any of the Big Four enough to massage your books?
Even better, the FT has an article on one of the minor players in the bitcoin industry, a firm called Marathon, whose sole purpose is minting bitcoin,
“Miners, which use a network of powerful computers to solve cryptographic calculations in return for new tokens, face the constant need to upgrade their technology and are also highly dependent on the price of the cryptocurrencies they sell.”
“Last year Marathon paid its former chief executive Merrick Okamoto just under $220mn in stock. The company has repeatedly been lossmaking. This year it has fallen well short of its own production targets set last year of mining 55 to 60 bitcoin a day and predictions of generating mining profits of between $86.5mn and $103.6mn a month.”
Just incredulous! It makes the head spin.
The FT piece ends,
“'Bitcoin mining misses the whole point behind digital assets: the goal, after all, is to decouple from the traditional world and all its players, and not go in reverse by camping out on the power grid,' he added.”
Which is amusing in oh so many ways. In the end, bitcoin turns out to be just hippie-money, nothing more than beads and flowers.
The FT has another piece worth reading authored by the Bank of International Settlements (BIS), commonly referred to as the central bank of central banks, but that's not true. The real central bank of central banks is the Fed. BIS is more or less an international bureaucracy. Anyway, BIS writes,
“Crypto operates under the banner of decentralisation, but it is highly centralised in two crucial respects.”
“First, many supposedly decentralised protocols turn out to be highly concentrated in terms of who actually governs and controls things. Often, it is the founder and a small number of venture capital backers that are in charge as evidenced by the implosion of the Terra stablecoin in May. In most instances, crypto is decentralised in name only.
“Second, centralised intermediaries, such as Sam Bankman-Fried's FTX, play a pivotal role as the gateway into the crypto world from the conventional financial system.
“To the extent that recruiting new investors is key to the survival of crypto, centralised intermediaries are crucial to propping up the edifice.”
True, true, and true. Then BIS succinctly defines the ponzi known as crypto,
“Even during the worst excesses of the subprime mortgage boom, the daisy chain of leverage ultimately led to real world activity most obviously buying a house with money. Crypto, on the other hand, is largely self-referential; its activities deal with trading other types of crypto and have little reference to tangible economic activity.”
The BIS ends with an unintentional punchline,
“A more promising approach is through central bank digital currencies that operate within the broader digital monetary system. This is an approach that builds on the trust embedded in central bank money, and could serve public interest in a future monetary system. The technology benefits flow to real world economic activities rather than just other types of crypto.”
Lord, “the trust embedded in central bank money,” the lack of trust is the whole thing feeding the crypto confidence game. All leading us back to square one and the state of commonly accepted real money.
The FT has a piece by the old Bond King, Bill Gross. Remember, Gross made billions from the beginning of the easy money scam the Fed began at the end of the 1980s. Gross' whole career basically knew nothing but declining interest rates and the Fed coming in to back-stop whatever crazy valuations the big banks, Wall Street, and Newport Beach could leverage.
Of course Gross concludes the Fed's done enough, time to start loosening. After all, how do you leverage ridiculous profits without oceans of liquidity? Gross warns,
“The Fed should now stop raising rates and wait to see if the punch bowl has been sufficiently drained.”
He then adds,
“Second, however, I think it important to recognise the dangerous levels of debt recently acknowledged by the Bank for International Settlements. “Off-balance sheet dollar debt”, they warned in a December 5 update, “may remain out of sight and out of mind, but only until the next time dollar funding liquidity is squeezed.”
“They calculate this hidden “shadow bank” debt may be as high as $65tn, more than 2½ times the size of the entire Treasury market and that most of it is owed to banks.”
Phew! Leaving aside “shadow bank” debt is mostly owed to the banks, meaning they originated it, $65 trillion is a big number. I don't think all of crypto, as ridiculously as it was ever valued, was much over a trillion.
Gross concludes,
“There could be trouble ahead if the 4.25 to 4.5 per cent nominal fed funds rate go higher. Too much hidden leverage, too much shadow debt behind closed doors.”
I'm surprised there hasn't been more cracks at this point. But then with just a few months of rate rises, the talk in finance has been overwhelmingly convincing themselves the Fed would soon stop and once again pump money at a rate far greater than any bitcoin miner could ever dream.
The great problems revealed with the whole bitscam are mainly two. First, it symbolizes for all to see the great disconnect between technology development and greater public understanding. Decisions on how technology is developed should not be left exclusively or even mainly to the technologists. Technology, as money, is a political construct.
Secondly, the whole development of cryptocurrencies came about with the greater problems of the established money system. Oxygen in the public sphere to actually talk about the money system is always extremely limited. The idiocy of bitcoin consumed it all. But then, why should that be different than pretty much any issue of importance in the political sphere these days?
Neither our money or political systems look too healthy these days, but amazingly resilient they both are.