My personal entrepreneurial experience in the .com bubble, and since, has helped reinforce the fact that, a sound business depends on the value of its assets. (Location 209)
Using economic theory, I analyse the functions and conditions of what constitutes money and assets. The first aim of this book is to analyse the degree to which bitcoin meets the conditions and functions of money and assets. Based on this analysis, my conclusion is that the only function that bitcoin serves is a form of unlicensed gambling where new players redeem those who entered earlier. It is a zero-sum game. (Location 221)
The most prevalent uses of bitcoin are for nefarious purposes (Location 246)
While bitcoin appears to share some of the characteristics of money, it is actually nothing more than a ledger system, a digital spreadsheet that does not significantly differ from other financial record-keeping technology. The bitcoin ledger system uses distributed computing and has some innovative technical features based on cryptography, which, to many people, is intriguing. (Location 270)
“Coins” is misleading because no objects are transferred; only the transaction exists. There is not even a transfer of some unique computer data from the seller to the buyer. All that happens is that the bitcoin accounting ledger is updated. The transaction is a number entry involving a sender and a recipient (both identified only by account numbers), and an amount is recorded as having transferred from one account to another. This number entry, or “coin” is meant to be a stand-in for money. (Location 293)
Initially, miners could not buy anything with their reward money. To get around this problem, Nakamoto implied that miners could advertise their bitcoin rewards received with the idea that this could generate demand and the public would want to buy their bitcoin for real money. This scheme worked. (Location 380)
According to the English economist William Stanley Jevons, for an item to work as “general purpose money”, it has to function in the following four ways: as a medium of exchange as a unit of account as a store of value as a standard of deferred payments (credits) (Location 405)
The ultimate purpose of money is to reduce the transaction costs for payments and credits/loans and to facilitate the relative valuation of goods, services, and assets. In this way, money works as a lubricant in the economy. What is required for money to meet this important purpose is that whatever is used as money itself possesses stable value. (Location 416)
Precious metals (particularly gold and silver) best meet the requirements of commodity money, since they have some extraordinary characteristics. Precious metals: 1) are resistant to corrosion and oxidation; 2) exist in limited quantities; 3) are widely considered as valuable; and 4) are relatively easy to handle and to cut into regular sizes. Thanks to these desirable characteristics, precious metals merited an exchange value and were traditionally used as money. (Location 431)
The largest risk with a pure fiat money system is that there is no limit to how much money can be “printed”, since the intrinsic value is essentially zero. (Location 483)
Theoretically, central banks are seen as independent authorities of their governments. However, in practice, they are not. If a government runs large deficits, it has to raise funds through issuing of bonds or short terms interest-bearing assets. Issuing many such financial assets will cause both the market interest rate and inflation to rise. In such cases, the central bank needs to buy these bonds in open market operations which expands money supply, and there is a risk with a negative spiral of both expanding money supply and inflation. (Location 503)
Such high volatility in the value of bitcoin implies that bitcoin is not a good store of value. It is not only the volatility that undermines it as store of value, but also the fact that the price can be markedly affected by the offhand comments of one or two well-known influencers. One day you can buy a Tesla for bitcoin, another day a Kia. The conclusion has to be that bitcoin does not fulfill the basic requirement of a currency: it does not have a stable value. (Location 566)
While VISA can verify a transaction in a fraction of one second, it currently takes about ten minutes for a bitcoin transaction to be verified. This delay is a problem for retail transactions. And the more people that use the bitcoin system, the longer the wait. In order to limit the number of transactions added to the ledger at any given time (see Chapter 2), new blocks in the blockchain can only be added at pre-specified intervals. However, because there is a limit to the number of transactions in any one block, this creates a queue and causes bottlenecks. (Location 608)
There are three general categories that make up the sum total of all bitcoin transactions: market trades, legal purchases and illegal purchases. The industry has produced data for the % of illegal transactions (0.15%). Therefore, using the same analysis, they are technically able produce the data for legal purchases. They have not done so. In the absence of such evidence of legal purchases to support the explicitly industry-claimed utility of bitcoin, it is evident that the industry has something to hide regarding the percentage used for purchases of legal goods and services. (Location 700)
