Partha Chakraborty-
Partha Chakraborty is an Indian-born immigrant; a naturalized US Citizen since 2018. Educated in India and at Cornell University, Partha is currently an entrepreneur in water technologies, Blockchain, and wealth management in the US and in India. The views expressed are his own.
What do you call an investment strategy whose marker of success is simply being able to offload the wallet to the next fool before prices move against you? You call it a Ponzi Scheme. How does an investment rise one hundred percent and then drop by half, now back to its starting value, in about nine months without any rhyme or reason? You call it a Tulip, and, today you may call it Bitcoin.
Beyond a possible occurrence of illegality, both are more likely to happen if the underlying asset defies traditional measures of valuation possibly because the asset does not produce cash flow, or because it is not used in the creation or maintenance of another productive asset. That’s the reality for Bitcoin.
I am not saying no Bitcoin project ever made money. Projects aimed at creating financial ecosystems based on Cryptocurrencies have had revenues, even profits. That said, none ever proved to be a store of value longer term nor was used as a medium of exchange at a significant scale. Yes, supply of Bitcoin is limited, but so should be supply of naivete. That does not, and should not, create demand by itself. No wonder Warren Buffet recently commented that he’d not buy all the supplies of Bitcoin with monies in his physical wallet any given day. The Oracle should know.
Bitcoin’s initial promise was an ecosystem agnostic to political idiocies and geographical boundaries. Proponents conveniently ignored the sovereignty of nations and basic requirements of a fiat currency in their zeal to make greenbacks obsolete. As the world goes through crisis after crisis, the US Dollar, backed by the faith and credit of the United States, remains the safe harbor. Crypto-maniacs never spent a single minute imagining what it would take to supplant what has been created over centuries on the backs of a vibrant democracy, rule of law, projection of power abroad, and legendary power to absorb immigrants by the millions. Bitcoin evangelists sold us a utopia they did not have the capacity to build.
What caused the price of various cryptocurrencies to skyrocket is simple – trillions of dollars infused into the global economy through fiscal and monetary schemes. Easy money became the mantra, quantitative easing happened when lowering benchmark rates was not good enough. Politicians were ever too eager to infuse trillions into millions of households that never needed one – US unemployment rate even at the worst of the Pandemic remained below 15%. Too much money first inflated the value of assets – houses, stocks and crypto, among others – then inflated the price of everyday commodities, e.g., gas and groceries. Now that Fed Chair Mr. Jerome Powell is forced to do a MacGruber on the revelry, a wall of liquidity comes crashing down forcing all inflated prices correct, so did all cryptos.
Post meltdown, productive assets reach an inflection point at some point. Cheap money will dry up, prices will adjust to levels that reflect true demand and supply. I cannot say the same for existing crypto assets. None actually adds value to the economy, and almost all profits outside of speculative trades come from facilitating storage, exchange and security of the same assets. Consequently, the crypto ecosystem, as is, is nothing but a house built on cards. Crash in the Crypto market highlights another false promise – that they are built to withstand financial turmoil. If they could do nothing but wallflower in the face of a little headwind, what capacity do they have if China, or the US, declares them illegal tomorrow?
Bitcoin trades are extreme examples of speculation whose marker of success is simply being able to offload the wallet to the next fool before prices move against you. Bitcoin itself has no intrinsic value, after a decade and a half. Ecosystems built to facilitate such transactions are no better if there is the speculative intent is factored out. Together, they depend on prices appreciating only because there is a bigger fool who is willing to take the other side of your trade, as they believe they can offload downline before prices turn against them. This is exactly stuff that makes up a Ponzi scheme, even a multi-level marketing scam.
This is not to mean that Blockchain as a technology is without promise. Today’s Decentralized Finance projects are looking beyond open Blockchain and Proof-of-Work mechanisms to lower computational strains. Promising identity solutions are expanding the reach of banking systems to the unbanked world. Next Cryptocurrency might even come with a stipulation that it is not tradeable against hard currencies or other Cryptocurrencies, potentially making them nonfinancial assets. None of them is dependent on the value of Bitcoin, or any Crypto, but they combine clever market designs and product solutions to create a value of the core proposition.
Unlike Bitcoin, some of these projects might create a lasting value. Maybe at that point the Oracle will be forced to use his wizardry to value the project instead of putting his wallet away.
