Crypto Carnage Coming?

“It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford

“What I recommend is relentless propaganda all day, every day. Pump. Pump. Pump. You were born to shill, do it... there is no bad news for Bitcoin. There has never ever been anything bad for Bitcoin. It’s all good for Bitcoin…. It means that all public-facing propaganda, anything you’re broadcasting, should be relentlessly positive because there’s no bad news for Bitcoin. There’s only good news for Bitcoin.” – Michael (Bitstein) Goldstein

I received my second dose of the Moderna vaccine on Thursday. Like with my first dose, it knocked me on my butt. I spent Friday on my couch, alternating between sweating, feeling chills, napping, and watching terrible TV. And by terrible TV, I mean CNBC.

I woke up from my fourth nap of the day late in the afternoon and rolled over to a most puzzling sight. I rubbed my eyes to make sure I was actually awake. Sure enough, there was a young man being interviewed on CNBC in his pajamas and a robe. Baller move, I thought to myself. He looked like he hadn’t showered in a good many days. Don’t believe me? I took a picture. See for yourself:

Turns out this fine young man is the CEO of a crypto exchange, FTX. I bet he is a billionaire, I mumbled. I’m totally doing this wrong. More on him later.

I should say upfront that I’m what Bitcoin maximalists call a No Coiner. I’ve never owned a cryptocurrency. I don’t have a crypto wallet. I own fiat currency that I keep in a leather wallet. That wallet has my initials engraved on it, which is kind of dorky, I guess, but I prefer to think of those initials as my own fiat wallet key.

I invest in companies that create value, produce cash flows, and pay dividends. I buy real, tangible stuff like land, gold, and collectibles. I have nothing against cryptocurrencies per se – live and let live – they are simply not for me. I view fiat money more as a medium of exchange than a store of value, and I’ve mostly been able to accumulate sufficient US dollars and freely exchange them for the things I need to live a good and happy life, so I’m not really mad at fiat currencies nor am I looking to join a rebellion against them.

But Bitcoin maximalists are. The specific stated purpose of Bitcoin (and other cryptocurrencies) is to usurp fiat currencies globally. To replace the US dollar, the Euro, the British Pound, etc. as the primary medium of exchange around the world. Google “Bitcoin versus fiat” and spend 20 minutes clicking around. Fiat currencies are evil, they say, because they preserve an existing power structure that is unsustainable and needs to be destroyed. Bitcoin brings money to the people. Bitcoin is a rebellion. A revolution. There is no bad news for Bitcoin.

Not all people who participate in Bitcoin or other cryptocurrencies believe this to be true, of course. Most are in it to speculate and hopefully leave their particular crypto adventures with more fiat currency than they started with. But Bitcoin maximalists certainly believe this to be true and are happy to leverage people’s greed to achieve their objectives.

Despite my relative comfort operating within the current fiat system, the intent of this piece is not to cast judgement on the cryptocurrency vs fiat debate. In an odd way, I admire the Bitcoin maximalists. I have my own strong opinions about the current power structure, central banks, corrupt governments, and so on. What follows instead is an agnostic analysis of a pattern of events that I think bodes extremely ill for the near-term value of the crypto ecosystem. In short, I think we are headed for a violent crash. Ultimately, pattern recognition and paranoia are what Doomberg is all about, so indulge me while I attempt to scare you.

My thesis begins with a simple observation. The power to control a society’s currency is the ultimate power over that society. The people who currently have control over the world’s fiat currencies have, by definition, a lot of power. Usually, people with a lot of power don’t like to give it up. When confronted with a risk to their power structure, those in power tend to fight back. They are often late to recognize the threat, especially in the Western democracies, but once they see it for what it is, they crush it.

I’m the first to admit that I’m shocked at how long the cryptocurrency game has been allowed to be played. The top cryptocurrencies globally have a market cap of over $2 trillion! Bitcoin alone recently traded over $1 trillion, although it has pulled back under that number in the past week. To put this into context, $2 trillion is equivalent to roughly the entire annual budgetary outlay of the US government in the early 2000s. 