Bitcoin transactions do not require people to use their real names, nor are there true bank account numbers, which is a bonanza for criminals. Their bitcoin addresses (wallets) are pseudonyms. (Location 709)
Using bitcoin makes laundering more convenient, especially across international borders. It can be performed online with no need to first buy gold bars, yachts, or expensive homes. This makes it harder for law enforcement, regulators, and compliance departments at financial institutions to identify illicit transactions and to trace origins and destinations. (Location 716)
Many claim that the value of bitcoin comes from its relative scarcity since there is an absolute limit of 21 million bitcoin that can ever be issued. However, scarcity in itself does not create value. To create something that is artificially made rare is not difficult. Furthermore, there is no limit to how many different types of cryptocurrencies can be created. Today, we already know of more than 10,000, and their number increases every day. (Location 813)
According to Bank of America analysts reported on February 9, 2022, bitcoin is not a good inflation hedge as it does not correlate with gold,. Instead, bitcoin is correlated with the stock market. The analysts stated that investors should not look to bitcoin as an inflation hedge because it does not resemble “digital gold” and that the correlation between bitcoin and gold is close to zero. (Location 829)
A Ponzi scheme is a zero-sum scam where losers can pursue a legal claim against the scammer. Bitcoin, however, is a negative-sum scam where there are no available assets in the scam to claim. Bitcoin, McCauley wrote, is more like a stock “pump-and-dump” from a cash flow perspective. In a pump-and-dump, traders buy worthless stock, promote it and trade it among themselves at rising prices before unloading it to a gullible public that has been taken in by hype and by a fear of missing out. Of the $20 billion in original investments in Bernie Madoff’s Ponzi scheme, 70 per cent, was recovered by claimants. Claims of up to $1.6m are being 100% repaid. If we contrast this with bitcoin, the 900 new bitcoin a day require 45 million USD per day of electricity (see Chapter 11). That comes to a billion USD per month. When the price of bitcoin crashes to its true value of zero, those who sold before the crash could never make up for the losses of those who held on. (Location 835)
A financial bubble occurs when an asset is valued far above its fundamental value. But in the case of bitcoin, no fundamental value can be calculated since bitcoin does not lead to cash flow nor has it any utility. Based on this chapter and on the previous chapters, the colossal ups and downs in bitcoin price can only be characterized as speculative gambling. (Location 848)
The use of the term “mining” by the promoters is also a brilliant distraction. The term suggests that the “coin” has had to be dug from the earth, “earned” through the sweat of one’s brow, an analogy to gold-mining and smelting. The term “mining” suggests that bitcoin is worth at least the sum total of the value of the electricity used (and computers purchased) to “create” that coin. (Location 906)
Bitcoin does not, however, have full third-party anonymity, particularly with respect to law enforcement. For example, as mentioned in section 4.6 above, the FBI was able to recover a significant part of the bitcoin ransom paid in the Colonial pipeline ransomware attack. Bitcoin’s second-party anonymity has some benefits for criminals including facilitation of tax evasion, terrorist financing, gun smuggling, human trafficking, and money laundering. However, governments can usually trace bitcoin transactions and learn the identity of the registered owner of an anonymous wallet through the use of their subpoena power. (Location 926)
Whether we know it or not, human beings have the tendency to rely on the first piece of information that we receive about something new and believing that, no matter how many times we hear the opposite. This is a form of cognitive bias that psychologists call ‘anchoring’. Probably the first thing most of us have heard about bitcoin was that it was a product of blockchain technology and, since blockchain is indeed a useful technology, bitcoin must be a modern, superior product. (Location 934)
What matters is a product’s functionality not the sophistication that went into its manufacture. (Location 941)
Every person who has ever bought bitcoin has simply paid a person to sell them their bitcoin. None of that money has ever been put to use to create value. The bitcoin network is simply a means to fool people to buy bitcoin from the current owners. All bitcoin initially came from miners. (Location 972)
Another distraction is calling bitcoin an “investment”. However, as bitcoin is not an asset, there is nothing to invest in. Since it is not an investment, no investment advisor credential or license is needed to promote the buying of bitcoin. Therefore, the bitcoin promotion market is left open to a vast number of self-interested bitcoin pumpers. Bitcoin promotion is similar to pyramid marketing. Once a person owns bitcoin, they are motivated to market bitcoin to their friends since greater demand for bitcoin will maintain or raise the price of what they themselves own. (Location 995)
Bitcoin is completely unbacked by anything. The money only goes into someone else’s pocket. (Location 1063)
