How to explain the Bitcoin bubble to young people

It’s an inescapable pattern of human culture: Each new generation believes it is smarter and wiser than the generation before. Throughout the history of western civilization, young innovators believed they had discovered near-magical wealth generating systems that could produce riches without effort. The railroad bubble of the mid 1800s… the roaring ’20s stock market bubble… the dot-com bubble… the housing bubble… and now Bitcoin… in each case, masses of youth convince themselves that “this time really is different,” believing the laws of economics no longer apply to them because they’re smarter than any human beings who have ever graced the Earth before them.

Today, we’re told by enthusiastic youth that Bitcoin is different, too. And if we disagree with them, they say we’re too old or stupid to really understand Bitcoin. The only way to truly understand this innovative cryptocurrency, we’re told, is to believe that its valuation will increase logarithmically, forever. Only then are we considered to have fully “understood” Bitcoin. (Yes, in cult-like fashion, only those who agree with never-ending valuation increases are deemed to have sufficiently understood the dark art of crypto. By definition, those who are skeptical of the Bitcoin Ponzi scheme are derided as low-IQ individuals who just don’t “get it.”)

She used to be a pole dancer; now she’s a Bitcoin investment GURU

Case in point: A pole dancer named Dee Heath is now a “Bitcoin guru,” according to SBS News. “I love pole dancing but lately my passion has definitely been Bitcoin,” she told SBS News. She’s reportedly tripled her Bitcoin valuation after investing an initial $5,800. The secret to her Bitcoin investing genius? “As long as you’re calm and you don’t let emotions run you when you’re dealing with any sort of cryptocurrency, particularly Bitcoin, then you’re safe,” she says. (Insert your own outrageous laughter here…)

Indeed, Bitcoin is “too complicated” for investment veterans like Peter Schiff to understand, we’re told, because he doesn’t “understand” Bitcoin. But when an Australian pole dancer tells us the secret is to just stay calm and keep buying Bitcoin, suddenly she “gets it.” This is what the Bitcoin hype has come to: Pole dancers are now “smarter” than 40-year veterans of finance and investment.

Young people have never witnessed a normal market

The very young people declaring “this time is different” aren’t old enough to have ever witnessed a normal market for anything. For their entire adult lives, all they’ve witnessed is a universe of financial bubbles that they think are the “normal way” things happen. Because they haven’t lived on this planet for very long, they’ve only seen stock markets rising, real estate markets rising and Bitcoin valuations exploding. They’ve never seen any serious downturn in any area of finance, investment or valuation, so they don’t even realize that everything they witness is an unsustainable bubble that in no way represents a normal market (which, by definition, experiences booms and busts).

The very idea that Bitcoin could one day experience a massive sell-off (crash) is so alien to Bitcoin promoters that they insist anyone who dares entertain such an idea is too stupid to understand cryptocurrency. The very fact that the prefix “crypto” appears in the term “cryptocurrency,” it seems, is a guarantee of never-ending logarithmic increases in valuation… to the point where we’re told that any person “wise” enough to “invest” in Bitcoin right now will never have to work an honest day in their lives. The magic of Bitcoin, we’re told, will generate all the wealth you’ll ever need.

That’s the real kicker in all this, of course: The younger the Bitcoin promoter, the more sure they’ve found an economic shortcut that will free them from the burden of ever having to work a job or earn a real living… such ideas are for “old people” (who are too stupid to understand crypto, right?). The Bitcoin youthers are sure they’ve figured out something so new, so miraculous and so smart that for all intents and purposes Bitcoin is a magical wealth-creating perpetual motion machine that cannot fail. They’re sure of it!

As long as everyone keeps buying Bitcoin, no one will ever have to work again, they proclaim. No more labor jobs or service jobs. No more college education or work experience needed. In fact, there’s no need to even think about your financial future as long as you buy some Bitcoin today because it’s going to go up forever, and every single person who buys into Bitcoin now will be a gazillionaire (or something) before they turn 35. (Wages are for LOSERS, say the coinerz, because “smart” people have figured out how to become wealthy by doing absolutely nothing.)

There’s just one problem with that entire narrative: All the leverage that makes the Bitcoin bubble dreamworld seem unassailable kicks into reverse when people start selling Bitcoin. Once the Bitcoin bubble pops, in other words, the entire Bitcoin house of cards will collapse faster than any financial blowout we’ve ever witnessed in the history of the world.

