President’s Corner – Bitcoin

I jumped on Jamie Dimon pretty aggressively earlier this year when he proclaimed in JPMorgan Chase’s recent annual report that a failure of any of the “too big to fail” banks would not harm the U.S. economy. The top ten U.S. banks hold almost $12 trillion in assets. The top five banks (Chase, Bank of America, Wells Fargo, Citibank, and U.S. Bank) make up nearly half of the total assets in all financial institutions. Credit unions, by the way, represent 7% of all financial assets. His argument is tenuous at best.

According to Reuters, Mr. Dimon, Chase’s CEO, has spent much of his summer vacation in Washington, D.C. opining on everything from immigration to criminal justice reform. He even has occasional flashes of humor. One day, he spotted Democratic Senator Richard Durbin, no friend of the banks or credit unions, at a non-Chase ATM. He approached the senator from behind and wisecracked, “We welcome competition.”

The Guardian reported Mr. Dimon said recently bitcoin is a fraud that will ultimately blow up because the digital currency was only fit for use by drug dealers, murderers, and people living in places such as North Korea. I thought this might be an example of Mr. Dimon’s sarcastic sense of humor, but he added that he would fire “in a second” anyone at his bank found to be trading bitcoin “…for two reasons: it’s against our rules, and they’re stupid. And both are dangerous…It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” I’m quite certain he meant that figuratively (I think.)

Bitcoin is a virtual currency that emerged after the Great Recession. It transcends all national borders, but no country has adopted it. Bitcoin is traded like stocks but can be used to purchase goods and services from merchants which accept the currency. Several British apartment complexes accept rent payments in bitcoin, which has approximately $70 billion in total market capitalization as of last month.

The problem is that while the thought of a digital currency not controlled by a government entity sounds idyllic, it also means there are no rules. The lack of rules, especially when associated with money, attracts the worst our society has to offer, like drug dealers, murderers, denizens of the “dark web,” and rogue countries.

The other problem is that bitcoin is subject to the whims of the investment market. When a high profile investment gets a lot of airplay in the media, the amateur know-it-alls come out of the woodwork. After Mr. Dimon’s “tulip bulb” comments, bitcoin’s value dropped 9% in one day and 31% in a recent two-week period. In the movie “Wall Street,” Gordon Gekko (played by Michael Douglas) explains to Bud Fox (played by Charlie Sheen) the price of anything is not determined by its intrinsic value but rather by irrational beliefs and expectations of buyers and sellers. Gekko is showing Fox a painting and says, “I bought it ten years ago for $60,000. I could sell it today for $600,000. The illusion has become real, and the more real it becomes, the more desperate they want it. Capitalism at its finest.”

On this subject, I agree with Mr. Dimon and admire his directness and brutal honesty. The world’s central banks like the U.S. Federal Reserve Bank, aren’t perfect, but it’s the best we have now. If someone comes up with a better mousetrap, then I’m all for it. I’m not sure bitcoin is that mousetrap.

Mr. Dimon and I still don’t hang out together, but some of our views are a little more closely aligned than even I originally thought. But, I’ve still never had the shrimp cocktail at Nobu.

David M. Green
President/CEO
(925) 335-3802