Do Not Go into Debt to Buy Bitcoin, You Idiots

A professor explains what's going on with the so-called cryptocurrency and why it's probably too late to make a fortune off of it.
Lia Kantrowitz
illustrated by Lia Kantrowitz
December 13, 2017, 9:00pm

Thinking back to the first time you heard about Bitcoin is probably painful, and not just because it might conjure up memories of the dreadlocked white dude you went to college with who knew what was good with the dark web. The most gut-wrenching fact about this so-called cryptocurrency is that you'd be rich as hell right now had you actually listened to that loathsome (and unlikely) financial adviser. In the past year alone, the price of BTC multiplied by double digits; last week, prices soared from $11,000 to $17,000. To put that in real terms, remember that guy who made news for buying two pizzas with Bitcoin back in 2010? Had he held onto the Bitcoin and shelled out regular cash, he'd be well over $100 million richer today.


Predictably, this news and its attendant promise of easy money has made Americans go insane. As CNBC reported Monday, citing an Alabama securities regulator, people are actually taking out mortgages to invest in Bitcoin, perhaps hoping to turn $20,000 into their entire retirement fund. Meanwhile, the phrase "buy Bitcoin with credit card" was at least recently trending on Google. These are tempting gambles given that pensionless people (a.k.a. millennials) run the risk of spending all their savings before they die. But are they ones you should take?

It depends who you ask, of course. That guy from college is probably a millionaire, along with the neck-bearded libertarian-type you knew back then. Meanwhile, JP Morgan CEO Jamie Dimon, once described by the New York Times Magazine as America's least-hated banker, called Bitcoin a "fraud" as recently as September. To figure out if I was missing out on the financial opportunity of a lifetime, I called Angela Walch, a law professor at St. Mary's University in Texas who studies cryptocurrency and financial stability. Here's what we talked about.

VICE: OK, first of all, why has the price of Bitcoin exploded so much in the past year, particularly in the past few weeks?
Angela Walch: I'm not sure anybody really knows, but it does seem to have caught everyone's imagination. From my perspective, I think there's a lot of speculation going on here. Particularly, there's this kind of weird thing happening where Bitcoin's original selling point was that it was going to be this kind of easy payment application where you can pay anyone anywhere in the world directly without having to deal with a middle man. And as the price has risen, and as the network has gotten clogged with too many transactions, that payment application doesn't really seem to be working anymore. So people have changed their way of talking about it to describe it as a crypto-asset. And people are buying it because they think it's going to have higher value in the future. So it's just a cycle of people thinking they're gonna buy it now, and someone else is going to be willing to buy it later from them for more. To me that sounds like a speculative bubble, but there is a core contingent of people who believe that as some point Bitcoin will be used for everything—they call it "hyperbitcoinization."

The way you're describing it, it sounds like people are treating Bitcoin like a collectable comic book more than a currency.
Absolutely. It's interesting to me if anyone is actually spending it instead of trading it. Like, "I'm going to cash in on some of my gains by selling it to someone who's going to get in now." Using it to pay for anything doesn't make any sense if you believe it's going to go up in price.

How does what's happening with Bitcoin hew to the classic definition of a speculative bubble?
Some of the hallmarks to me involve the FOMO idea—the fear of missing out and never being able to get in. People see other people making a lot of money and they just want in on it. The housing bubble is a good example of that. People thought another person would always want to buy their house from them at a higher price.


The other thing that makes it look like a bubble to me is the way people are talking about it. If you watch any of the CNBC, Bloomberg type shows, people are just saying, "Wow, how high can it go!" The media just continues to talk it up, and the people that the media interview are, too. It's fascinating to me that we can continue to be seized by manias at any given time. And people keep saying, "This time is different. It's not a bubble."

I'm skeptical that it is different. Another feature of a bubble is the failure of people to understand what they're investing in at all. They forgo that. People are making money, so they just want to jump in. They don't know the history of Bitcoin. They don't understand the scalability issues. They don't understand the mining centralization issues. But they see other people doing it.

