Blain’s Morning Porridge, Feb 24 2021: Rising Policy Risk

The Easy Way to get Rich… Isn’t.

Blain’s Morning Porridge 25th November 2021 – The Easy Way to get Rich… Isn’t.

“The greatest trick the Devil ever pulled was convincing the World he didn’t exist.”

This morning: Crypto currencies have confused the way we think about money and wealth. Its deliberate. It helps layer the crypto narrative they are modern and somehow better than fiat money. It’s fake news. Crypto is full of inconsistencies and outright bullsh*t – it’s time regulators did their jobs!

Regulators have a lot to worry about.

I saw a scary headline in a US newsletter: “Nearly two-thirds of Gen Z think they’ll become crypto millionaires.” Sure, of course they will. Meanwhile, in the UK, the FCA recently did a survey of “young” investors, (those under 40) and found 76% participate in high-risk investments as a result of social media and peer group pressure to do so. Cryptocurrencies are one of the main areas of risk, yet 58% of these UK investors think Bitcoin is regulated by the FCA!

We all want to get rich.

Personally, I have a standing order to the lottery, occasionally bet on the Grand National (a horse race), stay away from poker games, and have £200 invested in a random selection of cryptos on Coinbase just to see what happens. Statistics and probability dictate none of these things will make me rich – but we can all hope. If I want to get seriously rich I will either have to invest very cleverly, or invent, innovate and succeed with some new and vital good or service to create my own wealth.

Alternatively, I could look to get rich by relieving other people of the burden of their money.

That’s the blunt and brutal truth behind cryptocurrencies. The message is simple – invest early and reap the rewards as the coin inevitably rises. In that respect it’s no different from the classic Ponzi; a steady flow of new entrants pays off the older members. What ill-informed participants understand is simple: buy and wait for it to rise and they are “on-paper” rich. Simple. They are urged to HODL to juice up prices of the scarce crypto – if everyone is holding in a hot market, then of course prices will rise, and the “greater fool” joins the rush to participate because prices are rising.

The greater fool has been a tragic figure through financial history. He’s a nice sociable chap, who has worked hard, built a small nest-egg and wants to pay off the mortgage and send the kids to a good school. Unfortunately, he was the last man to buy tulips at the height of the frenzy, bought the Southsea Bubble at the top, Railways in 1871, Florida Real-Estate in 1929, Cisco in 1999, and today is wondering whether he should buy Tesla and Ethereum.

Crypto enthusiasts develop something of the religious zealot about them in terms of their belief system. They sincerely believe scarce, digital, decentralised money is so much better than ready cash….  The more they are invested, the increasingly confident they become.

The scam works because such devotion is fuelled by hopes, and by the large and sophisticated ecosystem has now grown up around Crypto – all of which adds to its “credibility”. But it’s mostly bullsh*t; carefully layered nonsense, half-truths, downright lies and bogus statistics designed to support the narrative cryptos can only go higher.

The success of crypto boils down to layering – a term straight out of the regulatory playbook on financial fraud. Layering builds credibility in a con by adding successive stories to the overall narrative to give it credibility. Part of that is the “only clever people” scam: bitcoin hucksters explaining the unexplainable in terms that “only really clever can understand this, if you don’t participate, then you are stupid.” It’s probably the most successful con line in history.

Bingo… Its worked for crypto. Millions of people have bought the dream. Millions of us haven’t – begging the question who is clever and who is stupid.

The young, the impressionable and the greater-fool read headlines about digital gold, widespread adoption, hedge funds participating, banks offering crypto services, well-known investors talking huge positions… and Elon Musk. If these guys are in – then it must be real.

I’ve written too many times arguing that crypto is bogus, and is not money. It’s far too volatile to be a store of value, its scarce and not a unit of account. I could explain why it can’t possibly work as money because its likely to prove an inflationary accelerant, the eqivalent of pouring petrol on a fire.. (OK: if everything is priced in bitcoin.. how do you buy it? If everyone wants to buy a $100 item using Bitcoin, then everyone has to spend more dollars to buy the bitcoin to buy the item, but if the item is priced in bitcoin so it will cost more in real dollar terms, equalling immediate inflation.. If the item is priced in dollars… why take the FX risk buying bitcoin to buy the item you could buy in dollars anyway?)

