I am not against cryptocurrencies. In fact, I am all in favor of alternative currencies, private currencies, LETS, etc. I believe that people should have the freedom to choose what assets they want to hold, and what to use as a medium of exchange for their market transactions. But I have never been in favor of Bitcoin. I think it is a stupid ponzi scheme.
I am broadly ignorant of what’s happening around the world since I don’t follow news. Thus it was that I learned from my friend Veer that cryptocurrencies were crashing today. That was interesting news to me. I looked up some sites to see what was happening. Here’s a graph of bitcoin prices over the last few months:
Bitcoin hit a high price of $69,000 on Nov 9th, 2021. Today at one point it was trading in the $27,000 range. The volatility of bitcoin makes it a lousy substitute for money. What’s it good for? Gambling.
Bitcoin and other cryptocurrencies are a wonderful innovation. In the bad old days, you had to get your ass over to a casino so that you could hand over your money to them. These days, you can gamble from the comfort of your bedroom or bathroom by logging into some cryptocurrency exchange and handing them your money.
Motivated by greed compounded with stupidity, people in search of easy money end up being taken for a ride by sharp operators. A fool and his money are soon parted, so the saying goes. The originators of ponzi schemes depend on the gullibility of the stupidly retarded to make out like bandits.
Just as a reminder, let’s recount how ponzi schemes work. They attract the greedy to invest in the scheme. Then, in the initial phase, the early investors are rewarded with insanely high returns. That attracts more greedy investors in the later phase which pushes up the price; the initial investors exit with profits; the price begins to fall and there’s a rush for the exit — and the ponzi scheme collapses, with the later investors left holding the bucket.
Ponzi scheme do not create wealth; they’re pure wealth transfer from one group to another. It’s a zero sum game: the aggregate gains by some is equal to the aggregate losses by others. That’s a mathematical certainty.
I am not a fan of fiat currency either. Governments cunningly inflate fiat currency for their own nefarious ends. Aside from the occasional bout of crippling hyperinflation that tinpot dictators inflict on their helpless citizens, most fiat currencies inflate slowly enough for people to take suitable action. Instead of a government monopoly on the issuance of currency, there should be a vigorous competition among private providers of money, and the government money must be required to compete with other currencies (if not constitutionally prohibited from issuing fiat money.)
I confess that I wasted a lot of time on twitter today. Many people were weeping in their coffee about how they put all their savings in crypto and now they’re ruined. These people were mostly not wealthy to begin with; and now they’re poorer than they needed to be.
Some people do get rich by being greedy. But being greedy is not a very stable strategy. The people who become wealthy in well-run economies (as opposed to banana republics) do so by creating wealth, which is never about getting unearned wealth. I doubt that Warren Buffett ever steps foot in a casino; I doubt Charlie Munger ever bought a bitcoin.
The moral of the story: it’s better to work hard to produce wealth so that one can be wealthy in proportion to the value one created for others. I am not wealthy because I am not capable of hard work. That’s the bad news. The good news is that I am not greedy. Thank goodness for small mercies.
Post script: I noticed that I had written about Munger’s and Buffett’s take on cryptocurrencies a few years ago.