Mark William’s Bitcoin 2014 Prediction
On December 17th, Business Insider published an article called FINANCE PROFESSOR: Bitcoin Will Crash To $10 By Mid-2014. The author, Mark T. Williams, teaches finance, risk management and capital markets at Boston University School of Management and is a former Federal Reserve Bank examiner, according to his Business Insider profile.
I theorize that each of us makes approximately 100-1000 false assumptions per day, inevitably engraved in our nature. Our ability to make a decision based on an assumption is necessary to navigate a car through a snow storm where, you cannot always know for certain which way the road bends, and other skills that let us navigate probability. Unfortunately, despite its ability to helps us in risky situations with unknown variables, more times than not we use it when we shouldn’t to reach conclusions that don’t really help us.
Let’s break down the assumptions that Mark asserts in his article as the foundation for his Bitcoin 2014 prediction, which will be interesting to look back on when 2014 is over. We’ll quote him, then break down the assumption as he builds his case for his 2014 Bitcoin prediction.
Ass. #1: “Bitcoin is steep in Libertarian and anti-Fed dogma but weak in understanding how global economics, central banking policies and financial markets function”.
The people who support Bitcoin understand very well, just as people like Kyle Bass does, the historically unprecedented bottomless pit of debt the world is creating via central banking policies, out of control deficit spending, and the loss of natural function in the financial markets as the US lead the way by printing nearly $5 trillion since 2008. Clearly, Mark is starting out his argument assuming to be smarter than everyone he opposes, while stereotyping critics of our central banking policies instead of discussing the policy issues that Bitcoin was created to mitigate.
Ass. #2: “it needs to be linked to fiscal and monetary policy”
Why? Because that’s how it has worked in the past 100 years? What about the past thousands of years. Did people cry for central intervention before they could trade their mules and sheep?
Ass. #3: “…economically dangerous”
Doesn’t he remember the concerns of the Euro and then the US Dollar collapsing in 2008?!? What’s not economically dangerous about fiat currency with no end in global debt growth, a runaway printing press and the joy of knowing it’s all backed by a fractional reserve system? Ask the people of Cyprus what they believe is economically dangerous.
Ass. #4: “for currency to be adopted as a medium of exchange there has to be trust in the ability to honor the underlying obligation and the ability for central banking policy to control inflation”.
$600 a Bitcoin says there is trust; but, certainly not in a central bank’s ability to “control inflation” by printing money without any vote from the people or even congress. Bitcoins was designed to do what central banks clearly don’t have the discipline to do… control inflation. History doesn’t mean squat when we’re on the same path as Argentina, which has 30% annual inflation due to its use of the printing press, with virtually no tools left to fix it if the US situation runs out of our control. And that completely ignores the fact that printing money to pay government bills is not only taxation without representation, but it is stealing from our savings.
Ass. #5: “fraud is also on the rise.”
The false assumption in this context is that this is different than the US Dollar or any other currency. Thank goodness no one has ever had a US Dollar stolen from them. Heck, one could argue this is proof it is becoming a currency, or at least a valuable commodity. To put this in perspective, if we just look at one type of fraud, identity theft, in one country, the US, in one currency, the total in 2012 was $20.9 billion, 2 1/2 times the current $8 billion market cap of Bitcoins. This doesn’t include types of fraud like the recent Target credit card scam.
Ass. #6: “the inherent secrecy of coin ownership decreases the ability to prevent and potentially solve crimes.”
Compared to what? Cash? Gold? Bonds? Or the new competition, digital fiat currency? Bitcoin is arguably the most transparent currency ever created since EVERY transaction is visible to EVERYONE forever. Yet, was the world in constant turmoil with evil running the show until computers digitized money became popular in the 1980? The assumption here is that we NEED big brother or evil will run rampant and destroy us all. History shows that the world was at least as safe before digital fiat currency as it is after, if not more safe.
Ass #7: “there is also little legal protection for investors and significant financial risk if an owner’s hard drive gets corrupted, the computer is stolen or lost, rendering Bitcoin Wallets permanently lost.”
First, if you don’t understand the risks, don’t invest. Second, there are tons of ways to mitigate risk so that you can, for instance, invest in gold without a whole lot of risk of it being stolen. Ditto for Bitcoins. I will objectively add there is potential systemic risk, just as there is with ANY currency, or indeed, any commodity, albeit for different reasons. Don’t be an idiot and put all your eggs in Bitcoins, gold or the US dollar. Diversify and learn how to manage risk.
Ass #8: “Should transfer instructions be incorrect and payments credited to a wrong account, Bitcoin transfers are not easily reversible.”
As with all software, there are ways to protect users from mistakes. The technology is very early on. There are development efforts to reduce these concerns with additional protocol layers and software solutions. The assumption here is that the user interface will not change, it but it most certainly will. The underlying protocol and original software is just the beginning, not the end.
