Bitcoin: An ethical investment or not?

Bitcoin: An ethical investment or not?

As I was zapping on the TV a financial documentary popped in my screen about the biggest contemporary financial scandal; the Madoff Hustle. The documentary, narrated by Robert Vaughn, tracks the life of Willard Foxton whose father passed away after killing himself because of investing all his funds in Madoff’s scandal. In this blog we are going to scrutiny over the case of Bernard Madoff an investor advisor and former stock broker who managed to commit a fraud worth of 64.8 billion dollars and afterward we are going to discuss about a controversy that began last year surrounding the ethics of bitcoin.

Madoff was the founder of the company “Bernard L. Madoff Investment Securities LLC”, whose main operation was to manage assets and securities in order to create wealth for its investors. His company had outstanding yields that outperformed all its opponents. Although all the firms in the Wall Street avoided to invest in Madoff’s firm, the U.S. Securities and Exchange Commission (SEC) did not manage to find any hard evidence of fraud. Even when financial analyst Harry Markopoulos informed it about the fact that there was no legitimate way in order for Madoff’s numbers to add up. In addition what must be noted is that the Madoff family had high access to the regulators and lawmakers mainly due to Madoff’s background.

So what was actually Madoff’s company? Well it was nothing other than a simple Ponzi scheme. As Ponzi scheme is defined a “fraudulent investment operation” where the operator pays back the older investors with the cash flows generated by the new investors. These companies are usually really fragile as they depend on attracting new clients. Madoff breached all the attributes (Honesty, Impartiality, Reliability and Openness) of Integrity, the main principle stated by the Financial Conduct Authority (FCA) .In more detail, he casually underlined the benefits of his strategy but always stated it was too difficult to be understood. Ponzi schemes usually collapse either when the main promoter takes all the invested money and “disappears” or when the new investors’ revenue is slowed down due to different factors (i.e. macroeconomic effects, law suits, natural disasters). But that was not the case for Madoff’s scheme. In fact, the proximate cause was his son who reported his father to the federal authorities, leading to Madoff’s arrest on December 11 2008.

The Madoff’s scandal exposed a lot of problems and irregularities in the heart of the infrastructure of the financial systems. In fact the Ponzi scheme is just one example of unethical behavior that amounts to market abuse. Insider dealing, misuse of information, improper disclosure, money laundering and “boiler rooms” are just a few other examples. The most recent debate over unethical conduct is about the cryptocurrency, bitcoin. Bitcoin is a form of currency created by a software designer Mr. Nakatomo and can be used to buy any products electronically or can be traded with other currencies. It was created in 2009 and until 2013 it has reached the price of 20 $ per bitcoin. Nowadays it is worth over 17 thousand dollars. Its competitive advantage (as well as the main point of its unethical behavior) lays in the fact that it is decentralized. Decentralized means that no bank neither controls nor regulates it. Thus, Bitcoin is subjected to great volatility as no valuation is guaranteed leaving its investors exposed to a potential fall of its value. Moreover, all its transactions are anonymous and untraceable. Consequently, bitcoin is frequently used for criminal activity. For instance, Ross Ulbricht, the man behind “Silk Road” the online market place which trades drugs and illicit products, accepts only bitcoins as a mean of payment for his website. Lastly, it can be noted that bitcoin cause serious problems. In more detail, in countries were capital controls are enforced this digital currency allows money to easily move from one country to another.

Nevertheless, Bitcoin is argued to help reduce inflation risk .Since bitcoin can be generated for a certain limit (21 million), the value will not be inflated by the increase of the amount of bitcoins. This characteristic differentiates this currency from other conventional ones, as in times of heavy financial costs countries tend to generate more money, thus diminishing the purchase power of consumers. Moreover, thanks to this cryptocurrency many countries have gained access to vital goods. The most significant example is Venezuela, where people suffered from hyperinflation. Nevertheless, individuals started generating Bitcoins to increase their revenue. In addition to that, bitcoins allowed them to acquire more dollars that otherwise would not be able to due to the monetary policies enforced by the government. Lastly, what must be highlighted is that as very low transaction fees (2%-3%) are imposed, larger amounts of savings are made which are also available for reinvestment in companies. Consequently, larger taxable profits can be achieved.

To conclude, I strongly believe that bitcoin is as unethical as the individual who invests on it. Moreover, this currency must be legislated in order to both reduce its volatility and deliver significant improvements in the daily money transactions. Until then, as most analysts estimate, I consider bitcoin as a bubble ready to burst at any moment.

 Until next time stay safe.