Blain’s Morning Porridge Big Read January 2^nd 2025: Bitcoin – Real or a Bubble?

“The best way to destroy the capitalist system is to debauch the currency.”

One man’s bubble is another’s irrefutable investment thesis. After a year when so many markets, and individual assets, have defied expectations and common sense, one stands out for its incredible and largely speculative upside – Bitcoin. No other “asset” so divides the market.

Time for a deep dive into what it might and might not be.

Welcome to a New Year in the financial markets! Through the coming 12 months I will endeavouring to post different and insightful comments across markets and the factors influencing them – markets are never less than interesting, so there is never a shortage of things to comment on. Rather than offer a simple scrape over the likely themes for the coming year – and there are plenty – I thought it might be worth doing a deeper dive into one topic: Bitcoin. Where is it heading next?

The second administration of President Donald Trump will inevitably be a massive force on markets – on trade, growth, conflict and prosperity, but this morning I’d like to pose a big question to start everyone thinking in 2025 – will his promise to make the USA the centre of the Crypto Universe, and rumours of a Bitcoin Strategic Reserve change the face of investment utterly?

Bitcoin – Was it 2024’s Bubble of the Year, or the Asset of the Future?

Over the break I spoke with a retail crypto investor who was delighted to show me his hefty CoinBase wallet comprising meme-coins and Bitcoin, yet he genuinely had never heard of Tulip mania.

Like moths and flames, markets can’t resist bubbles. Historically markets have shown they have no memory or common sense, which is why bubbles have been a re-occurring theme throughout financial history. Everyone seems to know someone who made millions in 2024 buying Bitcoin, yet everyone seems to have conveniently forgotten the losses inflicted during the 2022/23 crypto-winter!

Over 40 years in financial markets I’ve watched innumerable bubbles develop, inflate and inevitably pop. There are many common themes in the way they emerge and inflate. These include the old lie: “this time is different”. They raise doubts and questions: “what does the market know that I don’t see?” They are fuelled by “Fear of Missing Out”, and narratives, often false, that promise unimaginable upside. They work because greater fools buy the story and jump aboard – then pop when the bubble runs out of greater fools willing to invest.

2024 was a year of multiple speculative challenges to the market’s limited good sense. The sheer unstoppable power of the US stock market, the stratospheric rise and rise of Nvidia, and the mass-delusion as to what Tesla is worth – these are all examples of belief driving fantabulous upside. Yet, there is an objective element backing each of them: Nvidia chips are powering AI, Tesla dominates EV sales and may become a robotaxi paradigm shift in personal transport (although I personally doubt that one), and US growth and economic resilience is driving strong and profitable companies.

Bitcoin is different.

The Bitcoin protocols of the mythical Satoshi Nakamoto have established something quite extraordinary. He/she/it/they created a digital instrument that facilitates peer-to-peer transactions, dispensing with the need for third-parties, with verification and proofs backing a system allowing digital money. It is genius. It works. Just like any good religion, the founder was ignored for years, disappeared into the wilderness, but leaves a belief system millions now ascribe to – a belief system that is, perhaps, very different to the one originally envisaged.

Now there are many adherents who genuinely believe Bitcoin has become a core part of the global financial system, an asset with scarcity which will justify its continuing rise in value as it attracts more and more believers. It’s like a religion. But, no matter how intellectually curious you are about Bitcoin, or admire its structure, there is one question no one has successfully ever answered: what does Bitcoin do, achieve or enable that isn’t already done better by conventional money and traditional finance?

That is the core of the Bitcoin problem: why does it exist, what will it achieve, and what is something worth when no one really knows what it’s for? Blockchain is oft described as a solution in search of a problem. Something similar is true of Bitcoin – it may be marvellous… but what does it actually do that wasn’t done before and why should we replace existing monetary and financial systems with it? (New fintech payment, registry and transfer systems are transforming finance using smart tech and contracts – independent of Bitcoin.)

In the absence of any clear answer to these questions of what Bitcoin really is, it’s become one of the most bitterly contested areas within finance.  While Bitcoin’s terribly clever programming objectively works, the underlying narrative behind Bitcoin’s future place in financial markets is entirely subjective – it is all about what proponents say it is, there is nothing one can point to say: look what it has enabled. As a result, it is approached with great suspicion by traditional financiers.

The claims of the Bitcoin proponents include:

• As it becomes more widely adopted, the volatility will diminish.
• It will replace gold – becoming digital gold – as a better safe-haven investment.
• It will replace the dollar as the measure of global prices.
• It’s scarcity value means it can only ever increase in price.
• It is an asset everyone should hold in their portfolio.

Lots of folk have taken the stage to say what it can be, what it will be worth, and why it will dominate the future of money and finance. But, but, and but again, there is absolutely nothing backing these claims – except the strength of the repeating narratives; how loudly and often the shills say it, backed up by opaque data on how many people are buying into them, that it can only go higher, its’ scarcity makes it a must hold asset, everyone else is buying it, and now the Trump presidency being taken to mean it will become the USA’s de-facto strategic reserve.

