The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

No to Crypto?

12/16/2020

In 1962, a popular movie was called “The Music Man.”  One scene involved a parade, playing “76 Trombones”.  At the parade went by, onlookers jumped into the end of it.  After all, they didn’t want to miss the parade.

In recent weeks, several prominent, high-profile investment figures on Wall Street have said they are buying bitcoin and other crypto-currencies.  They point out the extensive media coverage, the development of “exchanges” to buy and sell cryptocurrencies, ever-increasing trading volumes, and the development of investment vehicles, like GBTC.   But, some people are afraid of missing the parade going by.

Bitcoin is approaching record highs, but that means there are more buyers than sellers, nothing more.  Research shows a disproportionate share of the buyers are retail buyers.  Think:  young Millennials.  They argue that mathemeticians assure us there is only a finite supply of bitcoins.  A finite supply with a rising demand naturally drives up market value.  But, there is an infinite supply of crypto-currencies.  Even Facebook has one.  Some estimate there are already a hundred crypto-currencies. (Some even consider such currency as a replacement for gold.)

At least one of these new crypto-exchanges has already been hacked. Did I mention that no crypto-currency has FDIC coverage?  Given the wild fluctuations in the value of bitcoin, is it really a fiduciary investment for my clients?  Someday, maybe.  Today, I don’t think so!

The most popular vehicle for investing in bitcoin is the $8 billion GBTC, which is a closed-end fund selling at a premium above the underlying bitcoins.  It also offers no redemption privileges. Parade-chasers might ask rhetorically:  Who would ever want to get out of bitcoin?  (There is a new vehicle, BITW, but details are still lacking.)

Nobody ever answers the most basic question:  What can I do with bitcoin that I can’t do with American dollars?  OK, bitcoin is 24/7, sorta.  Primarily, bitcoin is the currency most preferred by criminals worldwide.   That’s probably the reason that the Internal Revenue Service is now putting a prominent question on the front page of the Form 1040 (right under the address section) asking whether you are “tainted” by crypto-currencies.  Who wants to be targeted by the IRS?

You can buy bitcoin, but please don’t call it an investment . . . unless you’re chasing a parade in Vegas, baby!

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