Ass. #9: “Moreover, the Bitcoin authenticity process also takes time which is not conducive to high volume retail sales where customers want to get in, pay for their goods and get out with no delay.”
There are tons of way to mitigate this, such as BitPay. This is NOT a showstopper… not even close. Also reread Ass. #8, because the eCommerce solutions being built ON TOP of Bitcoin address this.
Ass. #10-12: “If Bitcoin was allowed to proliferate as a currency it would produce greater economic uncertainty, reduced trade and lower individual standard of living.”
That’s really three assumptions in one sentence, with nothing to back up any of them. Care to elaborate?
Ass. #13: “The more hoarded the less available to buy goods and services and spur economic growth.”
Just curious, what’s the difference between hoarding a currency and saving it? Obviously, when something is increasing rapidly in value relative to our other investments, we do tend to hold onto it. Yet, the value can’t keep rising forever. As it stabilizes, spending increases. We’ve seen this pattern as Bitcoins can become stable for months before running for new heights again. Regardless how much people are using as a vehicle for investment or saving, the number of merchants taking Bitcoins is rapidly on the rise, a necessary precursor for it becoming a currency. The trend is clearly favorable for this very young novel currency.
Ass. #14: “Unless retailers want to be in the commodity trading business, they would not be interested in taking Bitcoin risk.”
Or, they could just use BitPay, which converts it into US dollars the same day after accepting payment in the lowest exchange rate for the day, permitting merchants to begin taking payment in Bitcoins with virtually no risk, and certainly no need to become commodity traders. You are also assuming that Bitcoin will remain more volatile than other currencies over the long haul. As the number of people who have and use Bitcoins increases, value volatility will decrease. Will it disappear entirely? Just as soon as the value of the US dollar quits changing.
Ass. #15: “The buying and selling of Bitcoin is also controlled by only a handful of exchanges in places like China, Slovenia and Bulgaria.”
Only a handful? Really?
Ass. #16: “Bitcoin has seen an end to its hyper price run-up and can no longer support being priced for perfection.”
Isn’t this what people like you were saying in April when it lost 75% of its peak value after the run-up triggered by Cyprus? If you had bought it when it hit its peak near 280, it would still be worth more than double today. Nowhere in this discussion do you discuss the increasing demand as more people and merchants are using Bitcoins every day, and what the value of Bitcoin will have to rise to if this demand continues to grow.
Ass. #17: “Unlike gold which has tangible value, Bitcoin is backed by hopes/dreams and only worth what people are willing to pay.”
Isn’t this true of the US dollar, minus the fractional reserve system that is vulnerable to a run on the banks, a printing press, and growing national debt?
The Big Picture
Mark understands enough to be able to create a really long list of assumptions about Bitcoin, yet doesn’t understand the potential solutions to any issue he does raise, or the problem that Bitcoin proposes a solution to. He believes that the historically new central banks and the really historically new digital fiat currency (visa/mastercard) is the ONLY way to go, despite unprecedented global debt fueled by a fractional reserve system and printing presses. The citizens of Cyprus can testify in 2013 there isn’t anything real in the bank to back up those limitless credit induced Dollars, Euros or Yen. When the reserve credit system contracts, we are reminded that a run on the banks can collapse our banking system. We contemplated the the potential implosion and contagion in 2008 triggered by a collapse in real estate debt and an impending collapse of the Euro due to the sovereign debt crisis of the PIIGS. This was the year the Bitcoin option was publicized. This was the reason Bitcoin was born. It is in this context that I hope Mark can one day discuss the ups and downs of Bitcoin and other options in a very uncertain economic environment created by our unprecedentedly large central banks.
It is only natural that those tied to the central banks would be the ones to oppose Bitcoin. The fact that Mark steers clear of discussing the reason Bitcoin exists and the problems it tries to resolve that are partly caused by the central banks Mark, the former Federal Reserve Bank examiner, is fond of, suggests that Mark has an agenda to use his articles to try to decrease the price of Bitcoins.
To help Mark understand our current dilemma, let’s temporarily take Bitcoins out of the discussion and let him talk to Kyle Bass. Let’s discuss the problems the governments and central banks are creating and the potential implications for currencies. Let’s let him talk to people who lived through the Mexico Peso crisis of 1994 and the Russian Ruble Crisis of 1998. Let’s let him talk to people concerned about the ongoing Euro-zone crisis, the coming Japanese debt crisis and people living in Argetina. Then, when it’s clear that Mark understand the bigger picture, let’s come back to where Bitcoin can have a place in this uncertain world and see if his Bitcoin 2014 prediction holds up.
Erik Sliman has a passion for Technology, Business and Investing. To read more of Erik’s posts, check out his personal blog site.