Where is Bitcoin going next?

Although Bitcoin is now, apparently, a “real” asset, it remains divisive. I am struck by how many of my younger colleagues in markets accept the arguments being made around Bitcoin as gospel truths, rather than test and question them. I am also very aware old market dogs, including myself, struggle to learn new tricks. Few markets create such polarised comment as between Bitcoin and Crypto, but strip out the noise (if you can) and choose between:

• The fans who say Bitcoin’s 120% upside in 2024 will continue as it becomes an increasingly dominant investment asset, with greater adoption across the market… as above,
• The haters who dismiss it on the basis it’s risen on hype, speculative narratives and noise driving Fear of Missing Out (FOMO), “this time it’s different”, and how the bubble will pop when there are no more greater fools willing to buy at the top,
• Or, those who wonder if bitcoin represents something else – an important inflection point in the evolution of money that’s still underway?

Personally, I favour the last one… money is evolving. It may be a fork on the issue of monetary governance – between future financial systems where Government has complete oversight of all financial transactions versus one where it has none. Someday, I suspect a financial palaeontologist will look at Bitcoin and likely declare it was an evolutionary dead-end, or maybe a missing link in the evolution of new money.

…….

Bitcoin has always been interesting.. 15 years since inception its already technologically obsolete, clunky, and too slow to be a realistic form of money or even easily tradable asset in its pure form; peer-to-peer transactions. It typically takes minutes rather than microseconds to confirm a trade. Its’ blockchain would be swamped in a crashing market. Just like gold, its simply easier to hold in ETF format.

All bubbles usually start will a great idea – it’s how that idea advances that determines just how big the bubble eventually gets. I fully accept that Bitcoin is very clever, and I understand what the proponents are trying to say when they claim it’s a “decentralised alternative to central banking/money/finance”, but also how its’ volatility means it does none of the primary things that money does; like being a store of value, a unit of account, or means of exchange. It is too imperfect for any of these things. That’s a major reason the large and committed Bitcoin base is now marketing it as an “asset”, primarily denominated in dollars – the fiat currency it was designed to replace.

I certainly don’t understand the plethora of Meme-coins… They stem from Bitcoin, yet the ignorance around them is astounding. I asked the chap who has made a six figure sum buying bitcoin and trading meme-coins this year to explain how they work? After listening to how he uses crypto-news-sites to learn what new coins are coming, which new coins will make it on to CoinBase (which immediately boosts the price), how to get in and out of them ahead of everyone else, then how easy they are to trade, I asked the question in a different form: “yes, but, what are you actually buying?” He looked at me strangely and says “meme-coins, you know like DOGE”. I ask him to explain what they are, and he looks at me like I just came down from the trees. Maybe I have.

There is a risk the noise around these worthless meme-coins will bury the more thoughtful stable and utility coins with potential real world uses – how contagion risk could sink the whole crypto market. Should another crypto-winter occur, then much of the useful/interesting work being done in Tokenisation will likely wither in its wake. Others question whether tokenisation – converting stocks, shares, and other assets into digital tokens – will ever achieve breakthrough. They simply replace existing tried and tested methods of trading stocks through new vectors using smart contracts rather than share registers, and attract third parties seeking to charge fees. What’s changed?

That said, global utility coins tied to customer loyalty will no doubt become a very real thing in coming years – an evolution that began with Green Shield Stamps back in the 1950s (if anyone else remembers them.)

Lessons from Bitcoin and Market History…

2024’s Bitcoin rally represents the third time its price has spectacularly bubbled, bouncing off the apparent terminal downside of the crypto winter of ‘22 to soar to new record highs, touching $106k before the bearish Fed caused it to tumble 8% back to $97k the week before Christmas. Every previous bubble has then seen the price collapse some 70-80% from the high before a new bubble driven by a new narrative develops a year or so later.

The investors piling in at the $100k valuation are hoping “this time it’s different”. This year’s rally has led many critics to capitulate and think about how to embrace it. An increasing number of even smart investors are now questioning their initial suspicions about Bitcoin: If it keeps coming back stronger each time, then there must be something behind it?

Alongside Bitcoin, other Crypto deals have exploded – meme-coins with half-lives measured in moments. Elon Musk’s latest coin has soared in value simply on him tweeting it. The saga of the “Hawk Tuah” coin – which provoked much ribald hilarity as I explained it over a large Christmas lunch – was a classic pump’n’dump. One crypto wallet apparently made a $1.3 mm profit in the hour it was launched before the greater fools left holding it saw it crash to nothing. Over 20,000 crypto-coins have been launched – I am told there are only 6 worth following… (I hold Ethereum and Cardano – but mainly as an experiment.)

No one seems to remember how the NFT explosion of bored apes futtered out in obscurity, or how SPACs made everything possible, till folk walked away realising how loaded they were.

What changed to make Bitcoin so strong this time?

