How to explain the Bitcoin bubble to young people

Sunday, December 3, 2017
By Paul Martin

by: Mike Adams
Sunday, December 03, 2017

It’s an inescapable pattern of human culture: Each new generation believes it is smarter and wiser than the generation before. Throughout the history of western civilization, young innovators believed they had discovered near-magical wealth generating systems that could produce riches without effort. The railroad bubble of the mid 1800s… the roaring ’20s stock market bubble… the dot-com bubble… the housing bubble… and now Bitcoin… in each case, masses of youth convince themselves that “this time really is different,” believing the laws of economics no longer apply to them because they’re smarter than any human beings who have ever graced the Earth before them.

Today, we’re told by enthusiastic youth that Bitcoin is different, too. And if we disagree with them, they say we’re too old or stupid to really understand Bitcoin. The only way to truly understand this innovative cryptocurrency, we’re told, is to believe that its valuation will increase logarithmically, forever. Only then are we considered to have fully “understood” Bitcoin. (Yes, in cult-like fashion, only those who agree with never-ending valuation increases are deemed to have sufficiently understood the dark art of crypto. By definition, those who are skeptical of the Bitcoin Ponzi scheme are derided as low-IQ individuals who just don’t “get it.”)

She used to be a pole dancer; now she’s a Bitcoin investment GURU

Case in point: A pole dancer named Dee Heath is now a “Bitcoin guru,” according to SBS News. “I love pole dancing but lately my passion has definitely been Bitcoin,” she told SBS News. She’s reportedly tripled her Bitcoin valuation after investing an initial $5,800. The secret to her Bitcoin investing genius? “As long as you’re calm and you don’t let emotions run you when you’re dealing with any sort of cryptocurrency, particularly Bitcoin, then you’re safe,” she says. (Insert your own outrageous laughter here…)

Indeed, Bitcoin is “too complicated” for investment veterans like Peter Schiff to understand, we’re told, because he doesn’t “understand” Bitcoin. But when an Australian pole dancer tells us the secret is to just stay calm and keep buying Bitcoin, suddenly she “gets it.” This is what the Bitcoin hype has come to: Pole dancers are now “smarter” than 40-year veterans of finance and investment.

Young people have never witnessed a normal market

The very young people declaring “this time is different” aren’t old enough to have ever witnessed a normal market for anything. For their entire adult lives, all they’ve witnessed is a universe of financial bubbles that they think are the “normal way” things happen. Because they haven’t lived on this planet for very long, they’ve only seen stock markets rising, real estate markets rising and Bitcoin valuations exploding. They’ve never seen any serious downturn in any area of finance, investment or valuation, so they don’t even realize that everything they witness is an unsustainable bubble that in no way represents a normal market (which, by definition, experiences booms and busts).

The very idea that Bitcoin could one day experience a massive sell-off (crash) is so alien to Bitcoin promoters that they insist anyone who dares entertain such an idea is too stupid to understand cryptocurrency. The very fact that the prefix “crypto” appears in the term “cryptocurrency,” it seems, is a guarantee of never-ending logarithmic increases in valuation… to the point where we’re told that any person “wise” enough to “invest” in Bitcoin right now will never have to work an honest day in their lives. The magic of Bitcoin, we’re told, will generate all the wealth you’ll ever need.

That’s the real kicker in all this, of course: The younger the Bitcoin promoter, the more sure they’ve found an economic shortcut that will free them from the burden of ever having to work a job or earn a real living… such ideas are for “old people” (who are too stupid to understand crypto, right?). The Bitcoin youthers are sure they’ve figured out something so new, so miraculous and so smart that for all intents and purposes Bitcoin is a magical wealth-creating perpetual motion machine that cannot fail. They’re sure of it!

As long as everyone keeps buying Bitcoin, no one will ever have to work again, they proclaim. No more labor jobs or service jobs. No more college education or work experience needed. In fact, there’s no need to even think about your financial future as long as you buy some Bitcoin today because it’s going to go up forever, and every single person who buys into Bitcoin now will be a gazillionaire (or something) before they turn 35. (Wages are for LOSERS, say the coinerz, because “smart” people have figured out how to become wealthy by doing absolutely nothing.)

There’s just one problem with that entire narrative: All the leverage that makes the Bitcoin bubble dreamworld seem unassailable kicks into reverse when people start selling Bitcoin. Once the Bitcoin bubble pops, in other words, the entire Bitcoin house of cards will collapse faster than any financial blowout we’ve ever witnessed in the history of the world.

Fractional reserve banking, bank runs and the Bitcoin “zero reserves” problem

To truly understand the Bitcoin crash that’s coming, let’s take a closer look at bank runs. When a majority of holders of private bank accounts seek to withdraw all their money at once, it causes a “bank run” that can wipe out banking institutions in mere hours or days. That’s because when you deposit money in a bank, the bank doesn’t actually keep your money in its vaults. Instead, it keeps only a fraction of your money — about 10% these days — and loans out the other 90% to earn interest on that loans.

Thus, if you deposit $1000 into a bank, that bank turns around and loans out $900 to someone else. If that person deposits their $900 loan into the same bank, the bank loans out 90% of that deposit ($810) to a third person. Yet, mathematically, both the first person and second person believe they now have money in their bank accounts totaling $1900. (That’s the original $1000 from the first person, plus the $900 from the second person.) This is how banks create money out of thin air. The problem with this arrangement is that there’s really only $190 being held by the bank (that’s 10% of each of their deposits). So if both people demand all their money at the same time, the bank has to come up with $1900 when it only has $190. This is what causes bank runs (i.e. collapses) in fractional reserve systems.

In order to prevent bank runs from wiping out banks — something that happened quite frequently in the late 1800s and early 1900s, by the way — the federal government established the FDIC as an insurer for bank deposits. Now, if you’re part of a run on a local bank and that bank fails, the FDIC reimburses you up to $250,000 per person (and per account, for different types of accounts). In essence, the FDIC is an insurance company that covers catastrophic bank losses. The fact that this FDIC insurance system exists gives banking customers peace of mind, greatly reducing the chance of a bank run. (People are less likely to demand to withdraw their money if they’re sure it’s safe in the first place.)

Bitcoin has ZERO reserves and no insurance

The Rest…HERE

One Response to “How to explain the Bitcoin bubble to young people”

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