Why Bitcoin is worthless

Relative to crypto, every stock is undervalued

The crypto fad is in high gear with “blockchain” finding its way into pretty well every brokerage firm’s “research” department and any number of “tokens” highly promoted with incessant advertisements in every financial media outlet from television to print to social media. Bitcoin is the “poster boy” for the crypto “industry” (what is industrious about Bitcoin is beyond me) and has captivated the minds of countless young investors who are eager to lose their life’s savings on a dream that crypto will make them rich.

Bitcoin is a classical Ponzi scheme. A bit of background on Ponzi schemes.

Named after a famous fraudster named Charles Ponzi, a Ponzi scheme is simple. Investors in a non-existent enterprise are paid high returns using money provided by subsequent investors. There is no underlying enterprise that creates value and the so-called returns are no more than a return of capital from investors as a group. The scheme can grow very large as long as there are more people willing to invest to keep it going. None of the money “earned” by any investor comes from any value-added activity - it all comes from other investors. That is precisely the case with Bitcoin.

Bitcoin (and all crypto) does nothing to create wealth other than exist. There is no activity, no employees, no factories, no product. All that exists for a Bitcoin owner is the hope he can sell that Bitcoin to someone else. Nothing more. As long as there is someone else willing to buy a Bitcoin, an existing owner can sell it.

Not only does Bitcoin not create any wealth, it consumes plenty. In a classical Ponzi scheme the fraudster takes some of the money raised an uses it to fund their personal expenses. In the case of Bitcoin, the outgoing money is not to the originator of the scheme but to two parastical groups.

One parasitical group is the “Bitcon miners” who consume massive amounts of the world’s electrical generating power to “mine” Bitcoins. Mining Bitcoins is nothing more than running computers to prove the integrity of the Blockchain ledger for which a miner (if lucky enough to be the first to prove the state of the Blockchain for a given transaction) earns a new Bitcoin. Since the number of Bitcoins that can ever be produced is capped at 21 million, the “proof of work” or “proof of state” of the Blockchain will stop one day when there are no more Bitcoins to be “earned” through “mining”.

The second parastical group are the “Bitcoin Exchanges” through which one must pass to either buy a Bitcoin or convert one back into a fiat currency to spend outside of the Bitcoin world. Every transaction has a cost, and every such transaction is exposed to the very risks that Bitcoin is touted to avoid - the risk of fraud, theft, loss, etc. Major Bitcoin exchanges routinely fail and “investors” who owned Bitcoins stored on the exchange or held in Bitcoin “wallets” dependent on the exchange lose 100% of whatever “value” their Bitcoin ever had. Not much of a loss really, since the Bitcoin never had any value to begin with.

Several Bitcoin exchanges failed with losses totaling billions. The largest Canadian failure was QuadrigaCX with losses amounting to $190 million. Mt. Gox, once the largest Bitcoin exchange, went bankrupt with losses of $460 million. Hey, I thought the argument for Bitcoin was “security”??

Not only Bitcoin exchanges have failed but also other cryptocurrencies themselves. At least five copycat cryptocurrencies have failed with losses in the millions.

Anyone who has made a dime from Bitcoin made that dime at the expense of another Bitcoin “investor” who lost an equal amount. Bitcoin is a the equivalent of a casino with a “rake” and like all casino’s the house makes all the money and the gamblers net worth decays exponentially to zero if they keep playing long enough. In this case, the “house” is the electricity generating companies who get paid for the power squandered by “mining”; the “exchanges” who extract fees for their role in the scheme; and, the outright fraudsters who took off with millions of dollars in Bitcoin as exchanges were hacked, looted or just failed to meet their obligations to Bitcoin buyers.

Like every Ponzi scheme, the cryptocurrency pyramid has grown very large since it began and at one point the “value” of the world’s “cryptocurrencies” was close to $3 trillion, that peak occurring on November 10, 2021. Some $2 trillion of that has been lost in the short 8 months since that time. Eventually, it will all be lost.

The plethora of copycat cryptocurrencies that followed the introduction of Bitcoin is a key indicator of the lack of any valuable underpinning. Anything with the ease of entry of a “cryptocurrency” is worthless simply by virtue of the ease with which more can be created by virtually anyone. I laugh at those who use the term “Blockchain technology” since there is nothing technological about it of any consequence.

This column deals with “undevalued” securities. A good place to start in your search for undervalued securities is to rule out anything with the term “blockchain” or “cryptocurrency” in its description since if it claims to have any value at all, it is overvalued.