In my humble opinion, that’s all about to change. Something is afoot. Here’s a pattern of commentary from Team Fiat that should make you sit up and take notice:

“(Bitcoin) is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity. There has to be regulation. This has to be applied and agreed upon ... at a global level because if there is an escape that escape will be used.” Christine Lagarde, European Central Bank President, January 13, 2021.

"I see the promise of these new technologies, but I also see the reality: cryptocurrencies have been used to launder the profits of online drug traffickers; they've been a tool to finance terrorism." – Janet Yellen, US Treasury Secretary, February 11, 2021.

“To the extent that something is a security, the SEC has a lot of authority. And a lot of crypto tokens — I won’t call them cryptocurrencies for this moment — are indeed securities.” – Gary Gensler, US Securities and Exchange Commission Chair, May 6, 2021.

Here are a series of headlines I’ve pulled ­­from the news. The pace and severity of these headlines are increasing:

India’s proposed cryptocurrency ban: What it means for Bitcoin investors – Independent, April 23, 2021

A Second Bitcoin Exchange Collapses in Turkey Amid Crackdown on Cryptocurrencies – CNBC, April 26, 2021

Turkey Wages War on Cryptocurrencies, and Investors Lose a Fortune – Fortune, April 30, 2021

Turkey Begins Manhunt for CEO of Collapsed Crypto Exchange – Yahoo! Finance, April 30, 2021

Binance Faces Probe by U.S. Money-Laundering and Tax Sleuths – Bloomberg, May 13, 2021

Tether Says Its Reserves are Backed by Cash to the Tune of… 2.9% - Financial Times, May 14, 2021

Colonial Pipeline Pays 75 Bitcoin Ransom to Hackers – NASDAQ.com, May 14, 2021

The commentary and headlines shown above are bad enough, but the real inspiration for writing this piece came from three curious – and I believe connected – events that happened this week. The first happened on Tuesday, May 11. The Securities and Exchange Commission published an unusual and blunt public statement on Bitcoin. Here is the key passage:

Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment. As such, investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market. As with any fund investment, investors should focus on the level of risk they are taking on, and the level of risk they are comfortable taking on, prior to making an investment.

The second event happened the next day. On Wednesday, May 12, Elon Musk stunned the crypto community by reversing his previously bullish position on Bitcoin. Tesla would no longer accept it for purchases, and he went on to criticize its carbon footprint.

The randomness of this total backpedaling on the part of Musk is staggering. Do I believe for one second that Musk was previously unaware that Bitcoin mining is incredibly energy intense? Absolutely not. Do I think his stated reason for this policy reversal is genuine? No.

The third event that caught my eye happened on Friday, May 14. The following headlines crossed my Bloomberg terminal:

Square is run by Jack Dorsey, who is also CEO of Twitter. Dorsey, like Musk, has been a huge proponent of Bitcoin. Square’s embrace of Bitcoin was considered seminal in its normalization. This sudden reversal, on the heels of Elon’s 180-degree flip, convinces me something big is brewing.

Do I think the SEC staff statement and the reversals by Tesla and Square are a coincidence? No, I do not. Do I consider it a possibility that, with last week’s Colonial Pipeline hold-up, the U.S. populace just got a taste of Bitcoin-demanding-hacker-induced interruption to a precious supply chain (ahem, I drive therefore I am) to deepen the criminal-crypto association? Infinitesimally small, but a possibility, nonetheless.

I believe a significant regulatory crackdown on the entire cryptocurrency space is imminent. I think Musk and Dorsey were tipped off. I think the empire is about to strike back. What happens to the price of Bitcoin if US authorities make a move? I think it collapses. Big time.

Back to our friend in his pajamas on CNBC. His name? Sam Bankman-Fried. Bankman-Fried. Bank. Man. Fried. Where were the signs?

If you enjoy Doomberg, email a link to your most paranoid friend!

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