Red Collapso

ABERDEEN, SCOTLAND – “My Son-in-law has just bought ‘A Dummies guide to Bitcoin’” writes a reader. “I didn’t say anything, but headed towards the drinks cabinet for a large glass of ‘Red Collapso’”…

Bitcoin ain’t for everyone, that’s for sure. Though it’s normally me chugging down the “Red Collapso” in this newsletter!

My recent scribblings have drawn some interesting comments from the readership. The chap above is cynically bullish on BTC thanks to the addictive draw of speculation:

[Bitcoin] can only go higher, despite it breaking every financial law since the beginning of modern Financial Economics. The promise of turning £100 into £5000 (according to the Daily Mail/Sun….) is stronger than heroin and just as dangerous.

It’s a computer code, held in cyber-space in a place which you hope is safe. Which I think can never be safe. Anything which can be hacked or manipulated by a third party is open to compromise or downright fraud…

The 3rd Party risk is often mentioned why you should include crypto in your portfolio, but there is always a 3rd party risk, unless you go back to barter or the physical exchange coins for something you want. Bitcoin needs electricity – what happens if the grid is shut down by the Chinese Communist Party, what if a quantum computer breaks every crypto code that it wants to?

Just saying…. Glad I got a few gold/silver coins under the bed.

I agree that bitcoin would be of limited use if the grid went down – as would your online bank and brokerage accounts.

But as I’ve argued before, bitcoin is not a precious metal and shouldn’t be compared to one.

While they share some traits (and make complement each other well in a portfolio), they have a fundamentally different nature. There is not a zero-sum competition going on between them over the same territory, though admittedly there is evidence of short-term investment flows favouring the new kid on the block.

I would clarify that if you own bitcoin, it is not held in a single place in cyberspace – your ownership of it is something recorded across every node in the network. And that network has never been hacked – though as we always say in this industry, past performance is not a reliable indicator of future results…

We took a look at the quantum risk to bitcoin on Friday – I would worry much more about the “richer targets” for a quantum hacker than bitcoin. Why go after “magical internet money” when you could break into banks, internet giants, intelligence agencies, and all manner of public and military infrastructure?

Looking to the nearer term, I think the government’s clampdown on digital assets is a more pressing issue – one that this reader highlighted well:

I own some Bitcoin, and I’m a Goldbug. I agree with everything that you say about BTC and some of the nonsense spoken about it. But what I can’t shake is the feeling that governments, and their pals in the banking system, just won’t stand idly by while an alternate form of money just morphs before their very eyes.

The first thing that will happen is that there will be regulation placed on BTC (or any crypto that they don’t control) in terms of how you monetise it.

BTC will need to go through an exchange to get it into currency so it will be (a) forcibly declared and b) instantly taxed at a punitive rate. Any BTC spent as pure BTC (ie any BTC used to pay for anything in BTC), to any UK vendor, will carry an enhanced level of sales tax.

The vendors will be severely punished if they don’t declare those sales and the imposition of the sales tax. If you are buying from an overseas vendor who doesn’t charge this tax then good for you, but expect all the banks and governments to get in line world-wide. Everyone will have their noses in the trough. The excuse will be that criminals/drug dealers/tax dodgers etc all use BTC, and this is the only way to track it and monitor it. 

Governments will want their own people to use their own domestic digital currency, and if they can’t stop BTC (they can’t) then they will make it really difficult for anyone to operate in the BTC shadow economy. I’d like your thoughts on that….please!

What governments choose to do about BTC and the digital asset sector as a whole is a trillion-dollar question that merits its own book, let alone a letter, but I’ll sketch a few of my thoughts out here anyhow.

Future regulation of the crypto space seems inevitable to my eyes – the question is a matter of timing, and more importantly whether that regulation is benign or destructive.

Heavy-handed government intervention as prophesied by the reader above would make crypto harder to use legally than fiat money, effectively making it useless within that country. While this path may be pursued by authoritarian governments keen to assert dominance over capital inside their borders, it would also deter the innovation the space to offer. India, which is setting its sights on banning cryptocurrency, is going down this route.

But this creates an opportunity for less controlling governments. Those developing the digital asset economy will migrate to areas with benign regulation. The governments going down this “soft-touch” route stand to hoover up global capital and talent, get first access to innovative breakthroughs in the tech, and gain national prestige from having a digital asset hub (not to mention make their real-estate an attractive destination for the nouveau riche bitcoiner class).

The likes of Switzerland (unsurprisingly), Japan, and many island states would fall into this camp. Cities like Miami have also gone heavily pro-crypto recently. The US Comptroller of the Currency under Biden has also made it clear that he doesn’t want new regulation to damage the crypto space so that the US can benefit from the innovation. (That said, the Comptroller doesn’t hold all the cards when it comes to financial regulation in the US, and the secretary of the Treasury, Janet Yellen, has made her distaste for bitcoin clear.)

But how the UK approaches comprehensive crypto regulation remains something of a question mark. The City of London has a reputation to protect (and territory to defend) as a global financial centre, which you would expect would lend itself to the benign approach. Then again, the Financial Conduct Authority here in the UK banned the sale of crypto derivatives to retail investors last year (which came into effect early this year) and the harsh taxes on freshly minted crypto may well look appealing to the chancellor in future – he does have plenty of bills to pay now after all…

I’m stuck in the middle for what happens next. I would be cautiously optimistic that Her Majesty’s government would take a rational approach to the digital asset industry, but HMG’s WuFlu performance has… tainted my view, to say the least.

What do you think? Is the government gonna maul British bitcoiners and drive them out of the country, or let them prosper with a little oversight? Let me know: [email protected].

That’s all from me for today – back tomorrow. I’ll leave you with yet another collective noun for gold sovereigns that has been suggested by the readership: “an assembly of sovereigns”. I’ll end up sending a book of these ideas to the Royal Mint at this rate…

Until tomorrow,

Boaz Shoshan
Editor, Capital & Conflict

Category: Investing in Bitcoin

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