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Crypto - All or Nothing


Due to my current occupational hazard, the one topic that I am asked most often is for my view on cryptocurrencies. I haven’t written on this before because it's not a topic easily understood or explained. By this point however, I believe most people have an underlying understanding, or at least have soundbite they can repeat so they sound like they know what they're talking about.

Perhaps before getting into what crypto is, it is best to explain what it isn’t. One thing to remember is that crypto currency is virtual, there are no actual physical coins or bills being circulated. When you see an image of Bitcoin (the most popular of the crypto currencies) used in a news story, it is used for visual purposes only - to quote Getrude Stein “there is no there there”. Its value is entirely determined by what investors are willing to pay for it, and the only way to make money is to sell it to someone else at a higher price. If that sounds like any other investment, there are some key differences. For starters, crypto is a currency, not a stock in a corporation with assets. Stocks have book values and price can be tied to at the very least, the value of the company's assets minus any company debts or liabilities. Some stocks also pay dividends, to let owners of them share in the profits of the company. Crypto will pay you nothing to hold it, its entire value is again based on speculated appreciation. This is often used as a knock against crypto as an investment, but it really isn’t an apples to apples comparison. Crypto is a currency and so should be evaluated as such. Many investors have speculated in foreign exchange markets (buying and selling of country currencies) forever. The key differences for crypto and a national currency is its creation and backing.

If we again examine the crypto standard bearer, Bitcoin, it is created by computers mining (solving complicated mathematical equations) for it. Unlike a country’s money supply that is printed by a country’s central bank, Bitcoin has a finite number of coins that can be eventually mined and is capped at 21 million. The value of each coin mined is halved every 4 years and based on current mining success rates of computers there will be no coins left to mine by 2140 approximately. Currently, there are over 19 million virtual coins that have already been mined, leaving all the world’s bitcoin mining computers left to find the remaining. It is this artificially created scarcity that is meant to mimic mining for actual precious metals that also become more difficult to find over time.

So if we compare its value to a country’s currency, Bitcoin supporters will point out that governments are constantly increasing the money supply and thus devaluing their currencies over time. While the finite amount of Bitcoin gives it scarcity and protects its value. The problem with this logic is that the scarcity of something does not guarantee its value. Plant species have become endangered, but they are not necessarily anymore valuable monetarily speaking. What gives a currency its value is confidence. Confidence that it is backed up by something. People have confidence in the U.S. dollar because it is the top economy in the world and is backed by the U.S. government. A national currency is also legal tender, meaning it is backed up by nation’s law and is required to be accepted as a method of payment to settle a debt. Crypto has no backing of a nation and is not legal tender. Again, its entire value is purely speculative.

The fact that crypto is not linked to any country is seen as an advantage for many. To that I would not argue. World history has litany of mismanaged national banks that have driven national economies and their currencies into the ground. But their value or lack thereof was determined by a lack of confidence in their national governments and not purely on what the next person will pay for it.

Bitcoin supporters have all but given up on its use for day to day transactions. Its volatile valuation has made it impractical to use a regular method of payment. All the support for crypto like Bitcoin now surrounds its benefits as storage of value. That leads to what it can be best compared to - Gold. Many investors and even central banks have held gold reserves as their, just in case, reserve currency. But the portability, security and transparency advantages of bitcoin over gold are perhaps the reasons more countries including Trump's U.S. are exploring holding strategic reserves in Bitcoin. What shouldn’t be forgotten is that Gold has something that Bitcoin will never have, inherent value. Gold’s religious significance in many cultures provides its timeless appeal. It is also a commodity that is used in manufacturing components and construction. Crypto doesn’t have any cross purpose and its believers worship at the altar of greed.

Bitcoin is dismissed by some as being a Ponzi scheme, but it really doesn’t fit this classical definition as there is no central authority and the value of the holdings of the early adopters of Bitcoin is still market-driven. It reflects the supply and demand of a global market - just like other investments. I would charge that it more resembles a massive pump and dump scheme, where existing owners spread as much hype as possible to create a feeding frenzy of demand. The cult-like following of its owners certainly gives that impression. I bet you probably know someone who owns Bitcoin and can’t stop talking about why you need to own it too. If Bitcoin supporters wanted people to believe in their currency, just stop trying so hard to convince people and let its growth in value speak for itself.

Speaking of that surge in value, one of the big reasons for Bitcoin’s growth is ...

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