Thread by @smdiehl

Today let's discuss why #bitcoin is a rubbish investment and a why for most people it's simply a way to light a bunch of money on fire just like gambling on the roulette wheel. 🧵 (1/)

Last week we talked about why the underlying faux-innovation of blockchain is a technical mirage constructed by consultants to snake oil, and which most software engineers don't take seriously. (2/)

https://twitter.com/smdiehl/status/1363418896301228033

If we toss out the unscalable technology, the weird anti-state political fantasies and the toxic subculture around bitcoin and just focus on the pure fundamentals of it as an financial asset class like any other we find it's really quite terrible. (3/)

Well what kind of investment opportunity is bitcoin ... Is it an asset? Is it a currency? Neither?

The answer is that it depends on this narrative ambiguity to sell itself. The best analogue is collectables like baseball cards or beanie babies. (4/)

Now "beanie baby bubble on the blockchain" has a nice ring to it, but it wasn't the original aspiration. Originally it's purpose was as a peer to peer currency, except for one critical flaw ... it doesn't work. From both a technical and an economic perspective. (5/)

A successful currency has three basic properties:

1) it is a unit of account
2) it is a store of value
3) it is a medium of exchange

(6/)

A unit of account means the currency has a standard numerical unit of measurement, which accurately denotes the market value of goods and services and which can used to communicate prices quotes and engage in bargaining. (7/)

A store of value is a unit which can be reliably saved, stored, and retrieved and which the numerical value of must also remain stable over long time periods and between parties who wish to transact. (8/)

A medium of exchange is the property that a currency acts as effective means to intermediate transactions, it is a common unit that parties can exchange instead of bartering goods directly. (9/)

Bitcoin fails horribly at both (2) and (3). It is not a reliable store of value because it's price is hypervolatile and it is strictly impossible to do commerce with a unit of exchange that can drop 45% in a single day.

No one can do productive business in bitcoin. (10/)

The primary use case of bitcoin is hording it based on the fantasy that its price will forever go up and that it can be exchanged for more Dollars or Euros by seling it to a greater fool in the future. There's no incentive to use it for any transactions other than hording. (11/)

Bitcoin as a speculative asset has quite literally the opposite desirable properties of a currency. Usable currencies are stable in value, encourage economic activity, are fast to transact in, and reliably backed by legal safeguards on their use. (12/)

Bitcoin failed as currency because the technology is simply too slow, wasteful and immature to function that way. It's a broken proof of concept run awry.

And now it’s just a proxy to gamble for investors without transparency and controls by promoting it to other fools. (13/)

A good investment has an intrinsic value based on the stream of cash it generates for its owner. Bitcoin as a investment has no intrinsic value because it is not a reliable store of value and has no predictable future cash flows. (14/)

Any returns people make are purely from gambling/speculation trying to predict short term price movements. This kind of speculation, in aggregate, has a negative expected return for the majority of investors. (15/)

Why does speculation have negative expected return? Because in the absence of external cashflow, dividends or revenue there is only one input into the system. Buying tokens. One investors loss is another's gain, it is simply a wealth redistribution scheme not an investment. (16/)

> But Stephen, aren't stocks and bonds exactly the same?

No, Apple stock is valuable because the company produces awesome products and goes out and sells them. A stock is a lien on future of a company's earnings, an external cashflow based utility of services and products. (17/)

Crypto assets are non-productive and from an economic perspective investing in it is a negative sum game, an investment scheme that pays out early investors from later investors while insiders pocket fees and are free to manipulate price formation for their own gains. (18/)

Bitcoin is best analogised as a Ponzi scheme obscured by technology rather than the colluding insiders. It shares exactly the same unstable economic structure and unless you happen to have insider information, investing in bitcoin is precisely equivalent to gambling. (19/)

The reason Bitcoin advocates are so loud, angry and obnoxious is they know the influx of money to pay out their position needs to come from somewhere. And they desperately need it to come from your pocket.

/fin