I haven’t written a lot about cryptocurrencies like Bitcoin because, until now, I’ve felt ill-equipped to really weigh in. I was hesitant because of two of the four cornerstones of mindful investing: rationality and humility. Rationally speaking, crypto seemed too complicated to navigate. Humility-wise, it seemed like smarter people were describing things way beyond me.
The farthest I ever ventured was to say that crypto was too new to be safe and that the value proposition was based only on the idea that crypto will be incredibly useful in the future. So, up to this time, I’ve been skeptical, but neither for nor against crypto.
Rat Poison
However, I started gravitating toward the “against” position when I read Charlie Munger’s op-ed about crypto. I’ve often quoted Charlie and his partner Warren Buffett on Mindfully Investing because they’re both billionaire investors with a proven track record that embodies most of the principles of mindful investing. Over the last few years, Charlie has called crypto “rat poison”, “venereal disease”, “stupid and evil”, and “almost insane to buy”. Strong words!
Charlie recently wrote: “A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house.” The edge for founders and promoters of cryptos comes from buying in at the ground floor for virtually nothing, “After which the public buys in at much higher prices without fully understanding the pre-dilution in favor of the promoter.” Munger recommends that the U.S. government should ban cryptocurrencies, just like China did in 2021. If his sentiment becomes widespread on Capitol Hill, a total ban could result in all cryptos becoming worthless overnight, regardless of many other potential risks.
Signs of The Poisoning
Recent crypto news is finding traces of poison all over the place. For example, 2022 was the biggest year for crypto theft, with at least $3.8 billion stolen. For something that is touted as “immutable” and “unseizable”, that seems like a pretty leaky hole in the blockchain bucket.
Further, it concerns me that, like the days of profitless companies I observed during the Internet Bubble, the crypto investors losing the most money seem to be poor minorities. It seems likely that this particular demographic may be the least informed on the intricacies of crypto. Just like in 2000, the casino is again “winning” money from the gamblers who are least able to afford it.
And once again, most of the news focuses on price action or the tempting predictions of vast wealth from people who have a huge stake in the outcome. For example, a former Goldman Sachs and Morgan Stanley analyst, who “correctly called the 2020 Bitcoin price boom” has predicted that Bitcoin is poised to go “parabolic”. His reasoning? The Federal Reserve may start to pull back on interest rate hikes. What do interest rates have to do with the value of cryptos? He doesn’t say. Apparently, cryptos are just another “risk on” asset like stocks. But cryptos bear no resemblance to stocks in either substance or function.
And let’s not forget the slew of crypto, crypto bank, and crypto exchange problems over the past few years. From reading just a handful of articles I found reports of failures, legal troubles, or large losses involving: Grin Networks, Bitcoin Gold, Quadringa, Binance, Terraform, Kwon, Blockchain.com, Custodia Bank, Celsius, Genesis, Bitfinex, Kraken, Paxos, Three Arrows Capital, and Bitzlato. Note that I don’t claim to know what any of these companies do exactly or what their specific troubles are.
Of course, the elephant I left out of this list is the FTX crypto exchange fiasco involving founder Sam Bankman-Fried among others. (I like to call him “Sam Bank-Fraud”.) FTX collapsed in November 2022 following reports of leverage and solvency concerns involving FTX-affiliated trading firm Alameda Research, which had received hundreds of millions from FTX. FTX faced a liquidity crisis, failed to find sufficient bailout funds, and subsequently filed for bankruptcy. Around the same time, FTX was hacked and hundreds of millions worth of tokens were stolen. Sam Bank-Fraud has since been arrested and is facing criminal charges. The new CEO identified the core issue as “plain old embezzlement” and said that FTX’s accounting practices were so bad that they now have to navigate a “paperless bankruptcy”! Losses so far have totaled at least $8 Billion and counting.
So, everyone’s learned a valuable lesson with FTX and another outright crypto fraud couldn’t happen again, right? Wait, this just in from Reuters: “Crypto giant Binance moved $400M” to a trading firm that happens to be also managed by the Binance CEO. And did I mention that Binance is under investigation by The Department of Justice and the Securities and Exchange Commission for “potential breaches of financial rules…”? This all sounds suspiciously similar to the FTX shenanigans. And what was Binance’s main response? They said, “Reuters’ information is outdated”. Oh, that’s super helpful, thanks.
The Nail In The Coffin
One could argue that these are all the normal growing pains associated with any new asset in an under-regulated market. But for me, the final nail in the coffin was when I watched an hour-and-half video called, “Blockchain, Innovation or Illusion?” Normally, I don’t watch videos or listen to podcasts because I find reading more efficient. But this video captivated me in the first two minutes. It contains reasonable information about the many oddities of crypto that I’ve never seen before. The video is straightforward, uses common sense, explains jargon, and cites multiple sources for almost all of its claims. That’s a lot more than I can say for most of the stuff I’ve seen describing the benefits of crypto.
So, the remainder of this post contains a longish bullet-point summary of the video. You can probably read all the points below in 10 or 15 minutes, as opposed to watching the video for 1.5 hours. If you’re not convinced that crypto is rat poison after reading the rest of this post, and still aren’t convinced after viewing the details in the video, then I have no reply to you.
By the way, my notes gloss over some points from the video and occasionally add a few of my thoughts. But generally, these notes are pretty faithful to the main ideas and intent of the video. If you have doubts or think I got something wrong, then watch the whole video yourself and comment there.