Like any good religion, it’s all about persuading new believers to adopt it. Bitcoin has gained an element of institutional credibility – from investment firms advising clients to hold it in their portfolios, from investment banks financing crypto-based deals and acting as liquidity backstops to stable coins, and, of course, the new, transactionally orientated President of the USA saying he will make America the crypto-capital of the World.

The crypto-proponents hail institutional engagement as proof-positive of how Bitcoin and blockchain technology has gone mainstream. They cite how funds like MicroStrategy and a US Bitcoin Strategic Reserve will backstop the market. The investment banking and investment industry is only too happy to participate – earning substantial fees from leading and managing crypto and Bitcoin transactions.

The institutions are not stupid – hidden away in the disclaimer on a recent Blackrock video on why investors should hold Bitcoin in their portfolios was a warning that “there is no guarantee that Bitcoin’s 21 billion supply cap with not be changed.” It was enough to run a tremor round the market. Of course, the crypto shills say it’s impossible, but if enough “nodes” were to agree on a new fork, conceivably the supply cap could change, but who would possibly vote for such a thing? One can understand why Bitcoin miners would want to carry on mining… (As I’ve said before – the moment a Bitcoin priest assures you something is impossible, assume it’s already happening.)

Americans – lacking my British sense of the sublime hilarity of it all – don’t seem at all surprised a new industry that claims to be decentralised finance, replacing traditional finance, is now increasingly reliant on it. Bitcoin uber-investor MicroStrategy will pay fees of over $800 mm to investment banks to place its ambitious $42 bln bond and convertible capital raising plans in the next few years – that is simply too tempting for any investment bank to ignore!

Is Bitcoin a portfolio asset?

When your investment advisor tells you to hold at least 5% of your portfolio in Bitcoin, be concerned they might just be making you the greater fool. (The greater fool is necessary to sustain any bubble – when the last greater fool has spent his money, the bubble invariably pops.) When you question such advice, they will say it’s a hedge against missing out on future Bitcoin upside, and protection against weakness in the fiat-currency based markets. (I can also sell you insurance on extinction level meteor hitting the Earth.)

Investors are now being fed a simple argument by investment firms keen to earn fees from the crypto-markets:

• The size of the global investment asset base is around $270bln.
• If everyone was to hold 5% of their assets in Bitcoin – that would make BTC worth around $13.5 trillion.
• That would mean the price of a single Bitcoin would rise to $900,000 – based on only 15.7mm Bitcoin in circulation currently out of 19 mm that have been mined and the 17% that have been lost.

It is estimated less than 2.5 million Bitcoins have ever traded. Michael Saylor, the CEO of MicroStrategy is not the only HODLer – intent on holding his Bitcoin no matter what.

The scarcity value of argument assumes Bitcoin is the only possible scarce asset – but still doesn’t explain why we should value it a scarce asset. The global market cap of Gold – still the ultimate safe-haven asset – is around $18 trillion, 6.7% of global assets, and 16% of Global GDP, which is higher than normal because of the current global uncertainty and high price of gold. For Bitcoin to become as significant a safe-haven investment, then it will have to take share from Gold.

Gold trades on Global Fear. Bitcoin seems “tethered” to the fortunes of the Big Tech names and doesn’t really trade in line with rising or falling global instability risks. I do think it may be way to trade politics however – it rises and falls with the fortunes of those willing to support it! (More about that below.)

The thing about Gold is it’s a store of value and some 44% of all the gold mined goes into jewellery. Your partner or daughter is going to be kind of unhappy if you ever ask them to wear a bangle, earring or ring made from invisible, intangible, Bitcoin…  (Hang on… maybe that’s an idea…?)

Gold is scarce. Bitcoin is even scarcer – limited by the strict Nakamoto protocols. But are they comparable? Does 21 mm total coins make BTC a scarce asset? Proponents use the simple argument of Bitcoin’s scarcity means it can only go higher – therefore its scarcity value makes it digital gold, claim the Bitcoin barkers. I ask… why? Why not anything else that is scarce – cowrie shells anyone?

Why not buy gold? Its proven. The lustrous nature and scarcity of Gold has made it an exchangeable financial asset for at least 10 thousand years. Every gram of Gold on planet Earth was created in supernova over the last 13 billion odd years since Big Bang. Every bitcoin has been created by some miner’s “rig” – a warehouse of computing power – in the last decade or so. What makes Bitcoin’s apparent scarcity so much more valuable? While Gold will survive the sun consuming the Earth, it’s considered unlikely Bitcoin’s programming will survive Quantum Computing – which will emerge in the next few years.

However, the real questions that still need answered include: What is Bitcoin? Why is Bitcoin? What’s it worth?

Bitcoin – Where is the value?

Let’s start with the world of difference between investing in Bitcoin and trading Bitcoin. The big mistake retail investors often make is to think trading action represents an investment opportunity.

The Bitcoin trading case:

Traders don’t need to understand the fundamentals of Bitcoin, the tech behind it, its multiple claimed use cases, the real size of the market, or even what it is (or might or might not be). They understand trading is about reading the market’s shifting moods. 2024 demonstrated the need to understand what the voting machine called the financial market was thinking.

