I attended the posh but somewhat chaotic Lamb’s Club debate sponsored by Marketwatch, a part of Dow-Jones, last night. Its title: Bitcoin Boom and Bust.
One of the debaters, Prof. Mark T. Williams at Boston U Business Management School, was the most negative panelist about Bitcoin. His prior career was at at commodities trading house and as a Federal Reserve Bank examiner, My report below is based on his views.
Prof Williams summarized the origins of the new money proxy in the wake of the global financial crisis and the rise in risks which resulted. Bitcoins were supposed to reduce the risks of inflation from “fiat currencies” created by politicized central banks. They were also supposed to be protected against fraud by “banksters”, the source of losses of some $3 trillion-plus during the GFC.
Bitcoins were to be “mined” by computer geniuses using complex algorithms. There would never be more than a limited number of coins and their mining would be halted in 2040.
Trading was to be decentralized, without banks or intermediaries, and verified every 10 minutes. All trades would then become irrevocable. There was to be no insurance or FDIC.
The initial market reaction, as Prof. Williams pointed out, was a bubble which then popped. He noted that the lack of a centralized payments system or track put Bitcoin trading in the position of a locomotive running wild. To quote from an article he wrote in Jan. for Dealbook:
The speculative mania generated around Bitcoin has created a hyper asset bubble that is ready to pop. Since 2013, Bitcoin has risen from $13 to as high as $1,200, price appreciation of more than 9000%. There are 12.3 mn coins outstanding. Over 90% are hoarded, which helps to artificially inflate values.
Ownership is also extremely concentrated, increasing market manipulation risk. As prices have grown to the clouds, many Bitcoin millionaires have been minted along the way. But what supports these lofty prices? Bitcoin is neither a legal entity, nor a start-up, and no stock is available for investors to purchase. It has no management team, board, balance sheet, business plan, or even a coherent vision on how to commercialize technology that has been given away in the market for free.
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While backed by libertarians, Bitcoins turned out to be used most by “Silk Road” drug dealers. Then last month the largest exchange, Mt. Gox in Japan and then other trading platforms in Britain and Poland reported that billions of untraceable Bitcoins were hacked, lost, or stolen from their vaults.
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As a result the performance of Bitcoins has been rocky. Prof. Williams noted that Bitcoins are 7x more risky than gold; and 15 times more risky than US dollars. (As is customary, he used price variance as a risk measure. In this case it maybe a valid marker given the short period involved and the frequent triple-digit price moves.)
