Whitney Tilson’s email to investors discussing Bitcoin is in the dumps; Neo-Nazis bet big on bitcoin (and lost); most bitcoin trading faked; blockchains are now getting hacked.
This email is solely about bitcoin and cryptocurrencies, so if this isn’t of interest to you, simply delete and tune back in tomorrow!
Q4 hedge fund letters, conference, scoops etc
1) Since I haven’t written about this topic for a while and there are many new subscribers to my daily emails (welcome!), here’s a bit of background: I have long believed that bitcoin and its ilk are little more than a techo-libertarian pump-and-dump scheme foisted on gullible individual investors.
After watching this silly bubble inflate for years, I finally had enough and on Saturday afternoon, December 16, 2017, I called the top of the bitcoin bubble the very hour that it peaked at $20,000. You can read my full email here. It began:
In the past week, I’ve been asked about bitcoin by a parade of the least-knowledgeable investors imaginable – and the only times such foolishness has happened before in my 18-year career were at the peak of the internet and housing bubbles, so I’m calling a top right now.
Blockchain technology is real in the same way that the internet was real back in 1999 and housing prices tend to go up in the mid-2000s – in other words, a good idea taken to absurd extremes is NOT a good idea!
That said, the greed and speculative nature of humans is inherently unpredictable, so for all I know bitcoin could go to $1 million.
But I do know the ultimate outcome: smoldering rubble, a lot of finger-pointing (where were the regulators?!), and a lot of tears and empty bank accounts, especially among those who can least afford it.
Since then, it’s down by 80%, which has led some to recommend buying it for a bounce. I don’t agree for a variety of reasons, many of which are outlined below.
Just remember the old adage: “What’s the definition of a stock down 90%?” Answer: “A stock that’s down 80% – and then gets cut in half!”
2) It’s good to see that cryptocurrencies appear to be fading into well-deserved oblivion (though I have no doubt that there will be many brief dead-cat bounces): Bitcoin Is in the Dumps, Spreading Gloom Over Crypto World. Excerpt:
Bitcoin is in the longest slump of its 10-year history. That is forcing even its most ardent supporters to shelve dreams of global disruption and focus on simply tightening their belts long enough to outlast the downturn.
Signs of the crypto winter are everywhere, marking a sharp reversal since the manic highs of 2017. The price of bitcoin Tuesday was just above $4,000, down about 80% from a trading peak of about $19,800 in December 2017. The total market value of all cryptocurrencies outstanding is down 85% from its peak in January 2018. And volumes on the largest U.S. exchanges have been falling steadily for the past 15 months, according to research firm TradeBlock.
Bitcoin is still driven largely by momentum, and right now it doesn’t have it. Cryptocurrencies have struggled to attract mainstream institutional investors. Regulation is still unclear, which has scared off some potential users. Companies that have sprung up around the crypto world are under pressure until the next upswing, and crypto fans aren’t sure where that will come from or when.
It’s important to differentiate between blockchain technology, which is real and has many potential applications, and cryptocurrencies, none of which will, I believe, ever become widely accepted (like a real currency) and are thus nothing more than instruments of speculation.
3) As with all folks who've been swindled, I feel badly for most of the individual investors who’ve been sucked into the cryptocurrency scam, but I’m delighted that a small group of them – true scum of the earth – are getting destroyed (it’s also troubling to read about the overlap between neo-Nazis and bitcoin…): Neo-Nazis Bet Big on Bitcoin (And Lost). Excerpt:
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David Golumbia is the author of the 2016 book The Politics of Bitcoin: Software as Right-Wing Extremism. He documents the history of the ideas that went into bitcoin—such as long-running anti-Semitic conspiracy theories about “international,” i.e., Jewish, bankers—and how these extremist ideas are propagated by the subculture, even as present-day enthusiasts would utterly repudiate the ideas’ origins.
“I think only a small number of cryptocurrency users are out-and-out fascists or Nazis,” Golumbia told Foreign Policy. “But I also suspect that the proportion of fascists in that world is higher than it is in the general population. That’s due to the widespread presence of conspiratorial ideas in cryptocurrency communities. Many in cryptocurrency actively promote ignorance about what should be clear and uncontroversial facts about the world.”
4) Here’s further evidence (not that any is needed) that the sector is rife with fraud: Most Bitcoin Trading Faked by Unregulated Exchanges, Study Finds. Excerpt:
Nearly 95% of all reported trading in bitcoin is artificially created by unregulated exchanges, a new study concludes, raising fresh doubts about the nascent market following a steep decline in prices over the past year.
5) Fans have long touted that blockchain technology is "unhackable," therefore making the various (insert-your-preferred)-coin safer than today’s money. I’m sure you'll be shocked – SHOCKED! – to learn that this isn’t the case: Once hailed as unhackable, blockchains are now getting hacked. Excerpt:
Early last month, the security team at Coinbase noticed something strange going on in Ethereum Classic, one of the cryptocurrencies people can buy and sell using Coinbase’s popular exchange platform. Its blockchain, the history of all its transactions, was under attack.
An attacker had somehow gained control of more than half of the network’s computing power and was using it to rewrite the transaction history. That made it possible to spend the same cryptocurrency more than once—known as “double spends.” The attacker was spotted pulling this off to the tune of $1.1 million. Coinbase claims that no currency was actually stolen from any of its accounts. But a second popular exchange, Gate.io, has admitted it wasn’t so lucky, losing around $200,000 to the attacker (who, strangely, returned half of it days later).
Just a year ago, this nightmare scenario was mostly theoretical. But the so-called 51% attack against Ethereum Classic was just the latest in a series of recent attacks on blockchains that have heightened the stakes for the nascent industry.