Smart players saw how the component parts were all there; a promise of fantabulous upside – driven by a narrative of positivity. They foresaw how the rally was fuelled by the regulatory approval for retail to buy Bitcoin ETFs (fastest growing ETFs in history!), the April halving (reducing the number of coins miners receive for using vast amounts of energy to solve complex but ultimately pointless calculations), and on how President Donald Trump is going to deregulate and boost crypto. Crypto barkers have amplified these factors into a hard-to-resist story of unlimited Bitcoin upside.

With the benefit of hindsight, it’s easy to see how a smart trader would have connected the dots, and traded Bitcoin higher on the expectation more greater fools would join the party. They care about riding the upside momentum and avoiding the falling knife when sentiment reverses – which will happen when the market runs out of new buyers. Bitcoin traders understand the brutal reality behind Bitcoin – it is only worth what the next greater fool will pay for it.

Disclaimer: My biggest trading mistake in 2024 was in Bitcoin. I saw how the crypto market was buying the upside potential for Bitcoin on the back of the narratives around ETFs attracting new retail buyers, the hype around the halving, and the boost Donald Trump’s conversion to a Crypto-Bro would trigger. (I did trade bitcoin for giggles from my CoinBase account – buying the rumour, and selling the fact, but I have never ever considered it a serious investment.)

I got it badly wrong in November. I made a call Kamala Harris would win the US election. I took out a short on Bitcoin. I reckoned a Harris win would be seen as a massive knockback. Trump won, and Bitcoin rallied 50%! (I also shorted Tesla!)

Ouch.

How did I get the US election so wrong? I misread the power and engagement of Donald Trump across social media – how Musk was far more influential than I was prepared to credit, and how Trump, Musk and Vance embraced media and podcasts to engage openly with voters, while Harris remained essentially closed and unknown.

The scale to which Trump had captured the narrative of the election is only matched by how successfully Bitcoin and its’ supporters dominate the narrative on crypto as a valid investment asset, and endlessly promote their truth that it will go endlessly higher. The fact Trump is now surrounded by a coterie of tech billionaires, who are generally all positive on Bitcoin and Crypto – for multiple reasons, but mostly related to their wealth already being all-in – has been very supportive for powering the upwards narrative around Bitcoin.

I very much doubt Trump sincerely believes in the intellectual beauty of Bitcoin, or cares about what Crypto might be, but wanted dollars for his campaign funds and audiences who would listen. But his support for Crypto has sparked a whole new wave of crypto speculation. If they think Trump gets it – then so do his supporters!

The Bitcoin Investment Case

While traders buy based on the market’s sentiment (some would say the market’s incredulity), the professional investment case for Bitcoin is much more complex. While retail will buy because an asset because its price is rising, professionals will insist on understanding the asset and the risks around it. To maintain the $106k price reached as Bitcoin traded up, investors need to be convinced these prices are sustainable, real and long-term. They need to understand why Bitcoin is now a $2 trillion market – and why it will remain so or grow.

The institutional market is where Bitcoin has historically struggled to build traction. Institutional investors remain entirely unconvinced Bitcoin is a better form of digital gold. They see reputational risk swirling around it. While retail has been sucked into the narratives around Bitcoin, professional investors understand conventional financial systems, how to invest in real world and financial assets, the nature of risk and protecting against it. They look at Bitcoin and ask the obvious question I posed earlier: what does Bitcoin do or provide that isn’t already done more effectively? Fiat money and complex documentation is not perfect, but it works.

15 years after its inception, Bitcoin is still struggling to explain what it is to institutional investors. Today no one is wasting time explaining it’s a new form of money – now they claim it is an asset. Thus far it’s been hyped and driven by extraordinary claims made by those with vested interests in its’ success. It’s been captured by right-wing Libertarian monetary philosophy that says all government is bad, therefore fiat money is bad – an argument many retail investors are happy to accept. (If that is the case, remind me how America became so rich and powerful on the dollar, the most successful fiat currency in history?

Institutional investors don’t buy the Libertarian vs Keynesian willy-waggling contest over fiat money. They buy on facts, probabilities and risk. While it’s been easy to draw in the retail greater fools based on the trading action in Bitcoin, it’s proved very difficult to persuade professional investors that it has any real investment merit.

That’s what changed in the 2024 Bitcoin market: a shift in the underlying narrative around Bitcoin’s value – it is now marketed as a financial asset. That’s been a critical development for Bitcoin – becoming something professional investors can grasp, and upon which new professional investment narratives can be constructed.

Since its inception 15 years ago, the growth of Bitcoin has depended on drawing in successive audiences. Think of each step as Bitcoin filling an evolutionary niche.

• At first it had to attract the financial techies – those attracted to the intellectual premise behind blockchain and bitcoin – to create lift-off.
• Then it to create a reason for it; hence its roots as a Libertarian anti-fiat digital currency.
• It has continued to evolve, step-by-step, to the stage where today it has become a “financial asset” that has sucked in retail investors.
• The next level is to become legit – an institutional asset class.