Fractional reserve banking, bank runs and the Bitcoin “zero reserves” problem

To truly understand the Bitcoin crash that’s coming, let’s take a closer look at bank runs. When a majority of holders of private bank accounts seek to withdraw all their money at once, it causes a “bank run” that can wipe out banking institutions in mere hours or days. That’s because when you deposit money in a bank, the bank doesn’t actually keep your money in its vaults. Instead, it keeps only a fraction of your money — about 10% these days — and loans out the other 90% to earn interest on that loans.

Thus, if you deposit $1000 into a bank, that bank turns around and loans out $900 to someone else. If that person deposits their $900 loan into the same bank, the bank loans out 90% of that deposit ($810) to a third person. Yet, mathematically, both the first person and second person believe they now have money in their bank accounts totaling $1900. (That’s the original $1000 from the first person, plus the $900 from the second person.) This is how banks create money out of thin air. The problem with this arrangement is that there’s really only $190 being held by the bank (that’s 10% of each of their deposits). So if both people demand all their money at the same time, the bank has to come up with $1900 when it only has $190. This is what causes bank runs (i.e. collapses) in fractional reserve systems.

In order to prevent bank runs from wiping out banks — something that happened quite frequently in the late 1800s and early 1900s, by the way — the federal government established the FDIC as an insurer for bank deposits. Now, if you’re part of a run on a local bank and that bank fails, the FDIC reimburses you up to $250,000 per person (and per account, for different types of accounts). In essence, the FDIC is an insurance company that covers catastrophic bank losses. The fact that this FDIC insurance system exists gives banking customers peace of mind, greatly reducing the chance of a bank run. (People are less likely to demand to withdraw their money if they’re sure it’s safe in the first place.)

Bitcoin has ZERO reserves and no insurance

Bitcoin has no fractional reserve system because Bitcoin has no reserves at all. There’s no money “in” Bitcoin: No deposits, no assets, no corporation, nothing. Even worse, there’s no insurance for a run on Bitcoin. If everybody demands all their money at once — i.e. by selling off Bitcoin for other currencies — the Bitcoin valuations collapse in mere minutes, and there’s no central authority to cover the losses and reimburse wallet holders. Making things even more delusional, Bitcoinerz say your money is “safe” in Bitcoin but extremely vulnerable in “fiat” banking systems. What they fail to realize is that all funds invested in Bitcoin are subject to near-immediate and total loss once a Bitcoin selloff begins.

Young Bitcoin advocates falsely believe they are “investors” in Bitcoin. They think the Bitcoin “holds” the money they’ve spent on it, and as Bitcoin valuations grow, they think Bitcoin is a store of all the additional valuation they see reflected in Bitcoin prices. Yet Bitcoin valuations are an illusion. “Market capitalization” is a hoax, given that it’s calculated by multiplying all the existing Bitcoins by the very last purchase price of the most recent transaction. This creates the illusion of tens of billions of dollars in “market capitalization” that simply doesn’t exist. The money you spend on Bitcoin isn’t sitting around somewhere “inside” Bitcoin. There is no vault, no cash stash and no backup plan.

The Bitcoin system has no real assets whatsoever

Every dollar you spend on Bitcoin actually goes directly into the hands of the person who sold you their Bitcoin — which is nothing more than an entry in a grand, shared ledger. You’ve just spent dollars to buy a ledger entry. Notably, the Bitcoin system has no real assets: No corporation, no building, no intellectual property, no patents, no real estate holdings, no real cash flow, no revenue stream… nothing. Once you put dollars into Bitcoin, those dollars are gone… usually spent on living expenses (or Bitcoin mining investments) by the person who sold you the Bitcoin. There is no “withdrawing” of assets from Bitcoin. You have no savings.

If something goes wrong with Bitcoin, you have no due process to make a claim against the Bitcoin ecosystem because there’s no entity in charge of the system. From one perspective, decentralization is a good thing… and it’s part of the advantage of cryptocurrency. But when things go sour, it also means you can’t take your case to court. The entire Bitcoin system exists complete outside the law, meaning all your Bitcoins can be instantly stolen by changes in the software algorithm, and there’s absolutely nothing you can do about it.

