Bitcoin: FOMO Eclipsed by Fear of Whales
I have spent some time recently using genAI as a research tool. One area where I’ve tapped AI’s research facility involves cryptocurrency, especially bitcoin. I’ve never truly understood the bitcoin investment thesis, and I thought AI might be able to find and synthesize perspectives that offer a credible and persuasive case for bitcoin investment.
With that end in mind, I asked a few genAI chatbots variations of the same questions: What is the case for bitcoin as an investment vehicle? What is the thesis supporting bitcoin investment? I received various responses, but a consensus was evident. Perplexity AI, an AI-based search engine, responded as follows, encapsulating salient points I’d seen elsewhere:
The investment thesis for bitcoin has evolved over time. Initially, bitcoin was seen as "digital gold" with little correlation to traditional assets. However, in 2022, experts suggest that bitcoin's investment thesis has changed due to increased correlation with equities and other risk assets. Despite this shift, some believe that bitcoin will regain its role as an uncorrelated asset in the medium to long term. The investment thesis for bitcoin is multifaceted, with perspectives ranging from its potential as an aspirational store of value to its programmability and potential for widespread adoption. bitcoin's finite supply and predictability contribute to its long-term price appreciation potential compared to fiat currencies. Institutional interest in bitcoin has grown, indicating a maturing market and hinting at broader adoption.
Overall, the investment thesis for bitcoin encompasses its unique properties, evolving market dynamics, and the potential for long-term growth and utility in the financial landscape.
This response included citations of supporting data, including references to information published by investment funds, cryptocurrency advocates, and trade publications. I wasn’t convinced that what I’d received made an airtight case for bitcoin investment, but I didn’t expect AI, or anybody else, to clear that bar.
Subsequently, I asked the AI bots whether the bitcoin market is vulnerable to manipulation. In response to this question, the answers were more convincing in their specificity, particularly when I zeroed in on the potential malfeasance of bitcoin whales, generically defined as entities (individuals or corporations) holding large quantities of bitcoin. These whales, as I was helpfully informed, could use several mechanisms to move the market in directions that serve their interests.
For example, large buys or sell-offs could be engineered, inflating or depressing prices, respectively. Also cited was manipulation of public sentiment, resulting in a sustained price increase, especially when amplified by media coverage, which would draw retail investors from the sidelines. Another ruse involves utilization of asymmetric information, whereby whales, due to the significant presence they have in the market, make trades on the basis of knowledge not available to other market participants. Again, retail investors are tempted into a honeytrap.
Wash trading, a form of market manipulation that creates deceptive impressions of trading volume and price activity, is another deceptive practice that can distort perceptions and influence the behavior of smaller market participants. Finally, pump-and-dump schemes, certainly not restricted to cryptocurrencies such as bitcoin, were cited. When engaging in bitcoin pump-and-dump exploits, whales drive up the price of bitcoin before selling a portion of their holdings at a significant profit. Again, retail investors fall victim to the ruse.
The AI bots informed me of historical instances of suspected market manipulation by bitcoin whales, including a run in 2017 when a market entity used a stable coin with a 1:1 peg to the U.S. dollar to purchase bitcoin in large volumes. The tactic gave the appearance and broad and deep demand, attracting retail investors; once they came forward, the whales (identity unknown) lowered the boom.
Anonymity and the Deep Blue Sea
Despite that instance and other suspected cases of dishonesty, the anonymity of bitcoin trading makes it difficult to investigate and prove market manipulation. There is also a lack of regulations that militate against prevention or punishment of illicit activity, though the imposition a regulatory framework seems inevitable.
For me, the problem with bitcoin as an investment vehicle is that it requires a suspension of disbelief that borders on blind faith. Even the advent of bitcoin, invented by a pseudonymous Satoshi Nakamoto — who still may possess a veritable treasure trove of bitcoin — is shrouded in mystery.
To invest in bitcoin, you have to forget all that, and you also must overlook that bitcoin is merely a form of software that only retains value as long as people believe in it. As soon as they stop believing in it, or move on to something else, it will lose value. It is not a reputable currency — it’s far too volatile for that purpose — and most its investors only realize gains when they convert it back into a fiat currency, usually the U.S. dollar. Practically nobody investing in bitcoin uses it or values it as a currency. Its value is realized through its convertibility into real currency.
Is bitcoin analogous to gold? I don’t think so. Gold is a precious metal, a tangible, physical asset, with uses beyond speculative investment. In contrast, bitcoin is officially categorized as a cryptocurrency, though, as we just concluded, it’s a misnomer — wholly inaccurate — to classify bitcoin as a true currency. In the end, bitcoin is a speculative investment. If bitcoin goes out of fashion or favor, another cryptocurrency (or something else) can easily replace it.
I realize that my position on bitcoin is unfashionable, and it might even result in my missing out on investment gains that others are deriving from bitcoin and other cryptocurrencies. After a fitful start, the advent of cryptocurrency-related exchange traded funds (ETFs) brought institutional investors into the market in a big way, driving the valuation of bitcoin to unprecedented heights. Further gains could follow. I do not discount the possibility of bitcoin going much higher. I wish bitcoin investors all the best, but I just can’t take that leap of faith. The whales, whoever they may be, probably see it as a much lower risk, but that’s because they’ve stacked the deck in their favor. In a casino, the house always wins, and perhaps it’s the same for the bitcoin whales.
A Business Insider article quotes Richard Tang, CEO of Binance, the world’s largest cryptocurrency exchange, forecast that bitcoin will soon vault to a value of US$80,000. (Did you notice even Mr. Teng expresses bitcoin’s value through a fiat currency?) Again, bitcoin might well surpass those heights.
It’s hard to say exactly when, or how much, bitcoin will rise or fall because its value turns almost entirely on whether follow-on investors continue to believe fervently in its ability to retain and increase its value. It’s a matter of faith, and, as much as bitcoin enthusiasts will object, it’s also a matter of trust in the integrity of whales in the bitcoin market. But are the faith and trust warranted, and are faith and trust criteria for defensible investment decisions? The bitcoin mania is akin to a religious experience, but the motivation for bitcoin investment is aggrandizement in the corporeal world rather than eternal salvation in the hereafter.
That’s too much faith for me. I need more disclosure, more information. I still regard myself as a rational actor — most of the time, anyway — and I need to be able to articulate and defend a cogent thesis for any investment decision I make. A thesis must cohere and make sense, my assumptions and methodology must be sound, and I must use logic and reasoning to carefully assess the probable risks and rewards associated with the proposition under consideration. In the end, I might be right or wrong, but I can’t simply capitulate to faith, ideology, or religiosity. To my mind, that would be an abnegation of my responsibility, and I’m the one who would pay for it.
In my view, bitcoin seems more like a cult than an investment vehicle. I don’t doubt that some people have made shocking amounts of money investing in bitcoin, but the risk — particularly at current prices — outweighs potential rewards. Others will feel differently — and that’s okay. There’s more than one way to generate wealth through investments, and I readily concede that bitcoin investments have yielded, and might continue to yield, robust returns for those who’ve taken the leap.
Still, I can’t escape the conclusion that any decision to invest in bitcoin would be driven overwhelmingly by belief and emotion. That game could take a dark turn whenever the whales decide to roil the waters, as they seem to have done on more than one occasion in the past.