It’s a critical next evolutionary step for Bitcoin – access to the $270 trillion Global Investment Market as a core investment asset. That requires Bitcoin to become an investible asset with intrinsic value.

That’s a problem. Bitcoin has no intrinsic value, except what the next greater fool will pay. It doesn’t represent an ownership share of anything. It doesn’t pay any return or interest. Unlike gold, you can’t wear it. What is its USP (“Unique Selling Proposition”) that justifies the interest of professional investors? Scarcity is a subjective concept – not an objective value.

There is now much less noise about the “transformational” power of decentralised digital money. Few bitcoin barkers will bother to argue it’s a better medium of exchange or store of value – in reality Bitcoin tech is old, slow and technologically clunky. They will still cite fuzzy libertarian concepts that de-centralised money is free of the inflationary distortions inherent in Government run fiat-money – but its new primary value proposition is that it is a financial asset, where its’ value is based on its’ scarcity.

Bitcoin and Social Justice

There is of course another problem. Smart investors might ask the obvious questions about social stability in the event of the Bitcoinisation of the global economy:

• Ok – so you want me to value Bitcoin as global currency worth $100k per coin – when at least 66% of the total supply is held by a tiny number of early insiders who bought close to zero, and 6.4% is held by one chap who nobody knows anything about?
• Won’t that leave all of them fantabulously wealthy, and the rest of us incredibly poor?
• In a world where we believe wealth should come from creating value and income, isn’t Bitcoin just creating a new wealth inequality divide with a tiny number owning all the scarce capital (like land was once regarded), ultimately destroying social stability and cohesion, leading to revolution and economic destruction?
• Won’t adopting Bitcoin effectively transfer ownership of everything to the tiny minority of bitcoin whales?
• And you think that’s a good thing?
• Money is shared by everyone; shouldn’t everyone get the vote on the democratisation of money – not just the libertarians who were in at the start.

Convincing the market that Bitcoin might be a scarce financial asset has been the key to the 2024 Bitcoin Bubble. To understand what likely happens next, its critical to understand the financial history of Bitcoin.

Bitcoin – The Myth of Evolved Money and Libertarian Philosophy

I think the smartest line I’ve ever came up with is: “What’s the difference between a socialist and a libertarian? A socialist wants what is yours. A libertarian already owns it.” It pretty much sums up Bitcoin’s ownership structure.

The best financial book I read in 2024 was Money by David McWilliams. It is more than just a history of filthy lucre – he explains how Money has enabled human society to evolve and develop. He cites money as perhaps the greatest ever invention in history. In all its multiple formats, and the experimentation around it – including enabling markets and speculation – it’s clear Money has been the oil that lubricates commerce, growth and society. The great thing about the book is its readable, it’s amusing, and its non-political.

One lesson from the book is how money has been evolving since its inception. It will continue to do so. Many people believed Bitcoin would become the next evolved form of money. That is no longer the case. Bitcoin is not money. Its early crypto tech is too clunky, and its simply not fast enough to be a means of exchange for today’s markets, it’s too volatile, and the arguments now being made about its value as a scarce asset means no will ever seek to sell it, making it increasingly illiquid, therefore to small a niche to be important.

But the main problem is that if Bitcoin is evolved money – what problem with current money did it solve? Or what opportunity did it recognise as a its niche?

On the advice of a chum from the AI investment community I read “The Bitcoin Standard” by Saiffdean Ammous to try to fathom what it is I am missing about Bitcoin. (It is very interesting, informative, and reads much like a tract from a Jesuit training school so certain it is of its core message.) Just like the McWilliams book it tells a history of money, but then goes into the future – which is Bitcoin.

However, it is written by an avowed economist of the Austrian school – aka a Libertarian. Originally written in 2018, the book is getting on a bit, but it offers one answer to the question of why Bitcoin has evolved: “To counter the pernicious effects of fait government-controlled currencies in triggering inflation, and now the debt crisis that is going to destroy capitalist economies.”

That’s a Libertarian argument I’ve heard many times, and one that the right has rallied around.

The Libertarian argument is simple. Governments can’t be trusted to run money. Fiat Government Money is a danger that will destroy the West through inflation and debt – both crises we are hurtling into – say the Libertarians. (They might be right about debt – but otherwise Western Economies have done impressively well under fiat currencies.)

The Roman empire fell because legionaries were paid in an increasingly debased currency merchants stopped accepting – without functional money, the empire fell apart. Libertarians argue the same thing will happen to Fiat Currency because of debt and inflation – engineered and enabled by central banks has undermined monetary confidence, say the conspiracy theorists. That can clearly be seen in the way gold has soared in value on rising global geopolitical uncertainties. Yep. Gold.

One core tenet of the Bitcoin Standard is fiat money is a socialist trick to destroy capitalism. It repeatedly cites the predictable failure of communism and socialism and the blames fiat currency distortion. However, communism failed on authoritarianism being a remarkably bad way of planning an economy, and endemic corruption – witness Russian troops in Ukraine in Lorries with cardboard spare tyres because their officers had stolen and sold them. The failure of the Soviet Union was entirely due to non-monetary factors. Emperor Xi of China will no doubt be delighted to know it’s not endemic regional corruption and demographics causing crisis in China, but monetary policy.

