Bitcoin is a fraud and a bubble. Just like Coca Cola

Is Bitcoin a bubble? A giant Ponzi scheme? Lots of important people, like Nobel laureates and heads of international banks, seem to think so. Are they right? Is bitcoin a worthless fraud? Why are people giving up $10,000 USD for a single coin?

First, let's get one thing straight: value is a philosophical concept. It's a personal notion, and has no real-world measurable unit. At the end of the day, for any good/product/service there is only what the next guy is willing to give up for it at a particular moment. That is as true for Coca cola, the delicious sugary beverage, and Coca Cola, the NYSE listed corporation, as it is for Bitcoin. What makes trading USD for Bitcoin any better or worse than any of the other exchanges people make? Well, we could argue all day about it, but the very best part of capitalism is that we don’t have to: there is no need to arrive at a collective agreement about value, we just let people trade freely.

These free trades should, in theory, be great for everyone involved, otherwise why else would the people involved make them! Problems arise under two conditions: one, if either party has misrepresented what they are trading (fraud), as in a Ponzi scheme; or two, if parties outside of the transaction are negatively impacted by the transaction (negative externalities), as in air pollution. But there is nothing inherent in Bitcoin that puts it in either of those categories. Bitcoin is not claiming something that is not true, like a Ponzi scheme does; Bitcoin makes no claim, it just exists, like gold, for people to do what they want with. And like any real-world transaction there are plenty of externalities with trading Bitcoin, but nothing exceptional. (It does produce pollution, and that should be taxed, but that’s another debate.)

Coca cola, on the other hand, in my mind, is a net negative to the world: a global drug peddler endorsed by governments and cute computer-generated polar bears alike, that has been a motivated and active participant in an international health epidemic. That doesn’t stop people from continuing to buy its sugary drinks, and from continuing to trade its stock at some dollar valuation though. Why do they buy the drink? It’s delicious, I guess. Why do they trade the stock at a given price? For the simple reason that they expect a financial gain above and beyond any alternative allocation of that money; which is to say they expect the risk-adjusted price of Coca Cola stock to perform well in the future. Which, I’ll note, is exactly why people buy Bitcoin.

But Coca Cola Inc produces net free cash flows! Yes, it does, but that doesn’t really let us say anything certain about the price or the value of Coca Cola shares: you could have an expectation that those cash flows went to zero in the near future, you could anticipate a hyper-inflation event that destabilized and devalued the net present value of those cash flows, or you could imagine a large buyer, perhaps a global e-commerce behemoth, deciding Coca Cola was a strategic asset and acquiring it at a 100% premium. The price, ultimately, is subjective, and only what the next guy will pay for it, whether that’s a retail investor in a panicked crash or Jeff Bezos on a buying spree.

Diamonds, gold, advertising, works of art — how do we decide what is useful and valuable and what is a fraud and a bubble? We can’t, all we can do is buy and sell with a fungible unit of exchange to reveal our dynamic, relative preferences for various goods and services, and ensure those goods are fairly represented and that the transactions don’t produce unaccounted negative consequences. People may misunderstand Bitcoin and think its price can keep 10x-ing forever, but people can also misunderstand the benefits of Coca Cola and think it will provide them with happiness and satiety instead of diabetes.

The bottom line: aside from whatever liquidity problems Bitcoin solves, for most people it is speculative gambling; just like the stock market most of the time. Such gambling is fun, and potentially profitable (on a zero sum basis of course...), and fun is a perfectly legitimate thing to give up USD for, we all do it all the time.