2 Reasons to Bet Against Bitcoin...and One Reason Not To

Bitcoin is interesting. I’m not technophobic. I say, if people want to invest in it, that’s fine. I don’t own any. I don’t recommend them to clients. I have a couple problems with them.

Number 1, they’re unproven in the business cycle. Bitcoin was invented in 2009. The economy’s only been expanding since then. It’s been expanding at a very weak level, a very weak pace, but it has been in expansion. There has not been a contraction.

So, we don’t know how bitcoin is going to perform in the down cycle. We have some sense of how other asset classes do so that’s one problem.

The second problem, and it’s a big one, is the issue of taxes. If I buy a stock for $200.00 and then it goes up to $300.00 and I cash it in for $300.00 of goods and services, I have $100.00 gain. I have to put that on my tax return. It’s no different than buying and selling a share of stock.

I daresay a lot of bitcoin users are not doing that, which means they’re tax evaders, and we know from the tea party scandals that the government is using the IRS for selective political enforcement, so I’d hate to be a bitcoin guy who failed to report a gain, which can be a felony, and if you’re on the wrong side of the government, you could be targeted. So, that’s a genuine concern.

I think what’s interesting about bitcoin is that it’s a kind of currency. It’s a store of value although it’s got a lot of volatility, but it’s also a technology. I think bitcoin may be like the Neanderthals in the sense that the currency itself goes extinct the way the Neanderthals did, but the DNA lives.

I think the technology might be useful for a lot of property transfers, not just the bitcoin currency but also stocks, bonds, land titles, etc. so, you know, it’s a cheap, open source, widely distributed, robust, heavily encrypted form of tech transfer technology so maybe bitcoin the currency goes away, but bitcoin the technology survives.

The Daily Reckoning