Ray Dalio was on CNBC Tuesday morning plugginghis new book, and eventually Joe Kernen asked the question we all knew had to be asked. No, not whether Ray-bot has become self-aware yet. And no, not whether his Principles will save the planet or just America. Squawk Box had a much more pressing concern: Is bitcoin a fraud? Dalio's answer didn't disappoint:
There are two things that are required for a currency. The first is that you can make transactions it it – it’s a medium of exchange. And the second thing is that it’s a storehold of wealth. Those should be the two purposes of a currency.
By those two measures, Dalio said, bitcoin is not a currency. Unless you're paying for ketamine or hitmen, most vendors don't take bitcoin, and it's a pain to transact regardless. And bitcoin's value is too volatile to serve as a store (-hold?) of wealth.
So what is bitcoin? Dalio:
We have these criteria for determining what a bubble is...and we just define a bubble based on those criteria. And bitcoin is a bubble, OK? Bitcoin is a bubble... It’s very much speculative people thinking can I sell it at a higher price, and so it’s a bubble.
If you define a bubble as simply “something people buy with the expectation of the price going up,” well, gosh, a whole lot of investments could be considered bubbles. But the basic point is correct.
The only place where Dalio really goes astray in his crypto analysis is here:
It’s shame, it could be a currency – it could work, conceptually.
That's the thing about bitcoin: It can't be a currency! Even conceptually! For existing currencies, the more that people transact it, the lower the transaction costs are. For cash, transaction costs are nearly zero. For bitcoin, the opposite is true. Each transaction requires miners across the vast decentralized network to verify each other's work by means of cryptographic analysis, which becomes increasingly difficult with every bitcoin mined. The result: as the user base expands, transaction costs increase, settlement times grow, and the bitcoin network eventually devours as much energy as the nation of Denmark.
This isn't just some bug that can be programmed away. To be simultaneously decentralized, secure and scarce – as Satashi Nakamoto intended – bitcoin must be “intrinsically illiquid,” as Frances Coppola writes. Which is the opposite of money.
This is all to say that yes, bitcoin is a bubble. But even if Dalio's being charitable, it's a stretch to say that bitcoin could be a currency.