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John Engle
John Engle
Articles (332) 

Bitcoin: Take George Soros’ Advice and Steer Clear

The man who broke the Bank of England does not believe in the cryptocurrency

May 29, 2019

Cryptocurrency, especially bitcoin, has exploded onto the scene in recent years. Despite the considerable drop in price since the late 2017 highs, interest has not abated.

While some mom-and-pop crypto speculators undoubtedly folded up shop after the rout from over $20,000 to sub-$4,000, true believers have kept the cryptocurrency in the public eye.

Now market actors are once again scratching their heads as bitcoin continues its latest rally. With the cryptocurrency now trading close to $9,000, bullish voices have once again begun to reverberate.

Investors should approach the bitcoin rally with extreme caution. Indeed, they would perhaps be best served to take the advice of one of the all-time greats of currency trading and speculation, George Soros (Trades, Portfolio). According to “the man who broke the Bank of England,” bitcoin is pure fool’s gold.

Calling it out

Soros knows a thing or two about currencies, so it pays to listen when he speaks on the subject. When it comes to bitcoin, he has been quite unambiguous. In January 2018, he declared it was not a currency at all:

“Bitcoin is not a currency because a currency is supposed to be a stable store of value and the currency that can fluctuate 25% in a day can’t be used for instance to pay wages because wages drop by 25% in a day.”

This is a vitally important point that many crypto bulls either fail to understand or choose to ignore. Bitcoin and other cryptocurrencies may be ostensibly free of the machinations of government central banks, but that does not automatically make them a “sound money” alternative to conventional currencies. Rather, bitcoin functions as a purely speculative asset class, based on no fundamentals and not subject to any underpinning value.

Calling the bubble

Soros has highlighted how the misunderstandings surrounding bitcoin’s utility as a currency - now or in the future - have served to warp its price behavior. He made this point last year as well:

“Cryptocurrency is a misnomer and is a typical bubble, which is always based on some kind of misunderstanding.”

This is a crucial point for bitcoin speculators to understand. Its valuation is tied fundamentally to speculation, not to its utility as a medium of exchange or as a store of value for ordinary citizens and market participants.

Calling it doubly right

Soros’ comments from early last year do sound somewhat prophetic. The value of bitcoin burst, as all bubbles inevitably do, falling precipitously before beginning to trade for months in a much-diminished range.The guru did one better, though, predicting that any violent fall would be arrested thanks to the bottom created by the actions of certain shady market actors:

“Normally when you have parabolic eventuality it has a very sharp break but in this case as long as you have got dictatorships on the rise you will have a different ending because the rulers in those countries are going to turn to Bitcoin to build their nest egg abroad. So I expect instead of an abrupt break to have a rather flat top over.”

While it may be too early to tell, Soros appears to have called the behavior of bitcoin post-bubble pop remarkably correctly. The initial collapse cratered the cryptocurrency, but it has enjoyed a considerable cushion of support around $4,000 from which its latest bull run has been anchored. Bitcoin has considerable utility for a subset of actors working in gray areas of business and finance, especially in the increasingly wealthy and sophisticated economies of countries with lax attitudes toward the rule or law or authoritarian systems of political and economic governance.

Calling the next move

Whenever bitcoin picks itself up off the floor, market commentators start buzzing. This time is no different. However, as Ross Chalmers of Coin Rivet recently pointed out, the retail interest that fueled the last big bubble seems to be far more muted this time around:

“Whenever Bitcoin rises in price, commentators are quick to guess what the underlying reasons are. The last time Bitcoin saw its current price, there was a massive wave of interest from the retail market. Mainstream news outlets were writing articles and everyone was talking about it...The interest from retail investors appears to be very small this time around. For the most part, Bitcoin’s recent upward move has gone under the radar outside of the crypto community.”

While the exact source of the cryptocurrency's latest bullish energy is not entirely clear, we can see some likely contributing causes. Fears over the U.S.-China trade war, as well as uncertainty surrounding Brexit, have undoubtedly helped keep interest in alternative asset classes alive. But it is interesting that retail is not the key driver as it was before. That dynamic has given some long-suffering crypto bulls cause for hope that this time might be different.

Verdict

Alas, Soros has not opined on bitcoin’s latest moves, so we cannot directly look to him for guidance. For all the changing dynamics observable in this latest crypto upswing, however, the fundamental pathologies Soros identified in 2018 have not changed appreciably.

Fundamentally, bitcoin remains a niche speculative vehicle. There is still no clear path by which it could enter a mainstream financial usage, other than in the current niches it already serves. While we may not see so violent a collapse as last time, we cannot see how this latest bull run ends with anything other than another round of disappointment for long-suffering speculators.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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