By Roger Lowenstein
One of the most misleading statements, if not an outright lie, about cryptocurrency is that people invest in it.
No one has ever invested in bitcoin /zigman2/quotes/31322028/realtime BTCUSD -1.77% . They speculate. This is a distinction that Gary Gensler, chairman of the Securities and Exchange Commission, should keep well in mind when the SEC rules on a pending application for a bitcoin exchange-traded fund proposed by VanEck.
An SEC decision could come in June. If the regulator greenlights VanEck, bitcoin will be significantly more available to retail folks.
More to the point, people with self-directed 401(k)s, as well as Individual Retirement Accounts (IRAs), will be able to put tax-sheltered funds into crypto. Six firms have applied to list crypto ETFs, including Fidelity, the biggest brand in retail investing. It’s easy to imagine that the speculative craze could become a stampede. In that event, the government would be encouraging — nay, subsidizing — the most flagrantly obvious speculative bubble in modern times.
You may wonder, “shouldn’t people be free to choose their own, quote, investments?”
Yes, they should. But citizenship does not confer the right to a tax deferment. Tax deferments are a matter of public policy.
The government defers taxes on retirement funds for two sound reasons. Society benefits when people accumulate savings, because they are less likely to become indigent. And it benefits when people invest, rather than consume, because the country thus accumulates capital.
Bitcoin and other crypto meet none of those conditions. It is blatantly not an investment. If you think that doesn’t matter, try telling your spouse that you put the family nest egg into lottery tickets.
The money spent on lottery tickets isn’t saved, it is simply consumed. Similarly with crypto.
Benjamin Graham, a Wall Street sage, once defined investing as an operation that, upon careful analysis, “promises safety of principal and a satisfactory return.” Crypto currencies, which fell 20% one day in May and 50% over a single cycle of the moon, do not promise safety.
Since legitimate investments also fluctuate, what distinguishes a “speculation?” According to the economist John Maynard Keynes, speculations are concerned primarily with investor psychology. Not: ‘How much is something worth?’ but, ‘What are other people thinking?’ Conversely, a true investor can ignore psychology. He or she values their investment according to its intrinsic worth. Its value is derived generally from the income it produces, not from market noise.
Bitcoin produces no income; it is all noise.
VanEck, on its website, alleges an “Investment Case for Bitcoin.” It suggests that “Bitcoin is increasingly used as an asset with monetary value.”
The statement is reductive: “It has value because it has value.” In truth, bitcoin is not used as currency. No one asks the price of a washing machine denominated in bitcoin.
People speculate in bitcoin to make money in dollars—which is a currency.
VanEck’s second rationale, “Bitcoin adoption continues,” does not advance an investment case. It conforms to the explanation offered by Charlie Munger — “somebody else is trading turds and you decide” to trade them too.
VanEck also contends that bitcoin is “digital gold.” But gold /zigman2/quotes/210034565/delayed GC00 -0.02% is not an investment either. It produces no income and there is no rational way to value it.