Bitcoin has soared this year by more than ten-fold, defying all of the Wall Street veterans who have compared it to the Tulip Bubble and/or a Ponzi scheme. That doesn’t mean that Bitcoin is a legitimate investment; it just means that bubbles have no set expiration date.
The Nobel laureate economist, Joseph Stiglitz of Columbia University, appeared on Bloomberg television yesterday and had this to say about Bitcoin:
“One of the main functions of government is to create currency. And Bitcoin is successful only because of its potential for circumvention, lack of oversight. So it seems to me it ought to be outlawed. It doesn’t serve any socially useful function.”
Consider the remarks Stiglitz made yesterday to our more detailed assessment along the same lines back in 2014. We wrote:
“The business writers at Reuters are also dead wrong on Bitcoin being like other currencies whose ‘value depends on people’s confidence in it.’ Let’s take the U.S. dollar. Backing the use of the U.S. dollar as a world currency is the following: a Congress made up of 435 Representatives in the House and 100 Senators in the Senate; 535 people elected from all over the United States who have the power to tax the income of every American receiving wage, dividend, interest or even Social Security income at whatever rate they see fit in order to pay the Nation’s bills and debt obligations to other countries.
“There are two big mechanisms underlying the confidence in the U.S. dollar. Unlike many other countries which have a not-so-foolproof system of collecting taxes, in the United States Federal income tax is deducted from workers’ paychecks and sent off to the Federal government by the employer before the worker gets his hands on his paycheck. Every worker, therefore, becomes part of the store of value in the U.S. dollar.
“Next comes the billions in taxes owed on interest and dividends. Those are reported to the Internal Revenue Service under the individual’s social security number by the financial institution or company declaring the interest or dividends, leaving no escape hatch for not reporting and paying the taxes owed.
“When an individual or a financial institution tries to game the system to dodge paying their share of taxes to support the roads, schools, tunnels, bridges, national parks, and Federal law enforcement protections provided with those taxes, the government has both the ability and eager willingness to lock you up and/or make a public spectacle of you. Just yesterday, Credit Suisse was outed by Senators Carl Levin and John McCain and the U.S. Senate’s Permanent Subcommittee on Investigations for aiding and abetting tax cheats. In 2009, Swiss bank UBS was outed on similar charges and paid $780 million to settle the matter.
“A digital currency that is backed with nothing tangible, that has no legislated power of taxation to support the currency, that has no Federal regulation over the people offering the currency, that has no independent, taxpayer-financed police to prevent counterfeiting of the currency, is not even a Tulip Bubble. A tulip is a tangible thing. This is just a bubble.” (Read the full article here.)
Unregulated currencies also have the habit of being used to facilitate crime. In 2013, the U.S. Department of Justice shut down an online outfit called Silk Road that used Bitcoins as an exclusive payment mechanism. On November 18, 2013, Mythili Raman, Acting Assistant Attorney General of the Criminal Division of the Justice Department, testified as follows before the U.S. Senate Committee on Homeland Security and Governmental Affairs:
“…the Department took action against one of the most popular online black markets, Silk Road. Allegedly operated by a U.S. citizen living in California at the time of his arrest, Silk Road accepted Bitcoins exclusively as a payment mechanism on its site. The Department’s complaint alleges that, in less than three years, Silk Road served as a venue for over 100,000 buyers to purchase hundreds of kilograms of illegal drugs and other illicit goods from several thousand drug dealers and other criminal vendors. The site also purportedly laundered the proceeds of these transactions, amounting to hundreds of millions of dollars in Bitcoins. In addition to arresting the site’s operator and shutting down the service, the Department to date has seized over 170 thousand Bitcoins, valued as of this past Friday, November 15, 2013, at over $70 million. A separate indictment charges Silk Road’s operator with drug distribution conspiracy, attempted witness murder, and using interstate commerce facilities in the commission of murder-for-hire. With regard to the murder-related charges, the indictment alleges that the Silk Road operator paid an undercover federal agent to murder one of the operator’s employees.”
Bitcoin is now operating in the realm of the Madoff Ponzi scheme: Plenty of people understand that it’s going to collapse because it is based on an unsustainable illusion. Plenty of people are warning regulators to not allow this illusion to continue. But, hey, this is also the land of the libertarian Koch Brothers where the workings of free markets are sacrosanct and can’t be tampered with – even when it’s inevitable that they will end up disgracing the legitimate marketplace.