Argonaut’s Barry Norris has condemned Bitcoin as “the most successful Ponzi scheme of all time” which could see investors lose twice as much money as when Lehman Brothers went under in 2008.
Norris, who manages the VT Argonaut Absolute Return fund, said that like many other financial scams, Bitcoin claims to offer something complex and sophisticated. The initial concept set out by Satoshi Nakamoto in 2008 was that of a digital currency that would enable peer-to-peer financial transactions without having to pay fees to intermediaries.
In addition, a self-imposed ceiling on the amount of Bitcoin that could be mined meant it would act as a superior ‘store of value’ compared with conventional fiat currencies.
However, Norris (pictured) warned that neither of these claims stands up to scrutiny.
“At the heart of Bitcoin lies a deceit that decentralised private crypto fiat currency, which anyone can issue, is a superior store of value to centralised public fiat currency, backed by governments with tax-raising powers and the ability to pay interest,” he said.
“Unlike gold or silver, to which it likes to compare [itself], crypto is neither scarce nor difficult to produce; nor does it yet have utility, nor widespread acceptance. Although most have already failed, there are currently over 4,000 cryptocurrencies now in existence.
“Owing to the proliferation of new digital currencies, Bitcoin continues to shrink as a proportion of cryptocurrency, now accounting for less than half its current market value. It is also a myth that Bitcoin is immutable. It has been forked repeatedly into offspring crypto with different rules.
“Ultimately, absent sufficient remuneration in newly minted Bitcoin, the predominantly Chinese and Russian miners responsible for maintaining its transaction ledger and ensuring integrity of transaction could – and, a cynic might predict, probably will – eventually remove the 21 million future ceiling on Bitcoin supply.”
The manager added that cryptocurrencies are in fact so easy to produce that almost anyone can have a go: more than 200 new ones were launched last week alone.
While the concept of cryptocurrencies seems new and exciting, this is not the first experiment with decentralised money. Norris said that during the US free banking era (1837 to 1963), commercial banks – even railroads and drug companies – could issue their own currencies, which traded at different values backed by their own gold and silver reserves.
As a result, bank-runs and financial instability were frequent.
“Over half of all banks failed, with an average lifespan of five years and about one-third of notes in issue were thought to be counterfeit,” the manager continued.
“New banks would often issue new notes for deposits, buy assets, then skip town and default on their liabilities. Medieval Germany (1618-48) and early 20th-century Mexico (1910-21) had similar experiences, resolved with the establishment of a centralised banking authority, which in the US culminated in the foundation of the Federal Reserve in 1913. The history lesson is that wildcat money comes with high economic cost. The incentives to cheat are so high, whether conventional or digital.”
Just as conventional currency was eventually centralised, the same process now appears to be underway with its crypto equivalent. Public central banks, notably in Sweden, China and the US are attempting to centralise blockchain technology through the introduction of their own digital currencies.
Meanwhile, Norris said the claim that Bitcoin can enable peer-to-peer digital transactions is also questionable, as it has been shown to be slower, less scalable and secure, and more costly than conventional currencies.
He added the volatility alone makes it impossible to price items, and even Bitcoin conferences have refused to accept payment in cryptocurrency.
Performance of Bitcoin ($) over 1yr
Source: Google Finance
“Blockchain anonymity is useful for hiding wealth, money laundering and in enabling financial extortion such as the recent ransomware attack on the Colonial Pipeline (the 75-Bitcoin ransom was paid in full),” Norris continued.
“So far the main enhancement to civilisation from blockchain technology has been to enable transactions in gaming tokens and digital art. The environmental concerns whereby Bitcoin miners consume the same annual energy as a small European country is now well-documented.
“If to date the only Bitcoin killer app invented has been the enabling of financial extortion, then it is questionable why any reputable financial institution should want to endorse Bitcoin and certainly not crypto as an investment asset class.”
In addition, he pointed out 99 per cent of all Bitcoin transactions are speculative, taking place on a crypto exchange where commission on the average transaction is 3 to 4 per cent, making a mockery of the claim it would remove the need to pay fees to intermediaries.
Combined with volatility and stop losses, this ensures that the house almost always wins.
Meanwhile, security is not ensured, with Norris pointing to an incident where the chief executive of a Turkish crypto exchange was alleged to have stolen $2bn of customer assets.
This is one side effect of an industry that is almost completely unregulated, with an absence of anti-money laundering or know-your-customer regulations. This may be because regulators do not believe Bitcoin is big enough to represent a systemic financial risk, but Norris fears they are underestimating the scale of the problem; if the combined value of all cryptocurrencies were in a single stock, it would be the fifth largest in the world, between Amazon and Alphabet.
“If crypto really is worthless, then it would equate to a loss of more than double the assets involved in Lehman Brothers ($690bn) in 2008 and be 25-times bigger than Enron ($65bn) in 2001,” he added
“And this figure excludes financial leverage which is offered by most crypto exchanges, and which is almost entirely unregulated. Crypto regulation is increasing, but will it be too little too late?”
“Curiously, the market value of the only publicly traded crypto exchange, Coinbase, is currently double that of the NASDAQ exchange, despite accounting for just 12 per cent of crypto exchange trading worldwide, giving some idea of the degree to which this industry is not only overvalued but over-earning relative to more traditional asset classes.”
Looking back at the lessons from history, Norris said the contempt that cryptocurrency zealots show towards “non-believers” is reminiscent of any pyramid-scheme, where the victims can only extract value through converting more people to their cause.
Yet with a value of $1.5trn, he said cryptocurrency already constitutes “the most successful Ponzi scheme of all time”.
“The investment craze in bitcoin has often been compared to previous speculative bubbles such as the Dutch Tulipmania (1635-37), itself coincidental to a pandemic and lasting only a matter of months,” he added.
“According to Nout Wellink, former president of the Dutch Central Bank: ‘This is worse than the Tulipmania. At least you got a tulip, now you get nothing.’
“Whilst the crypto bubble may have already burst, the systematic consequences of unregulated wildcat money are yet to be seen.”
VT Argonaut Absolute Return has made 129.43 per cent since launch in February 2009, compared with 43.69 per cent from the IA Targeted Absolute Return sector.
Performance of fund vs sector since launch
Source: FE Analytics
The £34m fund has ongoing charges of 0.9 per cent.