Thread by @StockWonk

In a recent excellent thread by @coloradotravis on how crypto is the financialization of belief, I saw people respond with claiming Bitcoin has "unlimited upside." This isn't true. The upside is very limited, giving Bitcoin a very poor risk/reward profile. A thread /1

@coloradotravis First, Bitcoin is purely a greater fool asset. While it may not technically be a ponzi, it has the same structure in that it is 100% dependent on inflows of new investor money to pay out early investors. Unlike the stock market, there are no other sources of inflows /2

The problem with any pure greater fool asset is that you eventually run out of fools who are willing to buy at higher prices. This alone caps the upside 3/

Bitcoin is similar to MLM and pyramid schemes. Those schemes depend on an ever-expanding network of distributors, something that is impossible due to market saturation and the fact not everyone will want to be a distributor /4

Thus, just as the upside of any MLM is capped, so is Bitcoin for similar reasons. Bitcoin is zero sum due to the fact there's only a single source of inflows. For someone to win, someone else must lose, similar to my day trading. /5

In fact, one could argue that Bitcoin is negative sum for investors in the very long run, due to miners siphoning real $ out of the system (which also caps the upside). It would be akin to a series of poker games where a referee is constantly taking money out of the pot /6

The other factor capping the upside is the energy consumption. It's well known that the network consumes massive amounts of energy, and the energy consumption grows directly with the price /7

@vhranger has a tweet a while back about this as well. The price targets that people throw out for Bitcoin ($100K, $200K, $1 million) don't consider the energy consumption at those prices /8

The network already consumes the same energy as some entire countries, and it's already caused electrical grid problems in some countries leading to restrictions or bans on mining /9

Higher prices would only mean more problems, and would guarantee government interventions to stop it. And it doesn't matter whether the energy comes from renewable sources or not...it's still siphoning huge amounts of energy causing problems for everyone else /10

Those 2 factors alone (greater fool asset, energy consumption) cap Bitcoin's upside. And I haven't even touched the downside risks, ranging from systemic Tether risk to illiquidity to lack of use cases to the extreme leverage in the system /11

Even the greater fool nature increases downside risk because just as fools step over each other to try to get in, they'll step over each other to try to get out when things go south, but the illiquidity makes it tough, similar to when an OTC shell penny stock collapses /12

Ultimately, you've got a zero-sum ponzi-like asset with limited upside potential and very high downside risk ... a poor risk/reward proposition. /end

@smdiehl you may like my thread here