Opinion |

Bitcoin Is a Fraud, and Let’s Hope and Pray It Stays That Way

For all the hype about cryptocurrencies, no one except criminals and speculators use it. For once, Trump’s got it right

David Rosenberg
David Rosenberg
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Bitcoin change in Tel Aviv
Bitcoin change in Tel AvivCredit: Gil Cohen Magen
David Rosenberg
David Rosenberg

The hackers who broke into the computers of Bronx-based Monroe College can probably count themselves among the victims of Bitcoin’s latest crash. After they shut down Monroe’s computers last week, they demanded 170 bitcoins in ransom for restoring access. Bitcoins were trading at $12,000 each, which would have meant a $2 million profit for the criminals.

Whether the hackers got their ransom and, if so, when, no one is saying, but by early this week Monroe was back online. Trouble is for the hackers, in the meantime, Bitcoin had dropped more than 19% as of early Thursday. Maybe the hackers unloaded their bitcoins fast, but if they’re still holding on, their ransom is currently worth just $1.65 million.

And there you have the story of Bitcoin. For all the hype about it and other cryptocurrencies, if you want to enroll at a place like Monroe, you’ll have to pay tuition in dollars. If you want to buy a textbook at the college bookstore or a sandwich at the school cafeteria, you better have an analog wallet in your pocket with bills or a credit card.

On the other hand, if you want to extort the school administration, Bitcoin is the currency of choice.

Monroe’s misfortunes aren’t unusual. Ransomware attacks are a growing trend and Bitcoin is how the payoffs are made. Universities and smaller cities are the prime targets because they don’t have the technology resources to protect themselves but they do have enough money – a lot more than a private individual.

All of these disturbing facts about Bitcoin get lost in the ocean that's the cryptocurrency industry – an industry of currency exchanges, startups, conferences and dedicated media, all with the agenda of inflating Bitcoin & Co. into something more than the marginal and often criminal phenomenon that it really is.

It’s so successful that crypto even gets the attention of world leaders, including none other than Donald Trump, who last week tweeted that Bitcoin’s “value is highly volatile and based on thin air.”

Coming from a man who displays the same characteristics, that’s a little rich. But no matter, Trump’s views are typical of what politicians, economists and bankers have to say about Bitcoin.

There's a saying that bad publicity is better than no publicity at all. In fact, in the anti-establishment world of Bitcoin fanatics, attacks on their beloved crypto are a welcome sign that the phenomenon is unstoppable and that the elites are getting nervous.

They need not. If cryptocurrencies are ever going to be money in the usual sense of the word, they will have to become useful for financial transactions. Bitcoin could also serve as a store of value, but even so, it will be a marginal phenomenon: a financial redoubt for a few apocalyptically minded investors but not a financial revolution.

As a means for conducting transactions, the evidence is overwhelming that Bitcoin & Co. is doing nothing of the sort.

Thin air

Except when a speculative bubble is underway, the volume of bitcoins moving across global networks ranges between $200 million and $900 million a day, which sounds impressive until you realize that PayPal alone does far more business than that.

In any case, there is evidence that most of this movement is the thin air Trump spoke about. One study estimated that 95% of the trading taking place on unregulated Bitcoin exchanges is fictitious; it's the exchanges themselves making fake transactions to boost volume and appear active.

Chainalysis, a firm that analyzes blockchain for big corporations and governments, estimates that up to 80% of all blockchain transactions last year were speculative. What the other 20% is doing no one knows, but Chainalysis estimates that just 0.3% actually went to paying for something.

Bitcoin enthusiasts endlessly kvetch about how hard and expensive it is to move money around from place to another. But, Bitcoin hype aside, fiat money moves around the world with extraordinary ease, which is why trillions of dollars of international trade, investment and tourism occur every year. True, it isn’t always cheap and it could be easier, but neither is Bitcoin.

And when you get down to the level of ordinary day-to-day transactions in your city or neighborhood, there’s no fiat money problem at all. A decade ago, Paul Volcker, the head of the U.S. Fed in the '80s, said the ATM was the peak financial innovation of recent decades. His words remain true today.

The last line of defense for Bitcoin’s utility is in countries where governments are politically oppressive and/or economically incompetent, places where money is worthless and/or the government doesn’t let you take it abroad.

The evidence bears this out: A study of trading on the Finnish exchange Localbitcoins.com, which handles fiat-to-cryptocurrency transactions, shows that the biggest volume of trades comes from Russia by far, followed by China, Venezuela and Nigeria.

For the rest of the world where institutions and governments are functional, cryptocurrencies don’t have an obvious role and we should hope and pray it stays that way. The day one of your friends starts talking about buying something in crypto, you should think about calling the police. If they say they're putting their savings into it, you should think about fleeing the country.



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