The Motley Fool Slams Bitcoin: A Response

It is always nice to see Bitcoin getting coverage in the mainstream press, especially when you keep in mind the old adage that there’s no such thing as bad press. To be sure, when people read reports of Bitcoin being linked to terrorism, drugs, or any of the other bugbears they like to drag out to frighten their readers. People read the press, but they also are smart enough to know that not everything they hear is true. In this recent report on a Gallup poll, 60% of Americans have been ‘not much’ and ‘no trust at all’ in the ability of the press to report accurately and fairly.

It was for this reason that I was fairly happy to see the article 3 Reasons Bitcoin is Doomed to Fail by Jeremy Bowman on the Motley Fool. Before I start commenting on this article, though, I feel it’s necessary to talk about the website it appeared on: The Motley Fool, as these sites go, is pretty well known and respected in its field. They take a light-hearted approach to investment advice and claim to take a solid, grow-your-money-slowly approach. I personally began reading them pretty soon after they began publishing on AOL in the mid-90s. I’ve always kind of liked them, but have steered away from their paid material and taken their advice with the same grain of salt I take with any financial advice.

Now, the basic buy-and-hold strategy has been pretty good advice historically, and that’s how they get people liking and trusting them. Their real bread and butter comes from premium-content newsletters. As I’ve said, I’ve never bought any of these, but most of the commenters I’ve been able to find say that the stock picks here often border on speculation – not a Foolish core value.

And then there is their expansion into running their own mutual funds. Initially these were run transparently and according to the values of the site. They underperformed so badly, though, that the funds were made opaque since, as was publicized on the site, the funds were distracting from the site’s main mission of education. What information is available about the funds, though, suggests that the Motley Fool has been trying a lot of different strategies, not just buy-and-hold, to boost performance, and that this has not paid for their investors.

I still think there is a lot of good advice on the Motley Fool and enjoy reading the site now and again. When I finished reading Jeremy Bowman’s article, though, though I still think it’s great that there’s even an article about Bitcoin on the site, it would be useful to rebut some of the more serious errors that Bowman makes in his piece.

Bowman gives three reasons that Bitcoin won’t go mainstream, but I am going to ignore those (volatility, no need for it, and it’s just too damn shady) in favor of going after the arguments he uses to support those points.

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He first makes the claim that Bitcoin is deficient because the value of Bitcoin is tied to its value in dollars, and volatility makes it a poor store of value. Now there are a lot of commodities that have periods of volatility. My father was talked into buying gold by one of my uncles as a kid. He lost his shirt. If he had just held on for another twenty years, he would have made that back and more, but…

The real flaw in Bowman’s point is that Bitcoin is only valued against the dollar, or any other national currency, because that’s the point it’s at in its development. Bitcoin’s entire market cap of between 5 and 6 billion dollars means that if Bitcoin were a person, it would be only a moderately wealthy 1%er. Bitcoin is growing, and it’s going to have a lot of growing pains – which means that it’s going to be volatile.

So, if you’re interested in short-term gain, or if you need to be sure that that value is going to be there tomorrow, he’s right that Bitcoin is not for you. On the other hand, if you have a buy-and-hold strategy and are interested in betting with the trends, then Bitcoin starts to seem like a smarter bet. And, given the amount of value Bitcoin will need to account for before it can really go mainstream, it doesn’t seem like it will take 20 year, or 10, or probably even 5. When all is said and done, the positions may be reversed – with the dollar denominated in Bitcoin.

Bowman goes on to say that Bitcoin is the most valued currency in the world. True. The history of this goes deep, but the long-and-short of it is that after WWII, John Maynard Keynes tried to establish a super national currency known as Bancor. Partly because of the maneuvering of the American participants in the meeting, the idea was rejected for a system of pegged currencies that established the US dollar as the de facto currency for international settlements. This was reinforced when a deal was struck by the Nixon administration with Saudi Arabia to require all oil-sale settlements to be made in dollars.

Unfortunately, the system of pegged currencies was undermined when Nixon took the dollar off the gold standard, and the petro-dollar system is right now eroding as Russia, China and a grow set of other countries cut deals in currencies other than the dollar, typically the Chinese Renminbi.

Since the financial crisis of 2008, there have been calls for a re-examination of Keynes’ Bancor idea given that there is an inherent conflict of interest in a currency that tries to serve domestic economic policies and the needs of multiple countries around the world. It is nearly inconceivable that Bitcoin could replace national currencies – governments are too invested in their ability to control their money supplies – but Bitcoin could serve the role of a financial instrument outside the control of any government and so trusted by all.

Next, Bowman ties Bitcoin to Silk Road (drugs), Mt. Gox (scams), money laundering, and child pornography. Again, true. Of course, saying this ignores the fact that although Bitcoin works well in some very specific types of shady deals, like buying drugs on the internet, it is notoriously bad for the kind of large scale crime that he is talking about.

Money laundering: If you have real money to launder, Bitcoin is not really going to help you. When you try to cash out, you can do it through an exchange, but the markets are so small you’ll crash the price. Further, Bitcoin is not really anonymous – actually, since every transaction ever made is public and verifiable, it is more transparent than our current financial system. Once you’re able to tie a Bitcoin address to a name, then you can follow the money pretty effectively. Policing is still possible with Bitcoin.

Drugs: Sure, this is going on right now as I write. On the other hand, serious drug dealers are unlikely to want to be paid in Bitcoin. See above.

Scams: Sure. Bitcoin has seen its share of some pretty hideous scams and thefts. But if you want to see some really stupendous scams and thefts, you have to look at the US dollar: Madoff, Corizine, and, really, the entire 2008 financial meltdown. Bitcoin is not a special haven for scammers; it’s just that you have to be careful with your bitcoins just like you have to be careful with your dollars.

Child pornography: This one is pure mudslinging and doesn’t even deserve to be refuted. Child pornographers and their customers need to be hunted down by law enforcement professionals and brought to account. This will be possible to do with Bitcoin just as it is with dollars – it’s just that the police are going to have to earn their pay to do it. What Bowman is really doing here, though, is guilt through association. It’s undignified.

What I find really disturbing about Bowman’s inclusion of child pornography in this list is that every time the government wants to crack down on the privacy rights of you and me, it begins to cry about child pornography. It did this about Pretty Good Privacy encryption, it’s doing it now about the ability to use good encryption on the next generation of IOS and Android phones, and Bowman is priming the pump for it to do it about Bitcoin.

To state this again: Bitcoin may be used by child pornographers, but this will not stop police from finding ways of catching them. It may make them work a little harder for it though.

Bowman ends his piece by comparing Bitcoin to quidditch, the game played on broom sticks in the Harry Potter series. He states that just like that game, though many people may like it, it will never make the jump from being fictional to being real. Of course, the point that Bowman is missing here is that Bitcoin is already real. No one plays quidditch. No one can play quidditch since it requires magical broomsticks and balls to play. Bitcoin, on the other hand, is used every day by people all over the world as a currency, as a commodity, and as the foundation for a growing number of other purposes.

Bowman is sure that Bitcoin is a solution with now problem to fix and that it will fail on that basis alone. He says that currency in use now is just fine. To some extent we agree with him; if the financial system worked the way it was supposed to, there would be no need for Bitcoin. Unfortunately, the system has proven itself to be so broken that a solution like Bitcoin is being cried out for. The problem is, for a lot of people like Bowman, they are so invested in the status quo, they won’t hear the alarm bells until it’s too late for them.

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