Yet another cryptobubble has been inflating. Are you tempted? Don’t. It’s a Rorschach test for gullibility. Most people who buy bitcoin and it’s crypto brethren don’t really know what it is or how it works; all they really know it’s been going up. The first part might ordinarily be a disincentive, but for the techno-bedazzled, the more obscure and opaque, the more irresistible. Like I don’t understand how my iPhone works and smartphones are really big and important, so it must be with cryptocurrencies. It’s an emotional thing.
So if you’re into it, logic may not appeal to you. The lure of riches beyond the dreams of avarice is too compelling. But I’ll give it a try anyway.
What are the arguments in favor of cryptocurrencies? The best might be that they’re a form of money that can’t be inflated. Only so many bitcoin can be created. But that’s only true of a particular crypto. Once there was only bitcoin, now there must be thousands. There are no barriers to the creation of new cryptocurrencies … in reality the potential supply is infinite. Meanwhile there are other assets that are in fixed supply that have no rivals. Gold for instance can’t be created or destroyed outside of nuclear reactions and the amount in the earth is fixed. There are less than a hundred theoretically possible competitors since there aren’t that many stable atomic nuclei. Gold may have few industrial uses but nevertheless more than bitcoin. And any effort to express your affection for your sweetheart with a beautiful bitcoin ring or necklace is doomed to fail.
Long term investor? Impressed by past performance? An investment in gold at the beginning of this century has outperformed the stock market. If that’s not good enough for you, you’re not looking for an investment, you’re looking for a lottery ticket.
Land is another commodity in fixed supply. As they say, they ain’t making any more of it. It has a certain undeniable utility to it as well. You won’t be able to grow food on bitcoin, nor will you golf on it or sit on it next to the ocean enjoying a beautiful sunset.
And we can be reasonably confident no one is going to come up with another version of “land” to compete with it. So maybe land isn’t particularly convenient as a medium of exchange. But something like bitcoin that so wildly fluctuates in value has limited use for that purpose as well. It might be fine to hold it in waiting for your next cyber purchase as long as it’s going up, but not so fun when it’s plunging between the time you receive it and when you spend it. Not to mention that in this age of environmental awareness, that the production of bitcoin alone consumes an amount of power comparable to some entire countries. Not exactly what you want if you’re a sustainability type investor. That’s an awful lot of carbon just for keeping tally.
Bitcoin has zero intrinsic value. So why is it so heavily promoted? People who have it want you to want it. It will make theirs worth more when they hand you the bag.
But dollars also have zero intrinsic value, and don’t we use them for money? Well, yes and no. Dollars have value because so many people owe so many of them. This gives them a strong incentive to acquire them. In effect, dollars are backed by the labor and assets of billions of people. It’s only due to their constant production in the banking system that they tend to depreciate in value. Yet despite this, dollars remain far and away the most useful medium of exchange on the planet.
My humble suggestion? If you want a form of money that’s unparalleled as a medium of exchange, you want dollars. If you want a form of money that’s a reliable store of value, you want gold. Maybe when bitcoin has a five thousand year track record, it too will be worthy of equal consideration.
But don’t hold your breath. Those of us who still remember things like COBOL and MS-DOS are keenly aware of the limited shelf life of everything digital so far created. Wonderful as infotech has been, its track record is one of rapid obselescence. How long will it be before your favorite crypto is the next victim of “creative destruction”?