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Bitcoin: The Currency of Evil Corp

Andrew Stewart, CFA
Jan 2, 2018

BitcoinEveryone is talking about bitcoin. Even this guy. The price movements have been staggering, and will likely continue. The underlying tech, blockchain, is both confusing and exciting (at least for those in the financial accounting world). While blockchain does have a real potential value to the world, there is an active debate regarding what bitcoin is, what it's worth, and whether you should own it.

Is it a currency? Sure it is.

The "currency" label can be enigmatic and ephemeral, though. While anything that enough people are willing to accept as a transmitter of value (to avoid a barter economy) is a currency, bitcoin isn't a generally accepted currency. In the United States, we use the dollar as our currency, in the same way that the French use euros and the Russians use rubles. Gold is a commodity, used for jewelry and electronics, but it is also considered to be a currency by many people. That said, try to use euros, rubles, gold, or bitcoin to purchase a hammer at the local hardware store, and you'll quickly learn that not all currencies can actually transmit value at all times or in all places.

A layman's litmus test for whether a currency has "made it" or not is if a multi-national retailer is willing to sell its goods at a stable price in the currency in question. For example, I often buy my dress shirts from a British company that also has a website with USD prices. You can always get a shirt on the U.S. site for $50. Meanwhile, on the British site, you can always buy that same shirt for £25 (£ is the symbol for the British pound or GBP). The fact that these prices remain stable for years, even though the exchange rate between the USD and GBP moves around, indicates that both of these currencies are generally accepted in the marketplace. Bitcoin lacks stable pricing, obviously, and as far as I can see it fails my litmus test. Even though some companies will take bitcoin, they still price their goods and services in USD (or some other established currency) and then allow you to pay in bitcoin at the current exchange rate. Perhaps bitcoin can be discussed as an established currency when I can consistently buy a dress shirt for 500,000 Satoshis (0.005 bitcoin).

Another difference to consider between currencies is what drives transactions in the currency. USD is exchanged daily for goods, services, and other currencies. The same can be said for pounds, euros, and rubles. Bitcoin and gold are also exchanged daily, and sometimes for actual economic activity, but I think that most of the transactions are speculative in nature.

What is a bitcoin worth?

The answer to this question is unsatisfying: whatever you are willing to pay for it. Some will read that as a mark against bitcoin, but here is the confusing truth: that answer applies to every currency in the world! No currency has intrinsic value. It only has value because we, as a society, assign it value. Gold lovers raise this cry against the USD ever since we left the gold standard, but gold doesn't have intrinsic value either, so this is an empty criticism. I'm in the "all currency is worthless (except we all agree it isn't for now)" camp, which I know can be unsettling.

So why does bitcoin bother me so much? From a market perspective, it has the same features as gold:

  • It is considered a currency by enough people to be so
  • It suffers from significant price movements that appear to be driven by speculation
  • Few goods and services are priced in it directly
  • It is difficult and expensive to exchange for other currencies
  • It can't be manipulated by a central bank

My biggest concern with bitcoin is related to none of those things.

My distress lies in its physical portability (a USB thumb drive style "wallet" can carry millions of dollars) combined with the lack of international regulation (all major governmental currencies are regulated via the commercial banks). Some good people might consider these features to be useful and libertarian, respectively, but I argue that the bad players in the market have much greater use for these features than our friends in New Hampshire. I sum up my concern with bitcoin in the less often used definition of moral hazard: a feature of a financial tool that enables illegal or unethical behavior. While most of the transactions in bitcoin may be speculative, and very few people use it as a functional currency, I think that society would label many of the business transactions occurring in bitcoin to be abhorrent.

While currencies with moral hazard allow all sorts of objectively nefarious acts, consider the following particularly horrific business model: a group of criminals kidnap a child, Maya, in a part of world where this can be done easily and without notable repercussions, with the goal of selling her to the highest bidder as a slave. Like all goods and services in the world, the highest bidders are usually in the United States and other countries in the developed world. These countries also have laws in place that attempt to catch and punish human traffickers.

This business has two big challenges to overcome in order to avoid incarceration of its employees:

  1. Transporting Maya into the United States
  2. Getting the dollars the customer pays out of the United States. Even evil businesses need to pay their employees, who are scattered around the world.

Let's focus on the second part, because this is where bitcoin comes in. Between the post-9/11 focus on how terrorism is funded and the IRS trying to find tax cheats hiding money in Swiss bank accounts, we have lots of regulations that make it difficult to create and maintain a bank account in the United States that will be used for moving USD overseas for nefarious purposes. Similarly, there is an army of people staffing the airports, forcing you to take off your shoes, and asking uncomfortable questions about the stacks of dollar bills and gold bars in your suitcase. This business isn't new, and the practitioners have always had ways to do their work; just imagine the mafia conducting a trade in the desert between drugs, guns, and a bag of diamonds. That is a barter transaction, which is a pain to set up and execute, but better than nothing, from their perspective. When bitcoin came out, these transactions became much easier.

If you buy a bitcoin (please don't), you will probably do so online. It doesn't have to go that way, though. You can buy a physical bitcoin wallet, which can look a lot like a USB thumb drive, to carry your bitcoins with you. This allows the slave trader to sell Maya at an I-94 truck stop for USD on Monday, convert those dollars to bitcoin, put the bitcoin on a wallet, fly the wallet to anywhere in the world, convert the bitcoin to the local currency, and make payroll by Friday so their employees will kidnap Maya's sister next week. Sure, the price of bitcoin might swing wildly during that time, but these are people accustomed to high costs of doing business, ranging from bribery to jail time. Volatile currency markets are a small price to pay for them. Furthermore, human traffickers aren’t the only ones who are reaping the benefits of an easily transportable and launderable currency like bitcoin. Black markets in fentanyl, explosives, blood diamonds, and so on are all made more liquid when a currency is available to conduct business.

To buy or sell a currency with these attributes provides liquidity to the worst among us. When you buy the bitcoin, you may be helping the slave trader pay his employees. When you sell a bitcoin, you are taking dollars that may have just bought a human being. The same can be said for other currencies, but most other currencies are difficult to move (gold) or well tracked (dollars). Bitcoin is neither. What bitcoin is, for now at least: fraught with moral hazard.

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Andrew Stewart, CFA is a Senior Portfolio Manager at Exchange Capital Managementa fee-only, fiduciary financial planning firm.  The opinions expressed in this article are his own.  

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