The participation of institutional investors in the topic of bitcoin does not really stimulate its price growth. Everything is just the opposite. What they offer under bitcoin lending and other financial products has one dangerous aspect: all these tools are designed for an outdated system. Until sound commercial banking designed for the free market leads to the creation of a new type of wealth and, as a result, new non-inflationary money representing this new wealth is created, bitcoin will remain a worthless store of value, which nothing better than cash.
However, with all this, Bitcoin is a reasonable solution that deserves attention. The outdated terms for borrowing dollars against bitcoin are simply not good for the average investor, especially now. And I say this without a second thought.
Bitcoin by itself is not sound money. Sound money requires a new way of thinking that goes beyond traditional paradigms. What may be good for an old school bitcoin lender may not be good for a traditional school bitcoin borrower, and vice versa.
The traditional system tempts the not-so-smart adherents of the old school to play the tax evasion game. This will cause many long-term bitcoin holders to lose their positions if the price of the asset drops sharply to $18,000.
Bitcoin performance review from 2014
Below are bitcoin’s performance since its peak in January 2014. The 2021 recommendation of so-called old-school bitcoin gurus to borrow fiat dollars against bitcoins to avoid tax consequences is reckless to all but the most sophisticated investors. It is a surefire way for grief-stricken holders to lose all their savings.
The months when you should not borrow dollars against bitcoin are highlighted in yellow. Newbies tend to borrow against bitcoin when its price is at its peak, which inevitably leads to liquidation in the event of a sharp decline in price – highlighted in red. Safe months for borrowing bitcoin dollars are highlighted in green.
The table above shows the results of averaging the dollar value of bitcoin ($500 per month) since the peak in January 2014. The 2021 recommendation of so-called old-school bitcoin gurus to borrow fiat dollars against bitcoins to avoid tax consequences is reckless to all but the most sophisticated investors. A downward spike below $18,000 would destroy anyone who followed this bad advice.
I am writing this because I have many friends who have borrowed dollars against collateral in 2021, following the popular belief that the price of bitcoin will continue to rise. Many of these friends have chosen not to work and are living off their pledged money, believing that bitcoin will rise to $100,000, $300,000, or even $1 million, and are living off the dollars borrowed against bitcoin.
It should be noted that a jump below $18,000 would wipe out all those who fell for this trick of the old system in 2021. The loss of their savings will be a sad event, but well deserved. Those who follow the advice of old-school gurus assume that a jump below $18,000 will not happen.
Tough money requires a tough approach
While bitcoin represents great hope for a new generation due to its key qualities – a robust “proof-of-work” protocol, limited supply, no need for intermediaries, limitless transactions, and the impossibility of withdrawing it – it could all fade into oblivion due to attempts to drag it into the messy traditional system.
Bitcoin is designed to operate independently of legacy systems. The participation of traditional players in 2021 has changed the fundamental structure of the market and the dynamics of bitcoin.
Bitcoin, if tethered to the traditional system, would lose its primary value, which is that it cannot be confiscated. Or, as my good friend Ton Weiss put it, bitcoin is not subject to confiscation.
However, the withdrawal of accumulated bitcoins will first be carried out by experienced players of the old school from uninitiated amateurs, and then those who are at the helm of the traditional system will have their greasy paw on these savings.
There is a good chance that most of those who pledged their savings to the joy of the traditional system in 2021 will learn a hard lesson in 2022. There is more to creating sound money than bitcoin or gold. Bitcoin and gold are useful tools, but not a panacea. Like any tool, they can be useful or misused.
Already, trends are emerging that will present a challenge that is difficult to solve. Nevertheless, the innovation of bitcoin has provided an opportunity for change for the first time in four generations. With the tightening of regulation, there is a clear trend toward incorporating the bitcoin standard into the traditional system.
This evolutionary trend is occurring at an exponential rate compared to the evolution of the Gold Standard, which reached its peak in the “Gilded Age” of the late 19th century. This, of course, begs the question, does bitcoin really provide an alternative or is it just another paradigm providing a short-term reprieve that quickly degenerates into centralized control?
Although technology has given us a new tool that is secure, cross-border, not subject to confiscation as long as you have the keys, resistant to censorship, and decentralized, these innovative attributes are easily undermined by hardened old-school adherents.