Lessons from 19th Century Cryptos — Part Two

We pick up the story from yesterday with the Fed questioning the stability of so-called stablecoins.

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Just how stable are these stablecoins?

At almost three-times the size of its nearest stablecoin competitor, Tether is the ‘big dawg’ of stablecoins.

According to Almost Daily Grants:

Tether, [is] the most widely-traded crypto and the de facto source of liquidity for exchanges that cannot get access to traditional banking…

When you get this dominant, the regulators, lawmakers, and fiat money custodians start taking notice.

This is from the 23 February 2021 press release by the New York Attorney General (emphasis added):

‘“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” said Attorney General James.

Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system. This resolution makes clear that those trading virtual currencies in New York state who think they can avoid our laws cannot and will not.

‘Last week, we sued to shut down Coinseed for its fraudulent conduct. 

This week, we’re taking action to end Bitfinex and Tether’s illegal activities in New York. These legal actions send a clear message that we will stand up to corporate greed whether it comes out of a traditional bank, a virtual currency trading platform, or any other type of financial institution.’

Those naughty folks at Tether were telling ‘porkies’ about being fully backed by US dollars. Gee, who would’ve thought that possible?

Now, you’d think this public airing of Tether’s dirty linen would undermine confidence in its claim to be a ‘stablecoin’.

Not so.

Since being outed by the NY Attorney General, the unstable Tether has gone from strength to strength.

Given the stupidity and gullibility of the masses, perhaps Fed Governor Brainard was right in expressing concern about the adoption of stablecoins as an alternative payment network. Even if it was out of self-interest, he may have been performing a public service.

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Who knows, he might give some people enough pause for thought. Helping them to avoid the prospect of substantial losses.

What happens when there’s that ‘uh-oh’ moment, that moment in time when people see Tether for what it really is…nothing but an airy-fairy belief?

Then, that run-like behaviour Governor Brainard warned about becomes a reality.

I’m no fan of central banks. However, the devil we know — government-backed money — is, at this stage in the development of digital currencies, far better than the devil (scammers and shysters) we don’t know.

And for those who think the very clever puppeteers pulling the strings in the crypto show are doing this for the good of the people, you are in for a rude shock. These hustlers are in it for all they can get while this stuff is red-hot and common sense has been suspended.

Which is how all Ponzi schemes operate.

Ironically, the instability of stablecoins is what’s going to hand power back to the central banks.

When the crypto con all blows up and people find out these things are worth less than a Pokémon token, the authorities — under the cover of saving the people from these nasty scammers — will not let a good panic go to waste.

The PR campaign titled ‘Fiat money backed by government is the only money you can trust’ is prepped and ready to go into production. Just watch.

When it comes to traditional markets, we’re told ‘don’t fight the Fed’. Yet, in the crypto world that advice is scoffed at.

Well, from where I sit, it looks like the crypto faithful have picked a fight not only with the Fed, but with the central banks and governments of every developed and developing nation.

Talk about taking a pillow to a gunfight.

When the establishment starts firing off legislation to protect their patch, it’s going to be a massacre.

If you don’t believe me, look at the pressure Scott Morrison applied to Facebook and the pressure the Indian Government is putting on Twitter (threatening executives with jail terms). When governments decide to marshal the troops, it’s formidable.

I know the crypto faithful believe this is not going to happen. But that’s what the 19th century issuers of 10,000 unique and legal bank notes also thought.

Believers are seriously misjudging the firepower and willpower of the fiat money custodians.

The crypto faithful have fallen into the same old trap

Using past pricing action as a guide to future behavioural patterns is a trap many a past bubble devotee has fallen into…and future ones will fall into.

The crypto narrative goes something like this: ‘Well the last time there was a shakeout, it represented an excellent buying opportunity because eventually the price went even higher than before…HODL.’

The pricing graphs are trotted out to prove the legitimacy of this statement. Prima facie, what’s presented is true. However, the graphs lack context.

Crypto is a 21st century asset class. Born into existence after the GFC. Cryptos have been lifted up by the rising tide of the greatest bull market in history.

The UP phase of the market cycle is what’s given crypto its (rather short) 10-year trading pattern.

The charts provide absolutely no guidance on how this stuff will perform when the bubble pops and the DOWN phase of the cycle takes hold.

All we’ve seen so far is the speculative nature of the beast.

Thanks to the pioneering efforts of bubble participants past, Dr Jean-Paul Rodrigue was able to plot the emotional progress of booms and busts.

The absolute conviction in ‘buy the dip’ is easy to understand when you know the emotional drivers…the process by which sane and rational people change into insane and irrational beings, only to return to a sadder, poorer and saner version of their earlier self.

Dr Jean Paul Rodrigue

Source: Dr Jean-Paul Rodrigue

[Click to open in a new window]

What happens when the mood shifts from return to ‘normal’ to fear? All the pricing patterns from the ‘insane and irrational’ phase count for nought.

Moods turn…as any schoolie, the morning after the night before, will tell you.

The final word in this two-part series has been reserved for Nassim Nicholas Taleb, author of the highly acclaimed books, Black Swan, Antifragile and Skin in the Game.

As reported by CNBC on 23 April 2021 (emphasis added):

Taleb had once held favorable views toward bitcoin, which was created in 2009 and is the world’s largest cryptocurrency by market value. However, he told CNBC he was “fooled by it initially” because he thought it could develop into a currency used in transactions.


Nassim Nicholas Taleb…criticized bitcoin as a “gimmick,” telling CNBC he believes it’s too volatile to be an effective currency and it’s not a safe hedge against inflation.

And some more:

‘“Basically, there’s no connection between inflation and bitcoin. None. I mean, you can have hyperinflation and bitcoin going to zero. There’s no link between them”…

‘“It’s a beautifully set up cryptographic system. It’s well made but there’s absolutely no reason it should be linked to anything economic,” added Taleb…

He said bitcoin has characteristics of what he calls a Ponzi scheme that’s right out in the open.

And finally:

‘“I bought into it [bitcoin]…not willing to have capital appreciation, so much as wanting to have an alternative to the fiat currency issued by central banks: A currency without a government,” Taleb said. “I realized it was not a currency without a government. It was just pure speculation. It’s just like a game…I mean, you can create another game and call it a currency.”’

I know the crypto faithful will dismiss Taleb with their usual ‘well-reasoned’ retort…he just doesn’t get it.

Perhaps he does get it and just wants to avoid being a victim of this massive Ponzi scheme.

Crypto, like schoolies, is living in a make-believe bubble. In due course, the harsh realities of the real world will bring it all crashing back to Earth.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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