Dumb Money and Bitcoin

Financial markets are a red rag to many. In particular, the large number of sketchy characters who advertise snowball systems and “cocksure” returns in asset newsletters and financial blogs put some people off. It is indeed noticeable that when it comes to financial matters, there seems to be an above-average amount of scammers and charlatans around, who do their mischief. How come?

For the simple-minded, moralizing critic, the answer is easy to find. Responsible for this is the boundless greed of the people. This greed is particularly fostered by financial business that brings it to the fore. Wherever money plays a weighty and decisive role, human greed can be not far away, so the argument goes.

Such moralizing arguments sound impressively plausible at first glance; after all, greed is a primordial human vice and thus potentially omnipresent. But precisely because greed is an omnipresent phenomenon of human action, it is hardly suitable as an insightful explanation of why it seems to be so prevalent in the financial world of today.

Bait  for scammers

The crucial question is: What attracts greed, what drives it and why does it seem so enduringly worth its while? Fraudsters and impostors always have an easy job when there are major knowledge asymmetries. What this means: the matter at hand is complex, only a few know about it by virtue of their specializing in it, and still many people have to deal with this matter anyhow. 

This is roughly how the state of our current financial system can be described. Due to institutionalized money creation, our monetary system is experiencing permanent inflation, which in turn exposes our government’s fiat money to constant devaluation pressures. Bank deposits and money balances whether in a safe or piggy bank – everything that is kept in fiat for the long term is pulverized by the ever-increasing debasement pressure of cheap money.

The ordinary saver, who does not really want to have anything to do with financial markets and simply wants to save for a small home in the future, feels compelled by these circumstances today to become an investor. Given the huge opportunity costs by not being investing in financial assets today, he ultimately has no choice other than to get his feet wet in financial markets.

Central banks are at the origin

The unrestrained monetary policy of the central banks is thus today forcing an above-average number of inexperienced, unsuspecting and actually uninterested people to go into financial markets with their savings. One logical consequence is the concentration of an ever-increasing mass of so-called dumb money. The term does not describe an elitist flogging or the cheap mockery of these investors. It is simply a sober recognition of the fact that a mass of people is being driven to invest in financial assets who have little knowledge of the subject. In the style of sheep driven to the slaughterhouse, these people are mercilessly exposed to the machinations of scammers and charlatans. Quite a few succumb to financial speculation and lose a lot of money in the process.

So central banks today not only create a lot of worthless money, but they also create more and more dumb money. In the desperate search for yield, dumb money has of course also fought its way into the Bitcoin world. In view of the fact that Bitcoin, in keeping with its ethos, makes it easy for anyone to invest independently, many inexperienced would-be investors are entering the Bitcoin world.

It is therefore hardly surprising that in Bitcoin circles, a particularly high number of sophisticated pyramid schemes and fraud scandals are currently being played out. Those who avoid Bitcoin and the wider community for this or even scold them for it should not forget the dynamics around Dumb Money described above and look to the actual culprit of it all.

It is to be hoped that in the Bitcoin world, learning effects will still take hold and investors who have been ripped off will discover the true advantages of Bitcoin. These lie precisely in opposing the current institutionalized money creation of central and commercial banks. If the latter is pushed back, existing dumb money will not only have a harder time surviving but will hopefully also have a harder time being created.

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