The Smartest Guys in the Room Call Bitcoin “Rat Poison Squared,” “a Colossal Pump-and-Dump Scheme” and “a Big Criminal Scam” but Federal Regulators Look the Other Way

By Pam Martens and Russ Martens: May 12, 2021 ~

Bitcoin GraphicAnne Goldgar wrote of the Dutch Tulip bubble in her 2007 book, Money, Honor, and Knowledge in the Dutch Golden Age, that “the f1000 one might pay in January 1637 for one hypothetical Admirael van der Eyck bulb,” could have bought “a modest house in Haarlem,” or “nearly three years’ wages” of a master carpenter. Comparing that to U.S. dollars in 2007, the year her book was released, Goldgar says it would be like one Tulip bulb selling for $12,000.

Goldgar notes that as historians have looked back at this episode, the tulip mania of the 1630s in Holland has become a “byword for idiocy.”

In his 1841 classic on market bubbles, Extraordinary Popular Delusions and the Madness of Crowds, the Scottish journalist Charles Mackay wrote this about the Tulip bubble: “The rage among the Dutch to possess them was so great that the ordinary industry of the country was neglected…”

Four centuries have apparently not cured the propensity toward idiocy when the lure of riches beckons. The market cap of Bitcoin is now in excess of $1 trillion, despite the fact that it is backed by absolutely nothing.

No amount of disdain toward Bitcoin by the smartest guys in the room can stop the creature’s incessant climb. Bitcoin has multiplied more than five-fold since September, trading yesterday at over $56,000.

Bitcoin has been thoroughly discredited by some of the smartest people in the investment community and global finance, but that hasn’t stopped the oldest futures exchange in the U.S., CME Group, from offering futures and options trading on Bitcoin. CME Group’s federal regulator, the Commodity Futures Trading Commission (CFTC), explains in this podcast that all that CME Group had to do to launch its Bitcoin futures was to “self-certify” its plan with its regulator, the CFTC. The self-certified plan may be just fine – it’s the underlying product based on nothing that the regulator seems to have ignored.

(We’re thinking of submitting a self-certified plan with the CFTC to trade futures on spinning straw into gold. We’re toying with calling it the RumpelstiltskinCoin.)

The CME Group has exchanges that provide for futures trading based on real things: like milk, wheat, soy beans, oil, gasoline, ethanol and so forth. These are real things that fuel economic growth in the United States and/or feed a nation of 331 million people.

To paraphrase Mackay in Extraordinary Popular Delusions and the Madness of Crowds to sum up today’s Bitcoin craze in the U.S.: The rage among speculators to trade Bitcoin was so great that the harm this would do in the long-term to the reputation of integrity in U.S. markets was simply ignored by Congress and regulators.

One of the most respected investors in America, Warren Buffet, summed up Bitcoin like this in May 2018: Bitcoin is “probably rat poison squared.” In January of the same year, Buffet told CNBC in an interview that “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.”

Also in 2018, Bill Harris, the former CEO of Intuit and PayPal, wrote a detailed critique of Bitcoin for Vox, under the headline: “Bitcoin is the greatest scam in history.”

Harris elaborates:

“In my opinion, it’s a colossal pump-and-dump scheme, the likes of which the world has never seen. In a pump-and-dump game, promoters ‘pump’ up the price of a security creating a speculative frenzy, then ‘dump’ some of their holdings at artificially high prices. And some cryptocurrencies are pure frauds. Ernst & Young estimates that 10 percent of the money raised for initial coin offerings has been stolen.”

If Bitcoin is a pump and dump scheme, nothing is going to help that scheme to succeed over the short term more than highly leveraged futures trading, so conveniently accommodated by the CME Group and its equally accommodating federal regulator, the CFTC.

Harris also takes on the proposition that there is some intrinsic value to Bitcoin. He writes:

“It helps to understand that a bitcoin has no value at all.

“Promoters claim cryptocurrency is valuable as (1) a means of payment, (2) a store of value and/or (3) a thing in itself. None of these claims are true.

“1. Means of Payment. Bitcoins are accepted almost nowhere, and some cryptocurrencies nowhere at all. Even where accepted, a currency whose value can swing 10 percent or more in a single day is useless as a means of payment.

“2. Store of Value. Extreme price volatility also makes bitcoin undesirable as a store of value. And the storehouses — the cryptocurrency trading exchanges — are far less reliable and trustworthy than ordinary banks and brokers.

“3. Thing in Itself. A bitcoin has no intrinsic value. It only has value if people think other people will buy it for a higher price — the Greater Fool theory.”

In July 2019, NYU Professor and economist Nouriel Roubini launched a scathing analysis of Bitcoin. In a Bloomberg interview, Roubini said this:

“Crypto currencies are not even currencies. They’re a joke…The price of Bitcoin has fallen in a week by how much – 30 percent. It goes up 20 percent one day, collapses the next. It is not a means of payment, nobody, not even this blockchain conference, accepts Bitcoin for paying for conference fees cause you can do only five transactions per second with Bitcoin. With the Visa system you can do 25,000 transactions per second…Crypto’s nonsense. It’s a failure. Nobody’s using it for any transactions. It’s trading one sh*tcoin for another sh*tcoin. That’s the entire trading or currency in the space where’s there’s price manipulation, spoofing, wash trading, pump and dumping, frontrunning. It’s just a big criminal scam and nothing else.”

Later in the interview, Roubini added this: “There are millions of degenerate gamblers that are retail suckers, and they’re gonna create something where they can leverage not 10 times, not 50 times, but 100 times. It’s worse than those drug pushers who give you crack cocaine for free to get you addicted and then lead you to be broke….”

One of the oldest and well-connected investment banks in the world, UBS, whose roots date back to 1862, published a bleak critique of bitcoin by the UBS Editorial Team on January 19 of this year. It made the following points:

“Bitcoin’s limited and highly inelastic supply exacerbates its volatility, and our analysis suggests institutional speculation could worsen this.

“Limited real-world use and extraordinary price volatility also suggest many buyers are seeking speculative gains.

“Swings in investor sentiment or fresh rounds of regulatory crackdowns and curbs pose risks, especially when bubble-like trading conditions take hold.

“So we suggest investors seek out assets with traditional valuation models.

“With no yield generated, cryptocurrency valuations models invariably rely on theoretical future use cases, which cannot be assured.

“We think investors looking to protect and grow their wealth over the long term should maintain discipline and exercise extreme caution on cryptocurrency speculation…”

The UBS Editorial Team ended with this:

“Eye-watering gains and tales of fast fortunes may tempt serious investors, but speculation in cryptocurrency is a gamble, not an investment.”

But since the trading of futures on Bitcoin is happening on one of the largest and oldest futures exchanges in the U.S., right under the nose of federal regulators and Congress, that would seem to suggest that Washington is endorsing “gambling” as a feature of U.S. markets.

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