Crypto social media personality Trevon James, who was intimately involved in the promotion of the HYIP scheme BitConnect, which eventually led to law enforcement and legal action, says, in his infinite wisdom, that the Bitcoin price will be at $0 in ten years.
James’ YouTube channel often features him driving around his neighborhood in Florida, talking about investing in cryptocurrencies and platforms he prefers to use, most of which have some form of affiliate program from which he benefits. He occasionally does giveaways and things of that nature.
CCN has not spoken to James, but the author had previously watched a number of his videos for their entertainment value. As far as YouTube personalities go, James is certainly not the worst, and his 120,000 subscribers on that platform demonstrate it. Here he is in January, not long before the curtain really started to close on the BitConnect scheme, talking about it.
At that point he was still defending BCC and its operators, saying that “if they wanted to scam” they could have just left with everything already. It’s important to note that this is exactly what BitConnect did do at a later time.
The Wisdom of a BitConnect Pumper
You’re probably new to crypto or not too deeply involved if you have never been scammed. It’s almost a rite of passage in the space, a trend that gladly lessens with time, increased number of market participants, and government attention to the issue — depending on how broad the definition of a scam, that is. Many ICOs meet some of the qualifications of a scam, having never delivered a product or returning funds. Then again, so do plenty of Kickstarter projects.
Further tweets on the same thread reveal that the majority of his respondents feel that he will be in jail soon for his involvement in pumping BitConnect.
No word on that from SEC or otherwise.
In a follow-up tweet, he says the “full video is” the one linked below, but in that video he nowhere mentions his reasoning for the prediction, indicating that he said it specifically to garner attention. He also mentions the recalcitrant Bart Simpson patterns in this video.
Will the Bitcoin price be at $0 in 10 years? If the last ten years are any indicator, no.
The answer is, a swift and painful drop to zero.
In a MarketWatch column I wrote last April, I explained what it would take for bitcoin to become worthless. Bitcoin is getting close to that point. As I argued, once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral. That is, without the mining activities supporting the ledger that maintains the records of who owns what — bitcoin is, after all, a set of encrypted numbers that cannot establish the ownership of anything — bitcoin will become worthless.
A typical asset has a set of cash flows, and its value is driven by investors’ expectations of those cash flows. Bitcoin has no cash flows. In that respect, it is more like gold, in that its value is driven to some extent by its desirability and potential uses, but mostly by its cost of mining. While there are many estimates of bitcoin’s cost of mining, most suggest it is close to $5,000 per coin. Furthermore, even though traditional commodities like gold require significant investments, with limited technical knowledge and capital, anyone can mine bitcoins. Thus, the price of bitcoin must be close to the fully loaded cost of mining it (meaning you are modestly compensated for your time and capital outlay). So, one would expect the price of bitcoin to fluctuate somewhere around that point.
Moreover, there is one additional complication: Unlike gold, which, probably due to a historical accident, is universally accepted as a store of value, bitcoin is a digital commodity with no such universal acceptance as a store of value. While the original buyers and miners of bitcoin were true believers in the paradigm shift they thought it promised, and were willing to make the necessary investments for future gains, the more recent buyers and miners have been run-of-the-mill, greed-driven investors.
Their greed has been further fueled by futures trading, which was introduced when bitcoin prices were booming and the sun appeared to be perpetually rising on the horizon. With bitcoin prices well above the cost of mining, they saw an obvious arbitrage opportunity: Mine bitcoin and sell it for a higher price in the futures market for guaranteed arbitrage profits.
Not surprisingly, traditional investors took notice, with many investing in mining operations, and the bitcoin that were expected to be generated by mining were sold in the futures market. As more arbitrageurs entered the market to exploit this opportunity, bitcoin prices were pushed down close to their cost of mining (with a small return) and led to a long (in bitcoin world) period of stable prices. It also changed the complexion of the miners, and a higher proportion of them are now fair-weather miners looking for a quick buck who would quickly disappear once the opportunity dissolves.
Yet the cost of mining bitcoin is not a fixed-dollar amount. There is a feedback mechanism in mining any commodity that applies to bitcoin: as the price of bitcoin increases, new miners enter the market, increasing the effort required to mine a bitcoin, as its reward will be shared among a larger group of miners. Similarly, when the price of bitcoin falls and miners exit, the cost of mining decreases. However, the number of miners cannot fall below a certain level, because without the miners providing the computing power to maintain the ledger, the bitcoin blockchain will not remain viable.
Mining at a cost higher than the cost at which you can sell in the futures market destroys value. So, any rational investor — even one who strongly believes the price of bitcoin will rebound — has no incentive to mine if the cost of mining is higher than the future price and is better off buying in the futures market. And unlike gold, which can retain its value even if mining activity stops, bitcoin can have no value absent the mining activity that maintains the ledger of who owns it. Absent the mining activity, bitcoin is a just a set of encrypted numbers with no value.
So, it appears bitcoin is now entering a death spiral: If the price continues to drop and the cost of mining does not fall correspondingly (the cost of mining will algorithmically decrease, but not necessarily to same extent as the decline in prices), bitcoin will quickly go to zero.
Bitcoin proponents will argue that bitcoin’s price has dropped by large percentages before. Except this most recent decline is different in three significant ways. First, the magnitude of the recent decline dwarfs the magnitudes of past declines. Second, the losers in the recent decline are new investors who will likely retreat until there is more clarity around bitcoin’s use cases. Third, the futures markets have changed the game, enabling miners to estimate their mining losses and profits at the outset — if you can buy in a futures market at a price below my mining costs, why mine for a sure loss?
History is full of examples of innovative companies that went bankrupt, and the “me-too” companies becoming the best investments.
Many will argue that bitcoin becoming truly worthless is extreme. Sure, looking at some memorable fads and bubbles, tulips still trade for $10 a bunch and Beanie Babies are fairly priced at $5.
And it looks as though the Blockchain economy is here to stay, where many of our transactions will be processed on the blockchain and use cryptocurrency for daily transactions. Indeed, while the world maybe forever be indebted to Satoshi Nakamoto for giving us a viable cryptocurrency, bitcoin may cease to exist. An improved coin might evolve, or governments might start issuing cryptocurrencies. History is full of examples of innovative companies that went bankrupt, and the “me-too” companies becoming the best investments.