The point about Libertarian monetarist theory as the bed-rock of Bitcoin is it’s also become convenient part of the populist agenda. Bitcoin was launched at time of extreme doubt on the wisdom of bank bailouts and ultra-low interest rates to stimulate the post Global Financial Crisis economy of 2007-2008. (Funnily enough it was the cheap money of the QE era that eventually fuelled the speculative early bitcoin bubbles.) QE avoided economic meltdown, but fuelled an enormous speculative rally across all financial assets – fuelled by rising debt, and happened again during lockdown – when we saw another Bitcoin rally, driven by retail greater fools spending their Covid handouts.

It’s easy for populist politicians to blame the establishment for the inequalities in society. Bitcoin provides a veneer of alternative monetary respectability.  Take a look around the great disruptors in Politics today – especially Trump and Nigel Farage in the UK. They are successful populists, mixing a smorgasbord of left and right policies to appeal to voters, and pining blame on the establishment – particularly Central Banks for presiding over the fiat money debt/inflation tsunami they tell voters only they can save them from. The US Federal Reserve’s recent comments about the likely slow pace of interest rate easing in 2025 will drive Trump into conniptions, a direct challenge to his plans to reflate the economy.

It’s no surprise Trump has embraced Bitcoin as not only a get-richer-quicker scheme, but also as a crutch against the Fed. I expect Farage will do the same in the UK – to show how clever he is. Maybe we will get a Nigel Meme-coin? If he adopts crypto to attract cash from Elon Musk – what’s the problem?

However, is it likely any government will voluntarily accept the replacement of fiat money with Crypto? Government will see enormous advantages in the control and oversight of money – which will immediately be decried as an assault on personal freedoms by the Libertarians. We live in societies where data is already used across all possible vectors. Already Tax offices know exactly how much you are paid before you file a tax bill, and transactions are easily traced through bank accounts. The technologies of Digital Fiat Money used to track criminality would be welcomed by most law-abiding citizens, but will result in fury from the hard right.

…….

Evolution occurs when the need to evolve emerges. It a process by which an organism changes to avoid crisis or take advantage of opportunity. Evolution solves immediate problems. Bitcoin did not emerge because of any urgent need for decentralised currency. I suspect it emerged when someone spotted the opportunity to use the then new blockchain technology to create a libertarian alternative to fiat-money. The libertarian right – especially those from the Austrian School of monetarist theorists who believe central banks only exist to make the mistakes that lead to inflation – became its earliest proponents. It gives them something to say, a solution to the evil of fiat money, and an audience to preach to!

At present the global economy remains dollarized. Many market participants think that could change. Bitcoin supporters have seized upon de-dollarisation to propose Bitcoin as an alternative. Curiously, the Libertarian holy monetary texts arguing against fait money largely favoured a return to the days of the Gold Standard, and now they favour Bitcoin as Digital Gold.

But what would happen if Bitcoin replaced the dollar overnight? How would anyone trade if no one was willing to sell Bitcoin because of its appreciating scarcity store of value? Deflation and despond. Something worse, perhaps, than fait-money? An argument for another day as it will never happen.

The bottom line is Bitcoin fits both the libertarian agenda of the uber-rich and the current populist political vibe, it paints Central Banks at the core of the villainous establishment that encourages inflation and devaluation, and thus eats into the wealth of the uber-rich. It’s little wonder billionaires seeking to protect themselves for wealth tax raids are supporting it.

Bitcoin – the Foundation Myths

To try to understand the motivations behind Bitcoin, we really need a chat with Satoshi Nakamoto. I reckon Nakamoto, (or more likely the group using the name), is/are astounded and surprised at what his/her/its/their experimentation created. Why they remain anonymous is interesting – the way Bitcoin’s early use case was primarily to fuel criminality could leave them vulnerable. (Or, let’s lob a conspiracy theory into the mix: maybe it’s because they are a secret office of the Chinese Ministry of Financial Destabilisation… The Germans tried to break the UK during WW2 by forging £5 notes, intending to drop them on country to collapse the currency.)

Perhaps we will one-day know the truth of Bitcoins’ genesis – but the whole Bitcoin industry has now sprung up around the new financial religion they created.

Bitcoin was invented back in January 2009 by Satoshi. The first 22,000 blocks of Bitcoin, each then of 50 Bitcoin, were “mined” by Satoshi over it first 6 months – that’s 1.1mm out of a possible maximum of 21mm Bitcoin – currently worth $110 bln. Satoshi wallets hold around 6.3% of all the possible bitcoin.

That motherload of Bitcoin is held in multiple wallets, and not one of them has ever been accessed or transacted any Bitcoin according to the Blockchain. The very first “Genesis” wallet, initially comprised the first 50 Bitcoins ever mined. Over the years, usually in January, unidentified Bitcoin miners/holders have transferred small numbers of Bitcoin into the account – so it now has 99.9 BC in it. US Law states citizens must declare all crypto transactions over $10k, so when BTC was sent to Satoshi’s genesis wallet, he is breaking the law by not declaring it!