Government moves to criminalize Bitcoin

As all this is happening, the U.S. government is moving toward criminalizing Bitcoin because the system always fights back. Those who believe the money monopolies of the world — i.e. central banks — will just stand by and do nothing while cryptocurrency makes them obsolete are living in a delusional dreamworld.

Senate Bill S.1241, named, “Modernizing AML Laws to Combat Money Laundering and Terrorist Financing,” would criminalize ownership of any Bitcoins that aren’t tied to your social security number. “The US senate is proposing a bill to make criminals out of anyone intentionally concealing ownership or control of a digital currency or digital exchange account,” reports BTC Manager. “What’s more, according to the hearing’s prolonged discussion of US law enforcement’s handling of foreign banks and financial institutions, this bill is certain to have far-reaching effects on not only US citizens but the global community as a whole.”

The SEC has also begun cracking down on the wildly unregulated ICO market, a cesspool of stupidity and fraud that’s already beginning to collapse by the week. One company named “Tezos” raised $230 million with a cryptocurrency ICO based on a hilariously stupid white paper that attempted to lay out a “vision” that sounded more like drug-induced gibberish. Now, Tezos is being sued by its investors in a class action lawsuit that accuse the company of fraud. “A lawsuit seeking class action status has been filed in California against the founders and promoters of the controversial Tezos blockchain project,” reports CoinDesk.com:

That internal power struggle broke into public view earlier this month, stoking criticism of the project and raising questions about when the Tezos network would go live. It came months after the project raised a record $232 million in a token sale – the proceeds of which are now part of the dispute. The tokens have yet to be issued.

In case you’re not familiar with ICOs, they are the newest layer of crypto-stupidity that involve hypesters scribbling unworkable ideas onto pieces of paper, then convincing the world to buy into their not-yet-real “tokens” that are often never issued. Most ICOs have no product, no technology, no software code written, no employees, no management experience and nothing at all to show for their “investments.” Most are just scams that will produce absolutely nothing. Yet people buy into them because they don’t want to “miss out” on all the growth potential. (ICOs, in other words, are the dot-com bubble for Millennials, who have yet to experience anyone in the world telling them their ideas suck.)

Bitcoin is a pure speculation game at this point… a Ponzi con run by hucksters and hype artists

Ultimately, Bitcoin has devolved into a speculation game, where nearly everyone jumping on board the Ponzi scheme is doing so solely because somebody told them they could “get rich” without expending effort. Such schemes always end badly, and Bitcoin will be no exception.

Notice, by the way, that every single person pushing Bitcoin has a conflict of interest in doing so. They are all invested in Bitcoin, and they therefore profit from recruiting more suckers to buy into the system. There are no promoters of Bitcoin who do not own Bitcoin. Every one of them, without exception, is operating with a conflict of interest when they advise others to invest. Yet the system can only survive if prices keep rising rapidly, and that means new people have to be rapidly recruited to buy into the system in order for the early adopters to have a sufficiently large audience of suckers who will buy their older Bitcoins. This is the very definition of a Ponzi scheme: New “investors” are required to keep funding payouts to the earlier investors, all while the hype of easy money and insanely large returns is used as the marketing ploy to attract new suckers.

The very idea that Bitcoin is an “investment” is ludicrous. Bitcoin pays no dividends, produces no product and possesses no assets at all. The only gain comes from higher prices, and the entire Bitcoin movement has now become a clear speculative bubble rooted in mania, not reason. The madness of crowds, in other words, has never been more absurd.

Even the initial promise of Bitcoin’s utility has turned out to be a lie. First we were told by the Bitcoin con artists that Bitcoin would replace dollars and credit cards as the world’s transaction system for all purchases. But before long, it became apparent that Bitcoin was ridiculously slow, expensive and non-scalable. It also happens to consume more power than 159 countries right now, and the system is so inefficient with power usage that Bitcoin is on track to consume the entire power supply of planet Earth by 2020.

Bitcoin is actually powered by COAL

In effect, Bitcoin is powered by coal. It burns so much electricity that it’s one of the world’s largest users of coal-generated energy. Even worse, the increasing computational complexity of the Bitcoin algorithm means that the same amount of energy which generated $100 worth of Bitcoin just a year ago only generates about $10 worth of Bitcoin today. As more mining operations are launched, the electricity consumption required to generate a single Bitcoin skyrockets. This upward spiraling cost phenomenon can only be sustained when prices are rising logarithmically — something that isn’t mathematically sustainable. The collapse of Bitcoin, in other words, is mathematically inevitable.

