The Case Against Bitcoin and Other Cryptocurrencies
- Gordon Achtermann, CFP®, CSRIC®, MBA
- Nov 3
- 5 min read
The following was originally posted to the Your Best Path Blog about 7 years ago, long before our merger with Silverstone Financial. Today I have edited the piece for clarity.
The views expressed here are solely my own and do not represent Silverstone Financial.
-- Gordon Achtermann
The following uses Bitcoin as the standard-bearer for all cryptocurrencies. While I am most familiar with Bitcoin, I believe most of the arguments below apply to all the various flavors of cryptocurrency.
I have four categories of objections to Bitcoin: Financial, Practical, Civic, and Moral.
Before I address these objections, a brief bit of context is in order. I don't think Bitcoin is doomed to go down. I don't think Bitcoin is going to go up. What I do think is that there is no way anyone can make a rational case for analyzing Bitcoin's prospects, and that makes any purchase of Bitcoin more akin to gambling than to investing. Financial advisors who fail to make this clear are doing their clients and our profession a disservice.
1. The Financial Issue
Bitcoin is, at best, a commodity, but it has several disadvantages that other commodities do not have.
As an asset class, commodities come in various flavors, typically sorted into four broad categories: metals, energy, livestock and meat, and agricultural.
Metals commodities include gold, palladium, silver, platinum, and copper. Gold has the least industrial use of those, but the most decorative use and longest history as a store of value, which is why its price fluctuations may diverge from those of other metals.
Energy commodities include crude oil, heating oil, natural gas, and gasoline.
Livestock and meat commodities include lean hogs, pork bellies, live cattle, and feeder cattle.
Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar.
The primary disadvantage of all commodities (and what makes them different from securities) is that they cannot be improved by human effort. The definition of a commodity is that every unit is exactly the same, and any single one can be substituted for any other one. Therefore, commodity appreciation depends on either an increase in demand due to its consumption relative to any additions to supply or currency inflation.
Unlike other commodities, Bitcoin cannot be consumed. Look at the list above again. Every item is either used up in industrial processes or consumed by humans.
There is only one way Bitcoin's price can go up. It's called the "greater fool" phenomenon. The idea is that you can sell your (in this case) Bitcoin for more than you paid because someone (an even greater fool than you) will be willing to buy at a higher price. Bitcoin is a textbook example of the greater fool theory. In fact, Investotopia's article on the theory highlights Bitcoin as the prime example of this phenomenon in action.1
I can't stop speculators from speculating (gambling), but please just admit that that is all there is here.
2. Practical matters
Most people have no idea how blockchain (the technology underlying Bitcoin) actually works. To learn, start here (LINK). The fundamental things you need to know are that with Bitcoin, the blockchain table contains every Bitcoin transaction ever made.
The table has millions of rows. The computing power required is immense. So how do they solve this? They lure people into becoming "miners" (independent validators of the blockchain) and pay them off with occasional rewards of free bitcoins, which are essentially easter eggs placed on the blockchain by the administrators. So, the miners are betting that the value will increase enough to justify the electricity needed to run the servers and keep them cool. Blockchain miners operate on very slim margins. And if the price of electricity goes down, the admins just reduce the rate of easter eggs dropping in the ledger.
Additionally, the constant giveaway of Easter eggs means that inflation is built into the entire system. The supply of bitcoins has to keep going up! This makes it hard to distinguish Bitcoin from a Ponzi scheme, in my opinion. It is not actually very scalable.
Perhaps the most significant issue, because it is objectionable from a practical, civic, and moral standpoint, is this. We don't know who founded Bitcoin or who owns 40% of it, which has never changed hands since its beginning. Legitimate players in finance don't hide behind anonymous pseudonyms (Satoshi Nakamoto is the made-up name of the inventor). I feel it is highly likely that Bitcoin is an operation of a malevolent organization or some combination of organizations, whether state-sponsored (Russian, Chinese, North Korean) or international (Al-Qaeda, Mafia, etc.). I have no evidence of this other than the circumstantial evidence of their anonymity - a legitimate person or enterprise would use their Bitcoin wealth to leverage low-cost borrowing and multiply their financial power. I don't see how a fiduciary can recommend investment in a speculative product under the control of anonymous people or entities.
A final practical matter is the very real possibility that Bitcoin could be increasingly regulated, taxed, or outright shut down at any time. Dollars are, of course, the only accepted currency to pay your taxes, and the U.S. government does not want any competition in that space.
3. My civic objections
Bitcoin uses an astounding amount of electricity. "Bitcoin mining consumes an estimated 128.84 terawatt-hour per year of energy — more than entire countries such as Ukraine and Argentina, according to the Cambridge Bitcoin Electricity Consumption Index, a project of the University of Cambridge." 2
Obviously, continuing down that path makes reaching climate goals much more difficult unless the miners also build carbon-free electricity generation capacity.
4. The moral issue
Bitcoin is a bet on the destruction of the financial system as we know it. It preys on people's fear that the deck is stacked against them and their misunderstanding of the root causes of inequality. Many of these 'investors' are preppers in the sense that some of their actions are guided by a belief that they need to be prepared for a global economic calamity. While I don't criticize anyone for preparing themselves for emergencies, this particular form of prepping has a perverse effect: it makes a currency crisis more likely.
Other participants aim to store wealth in a location where the government can't tax it. (Yes, people are supposed to report Crypto profits on their Form 1040, but the anonymity of accounts makes enforcement avoidable.) Personally, I believe that taxes are the price we pay for the rule of law and civilization, and they are a bargain. People can disagree on the optimal tax rate, but without some taxes, there would be no national defense, police, firefighters, clean water, or safe products, among other consequences. Tax avoidance schemes are criminal, and Bitcoin's anonymity makes tax avoidance and money laundering easier.
Do you have a different perspective? I welcome your comments.
All the Best,
Gordon Achtermann, CFP®
703-573-7325
Your Best Path Financial Planning