Whales, so named due to the size of their bitcoin holdings, exert an outsized impact on the bitcoin market. One big trade by a whale (proportionally big, but small in their own eyes relative to the size of their bitcoin holdings) can significantly move the bitcoin price up or down – like real whales, they can make big splashes (see Picture 7.1). (Location 1074)
As long as financial markets have existed, there have always been people who have tried to manipulate them to their own advantage; bitcoin markets are no exception. Manipulation is easier with bitcoin because there are so few regulations and no direct oversight body, making the markets easy to exploit, easy to use for money laundering and easy to use for criminal activity. While interest in bitcoin trading grows, the threat of market abuse keeps many people understandably wary. There are three forms of potential manipulation that need watching: wash trading/churning, “spoofing” and “pump and dump”. (Location 1083)
Cyberattackers using bitcoin can receive ransom and blackmail payments without large amounts of cash needed to be transferred or wired and, thus, more easily identified or traced. (Location 1225)
Chainalysis estimates that criminals received $14 billion USD in cryptocurrencies in 2021. This amount only covers crimes such as ransomware attacks where criminals are directly paid in cryptocurrency. Money from offline crime, such as cash from drug trafficking, converted into cryptocurrency to be laundered is not included. (Location 1240)
In reality, cash payments are more anonymous than bitcoin transfers but they run into the difficulty of needing to physically transport large amounts of cash from one location to another. (Location 1256)
Gambling sites that accept bitcoin are also used to launder bitcoin. A criminal may establish an account and then transfer funds to the gambling site. He will then make simple bets at the site before withdrawing his funds to a new bitcoin address. This process creates a break in the bitcoin flow, making it harder to trace the chain back to the original owner. However, if the gambling site route (or other money laundering route) is spotted in the history of transactions (remember that everything is publicly recorded on the bitcoin blockchain), it raises a red flag for law enforcement. (Location 1271)
Indeed, the crypto market is now larger than the sub-prime mortgage market was when – worth USD 1.3 trillion – it triggered the global financial crisis. And it shows strikingly similar dynamics. In the absence of adequate controls, crypto-assets are driving speculation by promising fast and high returns and exploiting regulatory loopholes that leave investors without protection. (Location 1543)
Store promotional contests where winners are randomly selected are designed to avoid gambling laws. To avoid such laws, the contests often do not require a purchase (i.e. spending any money). The contest also often adds a “skill testing question” in an attempt to make it something other than a game of chance. If you have learned nothing else from this book, you have just learned why silly “skill testing questions” are added to such contests. (Location 1652)
All great bubbles seem to take place during periods when money is readily flowing, when interest rates are either very low or falling, and when people have a lot of liquid cash in their possession. (Location 1658)
Speculation goes wild when an asset is impossible to properly evaluate. (Location 1664)
Absent illegal market manipulations, the price of bitcoin price varies randomly depending entirely on capricious fluctuations of supply and demand. The game is to guess when those ups and downs will occur. (Location 1670)
In January 2022, when bitcoin was trading at 35,000 USD, more than two out of every three bitcoin buyers were losing their bet according to Eliézer Ndinga, the Head of Research at cryptocurrency investment firm 21Shares. How can that be if bitcoin has only been above the current price for only 9 months (all in 2021) of bitcoin’s 13 year history? The answer is that, increasingly over the last year, the whales have been selling their bitcoin on a significantly increasing number of small buyers who are enticed by the increasing hype. (Location 1768)
Bitcoin trading addiction is a rapidly growing health concern. It may become a health crisis on a par with the opioid crisis, albeit with far fewer deaths. But even this addiction, I learned, can be fatal. A small percentage of afflicted people do commit suicide after they suffer large financial losses due to risky purchases that they couldn’t seem able to stop making. (Location 1865)
Dr. Anna Lembke, one of the world’s foremost addiction experts and a professor of psychiatry at Stanford University School of Medicine, was quoted in The Guardian on January 15, 2022 that “crypto trading bears the hallmarks of addictive gambling products but without the acknowledged risk. It’s less stigmatised. It has this socially sanctioned status as something that maverick smart people do.”To (Location 1886)
When a gambler makes a large profit, a massive influx of dopamine is released in the person’s brain, accompanied by a feeling of euphoria. It’s that dopamine rush that you want to experience again and again and it overpowers all other sources of alternate pleasure. When you lose, your focus turns to the next trade so that you can win again, and again experience that same euphoric feeling. Individuals addicted to bitcoin trading say that it is not really about the money. It’s the rollercoaster rush of the highs and lows that fuels their addiction. (Location 1929)