Getting back to Bitcoin’s utility, large merchants still haven’t adopted Bitcoin in any widespread manner, and the price volatility introduces so many risks to retailers that very few are willing to take the risk of shipping physical product in exchange for non-real Bitcoin that might vanish at any moment. For example, cryptocurrency wallet holders recently awakened to discover $300 billion cryptocurrency had just VANISHED due to a software error. If Amazon were to start accepting Bitcoin, that would be a game changer, but Amazon is far more likely to announce its own cryptocurrency than bet its reputation on one that it can’t control.

So now, the Bitcoin hucksters have resorted to calling Bitcoin “digital gold” while claiming that Bitcoin is more valuable than gold, better than gold, and lasts longer than gold. (For the record, gold is an element of the universe that has existed for over 13 billion years. Bitcoin hasn’t even been around for 13 years… you do the math…)

Why Bitcoin is a joke compared to gold

I’ve even listed ten reasons why gold is better than Bitcoin:

#1) Gold has been around for over 13 billion years and is a fundamental element of the cosmos. Bitcoin has existed fewer than 13 years and hasn’t even come close to standing the test of time.

#2) Unlike Bitcoin, gold cannot be created or destroyed by human beings.

#3) When the power grid goes down, gold is still gold. But Bitcoin becomes worthless.

#4) Physical gold cannot be stolen through the internet

#5) The value of any single Bitcoin depends on the entire Bitcoin infrastructure continuing to operate

#6) When you try to burn gold, you just get melted gold. When you burn Bitcoin wallets, you lose all your Bitcoins.

#7) Owning gold is truly anonymous. Your gold cannot be detected, and if you move it around, nobody else knows.

#8) Gold has practical industrial, medical and scientific applications that grant it inherent value. Bitcoin can be replaced tomorrow by a better cryptocurrency.

#9) Gold is universally recognized and accepted as valuable in every culture on our planet. Bitcoin is unrecognizable to most humans living today.

#10) Most people buy gold to protect value, yet most people buying Bitcoin today are speculating on a “get rich quick” scheme that will blow up in their faces.

Don’t bet anything on Bitcoin that you can’t afford to have VANISH

The bottom line on Bitcoin? Because it has now entered a psychologically-powered bubble phase, the bubble could continue to go much higher, even possibly achieving $100,000 per Bitcoin before collapsing. But it is impossible to predict when it will collapse, and thus calling the high of the Bitcoin market is a dangerous game.

For this reason, any money you “invest” in Bitcoin should be money that you feel completely comfortable losing. Because that’s the most likely outcome you will experience, after all. Most people won’t sell Bitcoin while the market is rising because they don’t want to “miss out” on the upside. They’ll hold it until the collapse begins, and then just like everyone else, they won’t be able to get out without suffering massive losses during the blowout carnage.

Once the collapse takes place, all the stupid people who bought into Bitcoin will ask themselves in bewilderment, “Where did all the money go?” The truth, of course, is that it never existed in the first place. Bitcoin’s “market capitalization” is a hoax. The money doesn’t exist in the real world.

You’d be far better off buying gold and silver rather than Bitcoin. In fact, I’m going to plug Steve Quayle’s Renaissance Precious Metals as a trusted source for buying gold and silver. I don’t make a dime on this recommendation, and I have no financial stake in gold or silver markets (unlike all the Bitcoin hucksters who are profiting by selling you their Bitcoins). Long after Bitcoin has crashed and burned, your gold and silver will still be physically present and highly valuable. All the Bitcoinerz who are currently deriding gold bugs as clueless old farts will be bashing their heads against the wall one day, kicking themselves for not converting their Bitcoin to physical gold while they still had the chance. (And some of them will end up working at McDonald’s or Wal-Mart after all their Bitcoin holdings are wiped out.)

Today’s Bitcoin youth are about to learn a very difficult lesson in reality. But it is precisely the lesson they need to learn in order to gain a proper education about reality.

Follow more news on Bitcoin at BitRAPED.com.