It almost sounds like the dot com bubble is the more apt comparison in that all the traditional precautions of investing are being thrown out the window—people don't even take the time to understand what they're investing in, they just think it sounds good.
Yes, the dot com bubble I see as applicable because all you had to do was throw "dot com" on the end of a company name and have no business plan and no profits to get people to throw money at it. A lot of other cryptocurrencies are riding the coattails of Bitcoin, and people are rushing to those, too. As long as it's "crypto," you see hedge fund managers putting their money in. It's a trend.


It's similarly comparable to the housing bubble due to the failure of financial institutions to appreciate risk, as we've seen, with subprime mortgages being packaged up into mortgage-backed securities, so that everyone could have access to assets that were thought to only be able to increase in value. I'm worried that we're creating structures that mimic that, and that the futures we're creating, which will lead to [exchange-traded funds], which will come to rely on the one underlying asset of Bitcoin or other cryptocurrencies, which are moving targets and not an asset that can support that kind of structure built on top of them. To back up, how does something end up on the futures exchange to begin with? Does someone make an arbitrary decision, or does the asset have to hit a threshold of worth?
Because Bitcoin's value has gone up so much in the past year, there has been a demand from traditional financial sector players to be able to access it as an investment. Since the financial crisis, it's been hard to make big returns on stuff. Cryptocurrency has been area with a big return, but to participate in that big return, you had to be willing to navigate the extremely poor user interface for cryptocurrencies, and deal with all these huge risks. It's not easy. So [these traditional financial types] want to be able to access this stuff through intermediaries or parties they're used to dealing with. So I think the [the futures exchange CBOE in Chicago] saw some opportunity to make some money by offering a really in-demand product to their customers. I'm skeptical they understand the risks of what they're doing.

By risks, are you referring to the volatility of markets or susceptibility of cryptocurrencies to hackers?
There are many of them. Volatility, sure. Hacks on them, too. It's a purely software-based asset, so it sounds very basic, but having bugs in the software [is a concern].

People are allegedly starting to take out mortgages to buy Bitcoin. Can you explain to someone who might be thinking about doing this why it's a really bad idea?
I saw that headline, and that really frightened me, because taking out debt to invest is how people end up getting into trouble. That was at the heart, in many ways, of the financial crisis. People thought their investments could only go up, and when they went down, they couldn't pay back the debt. If enough people do that and can't pay back their debt that they borrowed to buy Bitcoin, the lenders can eventually be affected by that, and it can just spiral through the system. Cryptocurrency was developed as an alternative to traditional financial institutions. If and when the government tries to regulate it, will people lose interest? Or will it stabilize in some way?
The Commodities Futures Trading Commission has oversight over Bitcoin futures. They're expecting to monitor it very carefully for market manipulation, which I think there is a very high likelihood of that in the existing Bitcoin exchange system. The IRS has said that Bitcoin is essentially property, and so if you've realized any gains from it, you need to pay taxes on it. As the gains get bigger, the tax authorities will become incentivized. They're not gonna forgo that money. It's a bit confusing to me what the SEC is doing—they're definitely looking at initial coin offerings. But it's almost as if they've grandfathered in Bitcoin and Ethereum, which is interesting, because the distinction between them and the [currencies having] initial coin offerings is that they've been around for longer, and maybe they seem more familiar, but they're similar in many ways to what people are doing with [these newer cryptocurrencies].

I see every regulator having a little piece of this. But I'm interested in who's keeping track of the systemic implications of this. And I'm hoping people are, but I guess that would come through something like the Financial Stability Oversight Council, or the Financial Stability Board, or those types. I'm hoping we'll hear more from them. However, you can warn people about systemic risks, but you can't necessarily make people change their behaviors. Especially if each individual thinks that they're the one who's gonna make the money here, and who cares about everyone else.

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