In the early days Satoshi was a prolific commentator and explainer of Bitcoin, but then he disappeared – no one has heard from him since 2013. It’s either a bit like peering back through a telescope at the stars looking for evidence of Big Bang when looking at the early days of Bitcoin, or wondering where he was disappeared to?

About 5 months after Satoshi mined his original bitcoin, other accounts were starting to emerge. These accounts acquired millions of Bitcoin at a price of practically nothing – and many have never transacted. Recently one very early wallet transferred 10 Bitcoin mined in early 2009 to the Kraken exchange for $610k. account had been dormant since its inception – and there are still nearly 1200 BTC left in that wallet. Over Christmas 2024 another early account suddenly sold some of its coins – perhaps someone found an old computer up in the attic and managed to crack the code?

Behind Nakamoto there are six other big anonymous early holders of anything between 100-50k Bitcoins. The next largest 97 holders of Bitcoin hold nearly 3 million Bitcoin – 14% of the total that can ever be issued. I would love to know whose and from when these wallets date from. Again, many have never traded. The intentions of largely dormant “Whales” to sell/hold is unknown. (To add to the mix: the Winklevoss twins of didn’t-invent-Facebook fame hold 70k coins.) I suspect many of these Whale accounts might also belong to members of the Satoshi collective.

Why have 1.1mm coins held in the name of Satoshi and millions held in other wallets never traded? What do they know the rest of us don’t. When they trade we will see that on the blockchain. Do these people live in fear of being uncovered by quantum computing – their tax bills will be horrendous! Or is the truth more prosaic – have they died or simply lost their keys/codes? Or… does the Satoshi collective actually control far more of the Whale Wallets, and has been quietly living off trading them? (Think of a bank heist movie, when the apparently poor garage owner is actually sitting on billions of stolen banknotes he can only ever use in dribs and drabs as to spend them would give him away?)

If we knew what the early Bitcoin inventor/developers were really thinking, we’d have a much better understanding of the crypto reality. If we ever find out I suspect, it will be the end of the Crypto market – it would remove much of magic. There are very many vested interests who are likely to want to ensure Satoshi’s identity and the foundation story of Bitcoin remains mythical.

One thing is certain – Satoshi Nakamoto’s writings contain warnings to keep Bitcoin decentralised and never to engage with traditional finance – which is exactly what is happening to it now.

Who is Satoshi?

Many names and theories around the genesis of Bitcoin have been proposed. An early adopter of Bitcoin, Laszlo Hanyecz, bought 2 Pizzas worth $40 for 10,000 BTC in May 2010 – the first ever Bitcoin purchase in the real world. The first Bitcoin trade between a seller and buyer transferring coins between wallets didn’t happen till July 2010 – at 6 cents!

Others have suggested Bitcoin was commissioned by bad actors, such as Ross Ulbricht the founder of Dark-Web market Silk Road (which ran from 2011-2013), to enable trading on sites dealing in illegal goods to remain hidden. Certainly, there is very strong evidence, which is available from analysis of the blockchain itself, that Bitcoin’s sudden explosion into the public consciousness and its first rise in value only came after bad actors like Ulbricht persuaded criminals that Bitcoin was a traceless and foolproof way to trade and create markets in illegal goods and commodities. (How wrong that sense of security proved to be – Ulbricht is serving life plus 40. Seizures by the FBI of illegal crypto assets have made the USA one of the largest holders of bitcoin, regularly dumping BTC on to the market.)

A number of Bitcoin watchers have suggested the Satoshi collective were the only holders among themselves of Crypto until Silk Road and other bad actors stumbled on it as a potential exchange solution for non-cash transactions. They would be in all kinds of legal hell if it becomes common knowledge they enabled Silk Road. While the wallets in Satoshi’s pot are untouched, many other Whales have ridden the market successively higher – trading it. If the truth were ever known, the implications for them would be enormous.

Bitcoin – monetary evolution

Bitcoin may remain forever stuck with its clunky tech and a 21 million cap, but the narratives around it are developing. There is a middle ground; genuine financial innovations and a developing ecosystem of firms emerging around stable coins, utility coins, tokenisation, and how blockchain may finally have found problems to solve as AI, Web3 and ongoing digitisation drive a new wave of market invention. The explosion in new crypto-enabled financial technologies (FinTech) will see many concepts wither and die – fantastic ideas without any clear need or use case. Others will evolve into genuine solutions creating new market opportunities, and making finance more efficient.

The biggest factor that may boost that technology will Trump’s promised deregulation of crypto. Everyone has piled in. Yet, no one is asking – what will crypto deregulation make better?

I have some questions about that?

• What upside for investors will be created by deregulating crypto?
• Does making it easier to buy make Bitcoin any more intrinsically valuable – except that rising demand will push the price higher, thus making the crypto princes sitting on massive wallets even richer?
• How will deregulation make Bitcoin and crypto better?

