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Outside the Box: If the SEC OKs bitcoin ETFs, it would be encouraging the most obvious speculative bubble in modern times


One of the most misleading statements, if not an outright lie, about cryptocurrency is that people invest in it.

No one has ever invested in bitcoin
They speculate. This is a distinction that Gary Gensler, chairman of the Securities and Exchange Commission, should keep well in mind when the SEC rules on a pending application for a bitcoin exchange-traded fund proposed by VanEck.

An SEC decision could come in June. If the regulator greenlights VanEck, bitcoin will be significantly more available to retail folks.

More to the point, people with self-directed 401(k)s, as well as Individual Retirement Accounts (IRAs), will be able to put tax-sheltered funds into crypto. Six firms have applied to list crypto ETFs, including Fidelity, the biggest brand in retail investing. It’s easy to imagine that the speculative craze could become a stampede. In that event, the government would be encouraging — nay, subsidizing — the most flagrantly obvious speculative bubble in modern times.

You may wonder, “shouldn’t people be free to choose their own, quote, investments?”

Yes, they should. But citizenship does not confer the right to a tax deferment. Tax deferments are a matter of public policy.

The government defers taxes on retirement funds for two sound reasons. Society benefits when people accumulate savings, because they are less likely to become indigent. And it benefits when people invest, rather than consume, because the country thus accumulates capital.

Bitcoin and other crypto meet none of those conditions. It is blatantly not an investment. If you think that doesn’t matter, try telling your spouse that you put the family nest egg into lottery tickets.

The money spent on lottery tickets isn’t saved, it is simply consumed. Similarly with crypto.

Crypto does not deserve Uncle Sam’s blessing.

Benjamin Graham, a Wall Street sage, once defined investing as an operation that, upon careful analysis, “promises safety of principal and a satisfactory return.” Crypto currencies, which fell 20% one day in May and 50% over a single cycle of the moon, do not promise safety.

Since legitimate investments also fluctuate, what distinguishes a “speculation?” According to the economist John Maynard Keynes, speculations are concerned primarily with investor psychology. Not: ‘How much is something worth?’ but, ‘What are other people thinking?’ Conversely, a true investor can ignore psychology. He or she values their investment according to its intrinsic worth. Its value is derived generally from the income it produces, not from market noise.

Bitcoin produces no income; it is all noise.

VanEck, on its website, alleges an “Investment Case for Bitcoin.” It suggests that “Bitcoin is increasingly used as an asset with monetary value.”

The statement is reductive: “It has value because it has value.” In truth, bitcoin is not used as currency. No one asks the price of a washing machine denominated in bitcoin.

People speculate in bitcoin to make money in dollars—which is a currency.

VanEck’s second rationale, “Bitcoin adoption continues,” does not advance an investment case. It conforms to the explanation offered by Charlie Munger — “somebody else is trading turds and you decide” to trade them too.

VanEck also contends that bitcoin is “digital gold.” But gold

is not an investment either. It produces no income and there is no rational way to value it.

There is a salient difference between bitcoin and precious metals, but not  in bitcoin’s favor. Gold has an industrial function, and it has a monetary equivalence going back millennia. Gold is valuable—but the impossibility of calculating its value with precision renders it a speculation.

Bitcoin is a speculation with no intrinsic value, other than the value of secrecy that is of interest chiefly to drug lords.

It is not a currency and it is not equipped to serve as a currency. It is far slower than the systems used to process Mastercard and Visa (Bitcoin processes 4.6 transactions per second, versus 1,700 for Visa). It is way too volatile to serve as a measure of payments.

The most publicized, and virtually the only, vendor to accept bitcoin was Tesla
which also famously “invested” in bitcoin. Having aroused the public interest (and driven up the price), Tesla then informed Wall Street (and its followers) it had cashed out $272 million of its so-called investment.

Tesla’s self-styled chief executive, Elon Musk, next decided that Tesla would not sell cars for bitcoin after all. Rebel that he is, Musk now demands payment in legal tender.

Read: Musk says Tesla sold about 10% of bitcoin to test market, and will ‘resume allowing crypto transactions’ when 50% of miners use clean energy

And: ARK’s Cathie Wood blames Elon Musk, ESG investors for recent crypto crash

Bitcoin promoters often gush over the blockchain technology on which the coins are based. Blockchain has spurred tangible gains in logistics, however, bitcoin does not confer any rights to the technology. For investment purposes, they are unrelated.

VanEck also asserts a scarcity value. Scarce? There are 1,300-plus cypto-currencies and no limit on new ones. And scarcity does not suffice as an investment case. Rare turds are still turds.

VanEck’s next rationale is that bitcoin adds “portfolio diversification.” Keynes said it best: one good share is safer than 10 bad ones. To purchase a collection of assets each of which has no value cannot add value or security to the whole.

VanEck’s finale rationale: “Rising demand: More investors are buying bitcoin, including institutional investors.” This is the greater fool theory.

Securities regulators would be wise to study VanEck’s statement. If “rising demand” is the justification, what, perchance, will be the result if demand collapses?

Neither the press nor Wall Street have been adequately skeptical of crypto. Each has fallen for the dismal stupidity that since bitcoin is “volatile,” it should comprise only a small portion (rather than zero) of investor accounts. But volatility is not the main problem. It is a symptom of the problem, which is underlying worthlessness.

Read: Suze Orman says bitcoin is a ‘place to put some money and just leave it’

Washington should note that the median retirement account is only $65,000. It is easy to imagine that some savers, if permitted, would put a huge chunk into crypto—and possibly blow their retirements.

The SEC’s charge is to examine whether proposed ETFs operate in a fair and liquid market. It does not ordinarily examine investment merits.

In this case, it should. Congress has specified certain assets as not appropriate for retirement funds—including collectibles such as stamps and rare (tangible) coins. One reason is that such assets are not susceptible to precise valuation. This certainly holds with crypto. The SEC should seek clarifying legislation on this point.

Furthermore, the SEC could reasonably find that no guarantee can be made about liquidity, because there can never be assurance of investor demand for an asset with no intrinsic value.

Gensler taught crypto at MIT and is said to be sympathetic to the industry. The SEC also is under pressure to act because Canada has approved several crypto ETFs. The industry is applying soft pressure by throwing money at former regulators. (Two former SEC chairs are shilling for the industry.)

Gensler should take a cue from Andrew Bailey, the Bank of England governor, who said crypto has “no intrinsic value. Buy them only if you’re prepared to lose all your money.”

After the 2008 crash, Gensler — nominated as CFTC chair — told Congress he would work to make sure that another financial failure didn’t occur. Neither he nor anyone can stop crypto from blowing up. But he can make it a lot less painful. Crypto does not deserve Uncle Sam’s blessing.

Roger Lowenstein, a former Wall Street Journal reporter, is the author of six books on finance and economic history. He writes the Intrinsic Value column on Substack, where this was first published — “Memo to SEC: don’t enable the bitcoin bubble.” Follow him on Twitter @RogerLowenstein.

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