This post is a follow-up to my most recent post – A quick analysis of why investing in Bitcoin is stupid
I’ve received a few comments from readers either asking for more details or disputing some of my assertions on Bitcoin.
Bitcoin is clearly in a bubble
There are a few news stories that I’ve seen in the last few days that really underscore just how ridiculous things have gotten with Bitcoin and blockchain technology in the last few days.
First, I saw an article on CNN about a tea company “pivoting” to become a technology company developing blockchain technology. Long Island Iced Tea Corp. ( ) announced that it was changing its name to Long Blockchain Corp. and intended to buy other companies that had developed some blockchain related technologies. The stock surged 200% on the news.
Let me clarity – a fairly unsuccessful beverage company with NO existing blockchain technology has announced that it INTENDS to invest in some sort of blockchain related technology companies at some point in the future. There were no specific details because…well, the company doesn’t know anything about blockchain or technology in general. There’s no reason to think that their ability to identify potential winners in the blockchain field is any better than anybody else’s. After all, THEY MAKE ICED TEA.
However, the mere mention of “blockchain” in the press release meant that the company’s stock nearly tripled in one day.
Similarly, India Globalization Capital (IGC) announced that they would begin using blockchain technology in their business. The stock promptly surged 135%. What does IGC do? They are a cannabis company that is working on a potential Alzheimer’s treatment using…cannabis. How does a pot company plan to use blockchain in its business? Well, the details are fuzzy, but apparently they want to “leverage its existing team of technology and healthcare experts to develop methods utilizing blockchain in areas such as product identification assurance.”
As somebody who lived through the Dot Com boom and bust I can tell you this looks eerily similar. During the DotCom boom all a company had to do was add “e” to the front their name or a “.com” to the end of their name and their stock price would soar. Today a company just needs to mention blockchain in some way. It is particularly insane when a tea company and a pot company are claiming to be getting into the blockchain business and people believe the companies are instantly worth 2-3x as much as they were the day before.
Bitcoin is not a good hedge against disaster
For many years people have thought that gold would be a viable currency in case of disaster. The thinking has been that if something truly terrible happened and our economic/banking system fell apart and society broke down, you’d need to use gold instead of paper money to buy things.
This idea is absolutely idiotic.
Let’s walk through the many, many ways this idea is dumb.
First, most people who own gold don’t own actual physical gold. Most people who own gold as a hedge against disaster own gold that’s stored by a gold company. I Owning gold that stored somewhere else is not a hedge against disaster. If shit hits the fan how will you get the gold? Why would the company holding your gold actually give it to you? They’ll just claim their records were deleted or they can’t access the gold right now or something.
But let’s say, just for the sake of argument, that you DO own actual physical gold and it’s stored in a nice strong safe at your house. Something happens (a pandemic, an EMP pulse knocks out our power grid for months, etc.) Thank goodness you have that physical gold to buy things, right?
First, if shit hits the fan, the only things that have value will be things with practical uses. Food. Clean water. Seeds. Guns. Ammo. Solar panels. Generators with lots of fuel. These are all things that can sustain life, provide electricity for heating/cooling/cooking, etc. If shit hits the fan there won’t be any supermarket to go to. You’ll be bartering with neighbors, farmers, etc. Do you think somebody is going to accept a chunk of shiny metal in exchange for a nice warm blanket, some eggs, and a gallon of water? Hell no.
AND, even if they did agree to accept a shiny rock as payment, gold is an incredible poor way to pay for things. IF shit hits the fan AND gold somehow continues to be used as a medium of exchange, I think it’s fair to assume the price of gold will increase (which will exacerbate the problem I describe below). But, again for the sake of argument, let’s say the price of gold is unchanged. As of the end of December, 2017 the price of gold is about $1,300 per troy oz. Do you know how small a troy ounce of gold is? Here’s a great page that shows what different weights of gold look like. One ounce of gold is roughly the size of a dog tag (but a bit thicker).
So if we assume that shit has hit the fan, and that the person you’re looking to buy from is willing to accept gold, AND the price of gold is unchanged, you now need a way to give him a piece of gold that’s 1/13th the size of a dog tag. Do we assume that everybody has scales sitting around to weigh the gold? Will everybody know that specialized scales are needed, as a troy ounce of gold is different than an avoirdupois ounce used in bathroom and kitchen scales? How do you cut the gold? How can the other person be sure that it’s actually gold and not some cheaper alloy? Do we assume that everybody will instantly become a metallurgist after a disaster?
Clearly, the idea using gold to buy things in case of disaster is stupid.
AND BITCOIN IS EVEN WORSE!
After all, in order for Bitcoin to be functional you need a working power grid and a functional Internet. That would rule out most apocalyptic scenarios. But, assuming that somehow the power grid and the Internet continue to function but our banking and economic systems have collapsed, people are even LESS likely to accept imaginary electric money than gold. After all, at least gold is pretty and has a few industrial uses. Bitcoin would have zero value.
And, assuming a working power grid, a working Internet, and that both the buyer and the seller have access to some way to transfer the Bitcoins (phone, computers, etc.), you still have the issue of long transaction times and expensive transaction fees (see my previous post for more details). Given that computing power and electricity would be at a premium in case of disaster, it’s fair to assume that transaction times would be increased and transaction costs would soar. So, you decide to buy $100 of stuff from somebody, you might have to wait hours/days for the transaction to be committed and you might need to pay hundreds of dollars to get the transaction confirmed.
Bitcoin would be useless as a medium of exchange in case of disaster.
If you’re looking to hedge against disaster I’d recommend you do the following:
- Buy a bunch of freeze-dried food (I recommend the Mountain House stuff). It tastes great, is easy to prepare (just add water) and has a virtually unlimited shelf life. It takes up very little space and it’s easy to store. It’s available in small and large packages that would be easy to trade.
- Buy guns (both pistols and rifles) and lots and lots of ammo. I would expect that, in the case of disaster, you’d be able to trade a working gun for quite a bit of useful stuff. If there are no police then people will need pistols to protect themselves. Rifles can be used to hunt for food. A gun will essentially last forever if properly maintained, and ammo, if properly stored, has a shelf life in the decades.
- Buy a bunch of seeds. They are small, light, come in convenient packages that are easy to trade, and can be stored for decades. Their value would skyrocket if there was a disaster that affected our food supply system.
Food, guns, ammo, and seeds will be much more valuable than gold or Bitcoin if you’re worried about disaster.
For the record, I’m not concerned about an apocalyptic event. I have about 3 days of freeze-dried food for my family (in case of an earthquake) but I have not stockpiled guns, ammo, or seeds.
I’m really trying to find some sort of viable use for Bitcoin, but the more I research it the more useless it appears to be. Blockchain technology and the Bitcoin implementation in particular are clearly in a bubble and Bitcoin is useless as a store of value or medium of exchange in case of disaster.
Readers: Have you heard any other reasons to buy Bitcoin or other cryptocurrencies?