What I find curious about memecoins, but also Bitcoin, is how many people from outside finance evangelise about them as financial assets. Yes, there are increasing numbers of smart, sophisticated investment professionals active in the space – mostly proposing I join in and buy. I fear these people have stumbled upon the basic truth of financial markets – find assets that look attractive enough to sell to other people at a mark-up. It is clear more and more people are bought into Bitcoin. I am told I would be foolish not to have a least 5% of my portfolio invested in Bitcoin. But, I can’t understand why MicroStrategy, a 100% bitcoin play is worth 3x the value of its Bitcoin holding. Maybe it will be quantum computing that pops the bubble permanently?

Bitcoin has seen a crypto summer through 2024. It’s rallied as it’s the cryptocurrency everyone has heard about – and the easiest to market. That does not necessarily mean it’s the future of crypto, Web3 or the increasingly diverse digitisation of markets. Bitcoin’s structure is too limited and too associated with negative headlines linking crypto to crime.

Conclusions

Let’s try to draw some conclusions:

Adoption

I’m not surprised to see more and more institutions enabling bitcoin trading and investment – it’s fee paying business. I would question how many genuinely see Bitcoin as a long-term investment. If folk are trading anything, you can bet firms like Goldman Sachs and JP Morgan will be looking to take a slice.

Digital Gold

Much of the argument around Bitcoin being a better currency than, say, dollars, is based on Libertarian philosophy – which has become wrapped up in populist politics: that the establishment, including central banks and fiat money are responsible for all the economic ills of society. Contrast that to the massive wealth inequality effect the adoption of Bitcoin would create. And ask the question: fiat currencies have enabled enormous growth, lifting billions out of poverty – what’s so bad about that?

Scarcity

Bitcoin’s scarcity is cleverly engineered – but as Blackrock pointed out, it may not remain as scarce in perpetuity. Even if it is scarce – so are lots of other things; diamonds, rare minerals, gold, silver… but not everything is valuable because it is unique of scarce. Bitcoin will compete with other traded scarce assets – and preferences will be shown. The best form of digital gold is digital gold – which is available in Gold ETF format.

Will it become global digital money?

This is unlikely because of the clunkiness of the blockchain it operates on. It is unlikely to be a price setting currency because of its volatility. But no other currency looks likely to replace the dollar – which benefits from the US.

Is it an asset to hold in your portfolio?

Your call. But bear in mind, each Bitcoin bubble has popped and led to a downside between 70-80%.

Ultimately Bitcoin relies on new greater fools joining the chain to push its value up. That benefits the existing holders. That sounds like a classic Ponzi. Maybe that is all it is. Maybe not. I have described it many times as a modern take on the fairy tale: “The Emperor’s New Clothes“. Nothing I have seen or heard as yet changed my mind.

I have an idea: Reinvent Bitcoin. Give everyone on the planet 1 New Bitcoin. Everyone gets a Bitcoin the day they are born. They can choose to hold, hoard or trade it at any point in their life. The only provisos are it can’t be left as a legacy. The total number of bitcoins will match the number of people on earth. Let’s see how it develops. I suspect badly – in a few generations the majority of New Bitcoin will be held by a tiny aristocracy of holders, subjugating the rest of us. I think I might go write a science fiction novel around it.

If someone can show Bitcoin is a better form or money or asset, I will submit. Show me one thing it does better than what already exists? Until someone proves otherwise, I will continue to believe Bitcoin is little more than a hyped narrative. Whatever President Trump and his cabinet say about Bitcoin, whatever the multiple crypto meme-coin minters proclaim, and no matter how much Blackrock and others funds now promote Bitcoin investments to profit from retail investors.. I will not blindly agree the earth is flat when clearly it is rugby ball shaped.

As a final thought in this New Years’ Morning Porridge Big Read, I shall leave you with a passage from The Hitchhiker’s Guide to the Galaxy on the subject of money:

“How can you have money,” demanded Ford, “if none of you actually produces anything? It doesn’t grow on trees you know.”
“If you would allow me to continue.. .” [Said the management consultant]

Ford nodded dejectedly.
“Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.”
Ford stared in disbelief at the crowd who were murmuring appreciatively at this and greedily fingering the wads of leaves with which their track suits were stuffed.
“But we have also,” continued the management consultant, “run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying one ship’s peanut.”
Murmurs of alarm came from the crowd. The management consultant waved them down.
“So in order to obviate this problem,” he continued, “and effectively revalue the leaf, we are about to embark on a massive defoliation campaign, and. . .er, burn down all the forests. I think you’ll all agree that’s a sensible move under the circumstances.”
The crowd seemed a little uncertain about this for a second or two until someone pointed out how much this would increase the value of the leaves in their pockets whereupon they let out whoops of delight and gave the management consultant a standing ovation.”

Douglas Adams, The Restaurant at the End of the Universe

Out of time, and back to contemplating the multiverse from Monday…

Bill Blain

Author of the Morning Porridge

 

www.windshift.capital