There was a lot of shock and awe on my Twitter stream yesterday when JP Morgan CEO Jamie Dimon said Bitcoin was a fraud. He would fire any employee trading bitcoin for being “stupid.”
The cryptocurrency “won’t end well,” he told an investor conference in New York on Tuesday, predicting it will eventually blow up. “It’s a fraud” and “worse than tulip bulbs.”
If a JPMorgan trader began trading in bitcoin, he said, “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.”
A friend of mine was a Wall Street veteran. A few years ago, he was trying to get a startup fund going offering trading vehicles priced in Bitcoin. It was a good idea but way ahead of its time. When they went out to sell their product to customers virtually every customer told them they loved what they were doing. However, they said the risk was too great. If they lost a bunch of money trading Bitcoin products, they’d lose all their investors and their jobs-potentially never being able to work in the hedge fund world again.
Of course, the cynics deride Dimon and say he is talking his book. No doubt, he is talking his book but there is nothing wrong with that and he’s being transparent about it.
VC Mark Suster had a nice tweetstorm about it. I agree with some of his points and would go further. I don’t believe Bitcoin is a “store of value” yet. Just because something goes up in price doesn’t mean it’s a store of value. Suster correctly says Bitcoin isn’t stable. It’s far from stable.
Stores of value have deep markets with hedging and leverage. Bitcoin is a one way cash market right how. Bitcoin is not gold. Not even close. All the hedging and leverage instruments are coming. But, it has to get by government regulators and the existing entrenched structure on Wall St.
When the most powerful bank CEO says the product is a fraud, it’s going to make it tougher to get through the bureaucracy and standards.
Of course, exchanges like the CME and CBOE have taken steps to try and do things in the crypto market. It’s coming whether Dimon likes it or not but when established players are doing things in crypto, JPM won’t be left in the dust.
Governments will eventually embrace cryptocurrency and blockchain. They will have to. Taxpayers will demand it. Blockchain has the potential to get rid of thousands of government workers and decrease the cost of running the government. It’s got the potential to end things like voter fraud and political patronage.
That’s why it was no surprise to see China clamping down on Bitcoin. Communists can only tolerate a certain amount of “free market capitalism and libertarianism”.
Dimon is in one phase of the evolution on thinking about Bitcoin. The first phase is you think the whole thing is bunk. The next phase is about embracing the technology of the blockchain, but discarding the transactional piece of cryptocurrency. The last phase is understanding how the crypto fits in with the blockchain, and realizing it all fits together.
Without value in the crypto that backs up the blockchain, why would miners have an economic incentive to support it?
Dimon is not only speaking his opinion, he is also talking to his shareholders. He’s reassuring them that the bank isn’t dabbling in Bitcoin and exposing them. When the time comes for the mainstream banking world to embrace Bitcoin, JPM will lead the way. The problem today is they haven’t figure out how they can become gatekeepers in the same way they control flows in the Forex markets. When they can charge a toll, they’ll be there.
I would agree with anyone who said the ICO craze is way overdone. Whenever there is easy money to be made and uninformed breathless speculation, fraudsters enter. The mid 1800s snake oil salesman is now in the ICO market. There are certainly pump and dump schemes all over, just like their have been for stocks that JPM trades. Wall Street is where the pump and dump was invented. It’s easier to coordinate, and transmit information to make that pump and dump happen. It’s also easier to hide because of all the communication networks. In the banking world, everything is recorded and stored.
If you are long Bitcoin and have a nice profit don’t spend it. It could evaporate tomorrow. If you want to spend it, sell it. Take your profit and keep the cash. If you are dabbling in Bitcoin or thinking of dabbling don’t risk thy whole wad. Trade with only money you can afford to lose 100% of.
In 2008 I was short Lean Hogs from August to December. I had a huge profit baked in but wasn’t out of my position. The first three trading days of January 2009, Lean Hogs were limit bid. I lost quite a bit of my profit. It was almost impossible to cover, but you could add if you wanted. Thank goodness I hadn’t borrowed or spent the money, although I did have to pay tax on it. The market turned South again and I had a really good trade getting out in March. Both the limit bid for three days, and the turn back down were volatile and violent. The point is, I could afford to lose it. It didn’t affect my day to day life although it was tough to sleep.
What will the price of Bitcoin and the rest of crypto do? The answer is no one knows. I don’t believe the market is liquid enough or deep enough to meet the standard of “market efficiency” yet. Where ever it goes, the shock will happen fast and if you are on the wrong side it will be vicious.