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The Great Cryptocurrency Scam

When I first wrote about The Great Bitcoin Scam in  December of 2017, Bitcoin was trading at $15,433 after falling from its all-time high of $19,783 a few days earlier. As I write this article, Bitcoin is now trading at $4,359. Very simply, Bitcoin is in deep trouble. There are investigations about price manipulation, and the use of Bitcoin for payments is down 80% according to Reuters.

The Bitcoin BubbleJay Adkisson

As poorly as Bitcoin has done in 2018, Bitcoin is the best of a sordid lot. The website deadcoins.com humorously lists hundreds of defunct cryptocurrencies and related investments that were either outright scams or just really bad ideas, many of which attracted untold billions from investors worldwide who are now that much less wealthy.

Whatever else one can say that cryptocurrency has accomplished, it has been one of the greatest destroyers of wealth in the financial history of mankind. Take, for example, Bitconnect which was pitched by this guy to enthusiastic investors and at the end of 2018 was worth $450 — it is now worth $0.06 assuming you can find a buyer.

Nonetheless, hardly a day goes by that somebody doesn’t ask me about investing in cryptocurrency because their financial advisor told them that they need “some exposure to cryptocurrencies”. My response is always the same: They need to find another financial advisor, unless the plan was to go short on Bitcoin.

According to retired investment advisor and cryptocurrency watcher Charles Padua, “It is hard to imagine cryptocurrency being a suitable investment for all but those who are sufficiently wealthy that they can burn wads of cash off a bridge and not be distressed by it.”

The fact is that cryptocurrency is starting to make that transition from a bad financial idea to an outright scam. Although cryptocurrency has at best a dubious future, there are still companies out there seeking venture capital from investors to “take advantage of cryptocurrency” and which promise to be the next Apple or Google, although exactly what they are going to be doing that will ever result in a profit is anything but clear.

The larger financial firms have shied away from Bitcoin, with JP Morgan Chase’s Jamie Dimon calling Bitcoin a fraud. But this hasn’t stopped lesser firms from attempting to generate fees by attracting investors who largely don’t have the first inkling of what they are investing in, but succumb to predictions of instant riches. Far from being folks wealthy enough to burn wads of cash off the bridge, these investors are much smaller investors who are being told, among other things, to use their retirement funds for cryptocurrency investing.

There are also predictions about investment performance that make little sense. Take Fundstrat’s Tom Lee, who just a month ago predicted that Bitcoin would hit $25,000 by the first of the year. After the most recent price drop, Lee cut his prediction to $15,000 — which means that Bitcoin would have to go up by 300% in the next 40 days. One has to wonder what sort of data  pundits like Lee rely upon to make such predictions. In his defense, Lee is not alone: If you want a good chuckle, check out these crazy predictions for year-end 2018.

Without identifying anybody in particular, suffice it to say that a goodly number of Bitcoin prognosticators are simply shilling and attempting to pump the price of Bitcoin up because they themselves are invested in cryptocurrency companies. This is where the scam comes in. Very simply, cryptocurrency investors are being actively misled — Jamie Dimon’s reference to fraud — into investing in something that doesn’t have a realistic chance of yielding the promised results. In the old days of securities regulation, this was known as selling “blue sky” and resulted in state securities laws of the same name.

Which is all to say that securities regulators, both at the federal and state level, have let the public down by not more actively regulating cryptocurrency investments, setting suitability guidelines for financial firms, and prosecuting the worst offenders including those pundits who are nakedly shilling Bitcoin and related investments. At the end of the day, Bitcoin has become nothing more than a giant pump-and-dump scheme, and investors should be protected from the scheme just as they would be from such a penny-stock biotech company whose sole existence is a website plus a closet with a phone in Salt Lake City, and the promise of someday obtaining valuable patents.

As usual, the horse is already out of the barn, but this doesn’t mean that investors do not deserve at least minimal protection from cryptocurrency even as interest wanes in this alleged asset class.

This article at https://goo.gl/78Zo5g

I’ve previously written about Bitcoin in the following articles:

  1. The Great Bitcoin Scam (12/28/2017)
  2. Bitcoin and Cryptocurrency: Unsuitable At Any Speed (4/14/2018)
  3. Bitcoin, Cryptocurrency And The Government Regulation Paradox (01/29/2018)
  4. Why Bitcoin Is So Volatile (2/9/2018)

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