I can understand why people get caught up in the crypto scam. They want to get rich and believe what they read on their social media feeds. They want it to happen to them. But, do they understand it. Do they do any work to investigate it?

Periodically, I delve into the myriad of utter bullsh*t that masquerades as the blockchain genius, the maths and computing logic behind cryptos. Read it yourself – its 10% fascinating and 90% utter garbage. Mathematical dyslexia puked out and dressed up as original thinking and “proof of concept”.

Don’t accept my word for it. Go read this article from Bitcoin magazine: “Why you should care about Taproot, the next major bitcoin upgrade”, and then explain what it means in concise plain English and why it will make you rich. It’s layering to give credibility to the con, with the added of kicker of making you feel stupid if you can’t understand the gibberish!

The primary rule of any investment is very simply: if you don’t understand – don’t invest.

If you invest on the hope it will all become clear in the future, you are only doing so because you are afraid you might look stupid. It’s the oldest con in the book. If you question it, you get directed to the bullsh*t texts to explain how it works. Definitionally: something that has to tell you it’s money, isn’t! (Thanks Professor Mark Blyth of Brown University, for that little gem.)

Then ponder the ESG good that Crypto brings the World. Read this article from Zerohedge: “How large-scale Bitcoin mining is driving clean energy production”. Please. That’s the kind of convoluted logic that ARK’s Cathie Woods invents to cover up the billions of tonnes of CO2 that’s already been pumped into the atmosphere by socially useless buttcon mining. More bullsh*t, greenwashing the environmental damage done by pretending its forcing energy suppliers to provide bitcoin miners with clean energy.. Get real.. do you really think a skeevey bitcoin miner hiding millions of machines in the wastes of the former Soviet South gives a damn where the electricity comes from?

Read that article alongside the FT’s recent piece on how China’s exiled crypto machines fuel global mining boom. Over 2 million bitcoin mining machines have now been shipped to the US, Canada, Russia and Kazakhstan to continue digging for digital gold…. And Venezuela? The crypto barkers will say mining in Venezuela has triggered an economic boom in solar panels… No it hasn’t… Bitcoin mining in poor South American nations is due to thin regulation, and means power prices rise and outages increase for the locals as corrupt politicians feed the crypto machine.

Why has Bitcoin and Crypto’s been able to run this long? I suspect it’s because the sheer bloody misery of modern life and lockdowns has made folk more susceptible and gullible.  According to a recent FCA press release “young investors are driven by competition and hype”. No Sh*t Sherlock. Who might have possibly think inexperienced investors are being sold impossible tales of boundless wealth, the value of investible intangible money only really clever people understand, and that companies with zero track record or profits are sure-fire certs?

The FCA commissioned a survey of 1000 investors under 40. They found 75% of younger high-risk investors say the feel competitive when investing in high-risk products. The FCA is investing in a new “InvestSmart” campaign aimed at helping consumers to make better informed investment decisions.

The survey confirms many uncomfortable truths. Young investors see investment as a game, a gamble and few regard it as long-term planning for the future. Young investors tend to assume they are protected and don’t understand just how their saving are at risk. A majority of young investors say they are driven by competitive pressure from friends, family and acquaintances. 58% say hype on social media informs their investment choices. Only 8% of young investors expect to hold investments for more than 5 years.

Finally, smart financial eyes will have spotted Invesco has pulled its plans to launch a Bitcoin futures ETF – taking the view regulatory constraints would make it too costly for investors, and suitability issues were not clear. ProShares did launch BITO, their Bitcoin Strategy ETF – and it proved the most successful EFT debut. Invesco might just have figured the reputational risk – what would happen in the event of crypto crash and liquidity locks solid.

Yet it does amaze me the SEC allowed Bitcoin ETFs based on Bitcoin futures, but still won’t allow an actual Bitcoin fund because they consider BC vulnerable to “fraudulent and manipulative acts and practices”.

I am quite sure Bitcoin and Cryptocurrencies will continue to surprise us all, and that the greater fool is still to be found just around the corner. Cryptos have thrived because social media, the internet and connectivity have made it easy to disseminate the con around the global markets at incredible speed. They’ve thrived because regulators haven’t stopped them – hat-tip to the Chinese for being ahead of the regulatory pack in that regards.

Someday… the last greater fool will want his money back… and regulators will be exposed for not acting earlier. 


Out of time, back to the day job

Bill Blain

Strategist, Shard Capital