Bitcoin has morphed into a vehicle for speculation from the digital cash system it was meant to establish, â€œmagic internet moneyâ€� thatâ€™s now in a bubble and likely manipulated, according to Alex Pickard of Research Affiliates.Â
Pickard, a vice president in research at the firm, bought his first bitcoin in 2013 at age 25, according to his new blog that Research Affiliates posted on its website. â€œIt is hard to resist the siren song of bitcoin when, over the last two years, the price seemingly never goes down,â€� he wrote, adding that the digital currency is more difficult to explain in 2021 than at the time of his first purchase.
Bitcoin was set up for a digital cash system, and â€œunfortunately, the first real use case was Silk Road, an online marketplace for buying and selling illegal drugs,â€� wrote Pickard. Still, â€œthe potential for its use in legal commerce was obvious.”Â
Pickard found bitcoin attractive because its supply was limited to 21 million and its lack of government backing meant the currencyâ€™s value â€œcould not be inflated away.â€� Also, bitcoin had â€œa magical feelâ€� as it could move between digital wallets within seconds, when in the early 2010s â€œinstantaneous payment toolsâ€� such Venmo and Apple Cash did not yet exist, he wrote.
But â€œthe average investor has never actually used bitcoin for transacting,â€� instead purchasing units of BTC on Coinbase and watching â€œin aweâ€� as their investment rose in value. By 2017 Pickardâ€™s own windfall led him to quit his job in quant finance and invest in bitcoin mining equipment in Washingtonâ€™s Chelan County.Â
â€œAlthough I diligently abided by all regulation related to bitcoin mining in Chelan County, in January 2018 I had to shut down my mining farms because I was putting a strain on the electrical grid,â€� said Pickard. â€œTo make matters worse, soon after that, the BTC price started falling, and my equipment, gathering dust, was depreciating even faster.â€�
Pickard was forced to shut down his operations, a risk he had not contemplated.
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Bitcoin proponents today view the currency as an â€œunseizable, censorship-resistant, â€˜digital goldâ€™ that provides inflation protection,â€� according to Pickard. Like gold, the digital currency is vehicle for speculation, but it is not an inflation hedge or an investment vehicle, he believes.Â
The extremely volatile currency is not a â€œstore of value,â€� Pickard wrote. â€œBTC is not a capital asset: it does not generate cash flows derived from economic returns on capital.â€�Â
The price of bitcoin plummeted 83 percent in 2018, while inflation expectations remained at 2 percent, according to his blog. â€œThen, from year-end 2018 to year-end 2020, the price of bitcoin rose sevenfold” with inflation expectations remaining at that same rate.
Pickard also argued that the notion bitcoin is unseizable is wrong, as governments have many times â€œconfiscated bitcoin from illicit businesses,â€� including Silk Road. â€œBitcoin is easily trackable on the public bitcoin blockchain, making it a bad choice of currency to use when committing crime.â€�
The currencyâ€™s meteoric rise may be driven by more than frenzied demand: Pickard suggested the price of bitcoin may be â€œartificially manipulatedâ€� through Tether and possibly other stablecoins.
â€œIf the market manipulation story is true, then BTC is not in a bubble in the traditional sense,â€� he said. â€œIf Tether were to be shut down, and if, in fact, artificial demand from Tether was supporting the price, the losses from a BTC crash may not be recoverable.â€�
Investors, he said, should consider Bitcoin with â€œextreme caution.â€�
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