Why David Stockman Thinks Cryptocurrency Investors Are “Stupid Speculators”
In a statement made earlier this month, former Director of the Office of Management David Stockman stated his distrust for investors of the cryptocurrency market. In his view, the cryptocurrency market is filled with “stupid speculators” and that a “spectacular crash” is imminent.
Let’s take a look at the whole statement from Mr. David Stockman himself:
“It’s basically a class of really stupid speculators who have convinced themselves that trees grow to the sky. It will burn out in a spectacular crash. All of these latter-day speculators will have their hands burned to a crisp, and they will learn the proper lesson.”
Now let’s break down the statement and explain what he actually meant by “stupid speculators” and “spectacular crash”.
Analyzing Cryptocurrency Mass Adoption
The trend of investing huge financial resources into the cryptocurrency market was triggered by the recent surge in bitcoin, the original blockchain that has revolutionized our concept of value. This has attracted several investors towards blockchain-based digital currencies, which have sprung up almost like mushrooms in recent years. Of course, bitcoin is not the only game in town. It isn’t even the best, according to many industry insiders. Coins like Ethereum, Ripple, Dash, Litecoin, Monero, bitcoin cash and others also offer compelling value propositions and use cases.
Analysts have cited bitcoin’s fluctuating and highly unstable price as the reason for Stockman’s comments. According to some views, bitcoin’s volatile price swings over a short period makes it practically useless from the standpoint of credible currency alternative. As seen recently, the “bears” have been influenced by the launch of bitcoin futures contracts on mainstream regulated exchanges like CBOE and CME. Backers of bitcoin futures hope that, with more institutional money flowing into cryptocurrency, the market will eventually stabilize. At the very least, it will be less prone to wild fluctuations. In this vein, exchanges and fund providers are scrambling to list the first bitcoin ETF, something that will take a lot of convincing at the Securities and Exchange Commission (SEC).
However, it is worth bearing in mind that bitcoin alone does not dictate the whole of the cryptocurrency market. In fact, altcoins currently account for roughly two-thirds of the total market.
Figure 1: Stockman Bitcoin- Bubble Comparison
Stockman’s Opposing Views
There’s no denying that bitcoin surged to meteoric levels throughout 2017, reaching a high near $20,000 in the final month of the year. However, in Stockman’s view, price is hardly an apt indication of value. Value is what one gets, whereas price is what they pay. According to him, derivatives such as the bitcoin ETFs do not legitimize the market but have quite an opposite effect. The introduction of bitcoin derivatives would only embolden predator firms on Wall Street, which can take advantage of an ordinary investor’s fascination with bitcoin’s rapid appreciation. In short, he believes that every cryptocurrency on the market will fall in value in the near future.
Figure 2 The “Bubble” Cycle for Cryptocurrencies
Arguments against Stockman
Even though elitist economists and professionals like David Stockman express a bearish stance on the global stock market, there are various loopholes in this argument. Firstly such economists fail to provide any substantial argument against cryptocurrency adoption being favorable.
Bitcoin is a “bubble” according to them, with price not reflecting the actual value of the instrument. This would make them unfit for widespread adoption. However, even though the statement is partially true, the lack of intrinsic value is true for any currency, including fiat currencies. In faulty economies, especially in nations having significant political instability, fiat currencies are not stable in value, even though they are controlled by their respective governments. This is because their valuation depends on the market and demand from investors, which ultimately revolves around the use of the U.S. dollar. Hence, if businesses, investors and individuals, shy away from utilizing the U.S. dollar, the values of all other related financial instruments will also fall.
If we take the example of bitcoin, the value revolves around the people’s acceptance of it as a means of exchange. The value of bitcoin and indeed several other cryptocurrencies are backed by the value of electricity, as well as the infrastructure and equipment required to mine it. This draws the comparison to the value of Gold, which is also based on the average difficulty of extracting it from the ground. It should be noted that not all cryptocurrencies should be bundled up into one category and considered at par. The market also experiences frequent movements in small periods of time.
Even though the cryptocurrency market is still prone to experience short-term bubbles, the term cryptocurrency is not synonymous to the term “bubbles”. It is one of the most liquid markets in the world, with bitcoin still leading the way in terms of market capitalization. It is already proven to be more liquid than the stocks of Apple itself.
That Stockman’s claims have hinted that cryptocurrencies are not actually “real money” is also flawed and up for debate. In fact, barring bitcoin, transactions on leading public blockchain systems like Ethereum, Litecoin, Dash, Ripple, etc. use a stable network with a well-thought-out fees structure and consensus protocol algorithm.
While bitcoin is certainly unpredictable, the core concepts of decentralized ledger, blockchain technology, and the larger scope of censorship resistance or “decentralization” are certainly worth looking into. Technology companies and MNCs alike have started investing in their own prototypes of cryptocurrency systems. All said and done, the emerging cryptocurrency craze revolving up and coming coins have driven the investing community towards widespread awareness and adoption. All the signs point towards this digital revolution gathering speed in the coming years, especially in 2018.
Featured image courtesy of Getty Images.