A characteristic of many people is to be “regret averse.” Once they begin something, they don’t want to admit that it was all a mistake. They want to continue to show the world that they were right to start in the first place. (Location 1961)
Human beings exhibit a well-documented “longshot bias” where small probability, but high payoff stocks are preferentially bought because their price is low. Unfortunately, the thrill and unpredictability of longshot investments (such as bitcoin) link them to pathological addiction. (Location 1988)
Individuals attracted to gambling harbor an illusion of control. They think that they are so perceptive, so informed, so plugged-in, so good at predicting the future, so risk-savvy, that they can control uncontrollable events. (Location 2013)
When we listen to financial advisors or read about financial markets, we search out those advisors and those pieces of news that confirm what we already plan to do. We don’t usually look for disconfirmatory information. Once we develop a point of view about a topic, we keep looking for news outlets that are “on our side.” We ignore what people “on the other side” say. We tend to think of the other side as old fogeys at best. Youth is most vulnerable to this confirmation bias, but the old are not exempt. Addiction tends to develop quickly in the young. If one wins the first time around, the surge of physiological excitement that follows that first win is so powerful that it somehow changes our brain to make all our illusions and biases more salient. If we lose the next time around, it doesn’t act as a deterrent (though it should) because that initial great exhilaration has left its mark on the brain. (Location 2017)
The results of the study show that cryptocurrency trading is similar to investing in speculative stocks where prices fluctuate rapidly based on nothing more than celebrity endorsements, or social media comments. (Location 2041)
The feeling of control whenever the market is having a good day is a mirage. The less skilled you are, the more you are likely to think that all your gains are due to your own cleverness. (Location 2048)
Stick to a strict budget and do not chase your losses. (Location 2059)
Preoccupy yourself with people, not with coins. Relationships are what matter in life. (Location 2062)
Signs of a bitcoin addiction have been identified as the following: • Wagering increasing amounts of money in order to attain the same excitement as initially. Anticipating the rush more than the win. • Constantly preoccupying oneself with bitcoin prices. • Relative loss of interest in everything else. • Trying but failing to stop trading. • Experiencing strong cravings to engage in trading. • Camouflaging trading activities. • Running out of money so borrowing, stealing, selling personal items to enable more trades. • Experiencing difficulty in relationships (isolation, distrust, codependency, communication problems, arguments, tension), poor health (depression, anxiety, irritability, insomnia, binge eating or loss of appetite, guilt, shame), and poor academic or job performance (absenteeism, loss of concentration) as a consequence of constant trading. (Location 2070)
The bitcoin system wastes vast amounts of electricity. As miners compete to win the verification reward, massive amounts of computing power and electricity are squandered. (Location 2287)
So much computing power is needed by the bitcoin network for mining that, as of January 5, 2022, its energy consumption exceeds that expended by the whole country of Norway, 365 days a year and 24 hours a day. The Cambridge Centre for Alternative Finance estimates that bitcoin mining consumes about 124 terawatt-hours of energy annually. This unimaginably large amount of electricity is a concern for the environment, especially since energy used in this way produces nothing. It simply audits a single decentralized ledger, something that the centralized ledger system of the VISA® system, for instance, can do more efficiently, using tens of thousands of times less energy per transaction. (Location 2292)
By pushing up energy prices, the bitcoin network has negative consequences that impact many aspects of life. (Location 2300)
Bitcoin is designed to function as an open censorship-resistant value transfer system that anyone can access without requiring permission. Achieving these properties requires engaging in different trade-offs which, as mentioned previously, necessarily results in massive operational costs and inefficiencies (Location 2309)
According to University of Cambridge Centre for Alternative Finance, transferring bitcoin uses 0.6% of global electricity production, the same amount as that used by all the residential fridges in the USA. (Location 2333)
Marion Laboure, a Deutsche Bank analyst, stated in December 2021 that mining one bitcoin leaves a larger carbon footprint than nearly two billion Visa transactions and that one bitcoin transaction could power the average U.S. household for 61 (Location 2386)
Bitcoin is not only worthless, it diminishes access to electricity and products of worth. Bitcoin is less than worthless. (Location 2423)
