Early investors in Bitcoin have profited from staggering gains over the past few years. Crypto-currencies were the hot-investment of 2017. I have to confess, that I have earned some money speculating with crypto-currencies and I hold small amounts of Bitcoin (BTC), Bitcoin Cash (BCH), Dash, Etherum Classic (ETC), Etherum (Ether), Litecoin (LTC) and Ripple (XRP) (though as of week 4/2018 I am shortening in the majority).
While I am not sufficiently technical to give a judgement on the different blockchain developments, I understand that there is a future for the technology in a number of fields. However, I make a distinction between the blockchain technology being used in transactions (eg between financial institutions) and a bit of crypto code to be held as an investment. I will try to explain why below:
The enormous fluctuation in value produced by the speculation in the likes of Bitcoin, Ripple and other crypto-currencies (pump and dump of 40% or more in a week) actually make them unattractive as a method of payment. Who would close a futures contract for oil or sell their house in BTC, if its value fluctuates so dramatically.
Anonymity – governments will fight it
The EU and other advanced social-market-economies are slowly advancing their difficult fight against tax evasion. Breaking the secretiveness of tax-havens is a crucial element of this struggle, diminishing the use of cash over traceable electronic payments another one. Crypto-currencies anonymity appeals to certain types of investors, Mafiosi and dictators, as it allows them to store and transfer funds in encrypted anonymity and circumvent embargoes. Think e.g. of Kim-Yong-un paying in crypto when shopping for missile parts or computers.
Seizure of US$206 million from a drug trafficker in Mexico’s capital in 2002. That wouldn’t have happened with Bitcoin.
If not just the Mafia and the wealthy elite, but every cabbie and plumber can hide their cash and payments, too, it will make tax evasion more egalitarian, but come to the detriment of schools, roads, police, the armed forces and the health service. Democratic governments will need to fight encrypted payments and storage Dash et al are facilitating, or find a way to secure their tax base by other means.
The appeal of limited supply
Bitcoin and Etherum Classic (among others) appeal through the limit put on the number of so called coins that can be minted – often compared to the way in which gold is costly to mine and its supply limited. However, unlike precious metals, there is no limit to the number of forks or crypto-currencies to be created. There are plenty of alternatives to Bitcoin. According to a recent article in the Economist, “by January 10th, around 40 had a market capitalisation of more than $1bn.“ “Even Dogecoin, which was launched in 2013 as a bitcoin parody… The crypto-currency was never really used, except for tipping online, and one of its founders has called it quits. But recently its price has soared: on January 7th the dollar value of all Dogecoins in circulation reached $2bn” – suggesting not only that investors are going irrational, but also that there is no gold standard in cryptos – every crypto-currency can easily be replaced, potentially rendering a previous generation of blockchain technology worthless.
Want to store money or create value?
There is a fundamental economic difference between storing money in e.g. land, gold or bits of blockchain code versus investing in productive capital (for example through the stock market). Investing in limited supply assets like land or BTC makes these dearer, while investing in shares provides employers and inventors with capital, driving economic growth, potentially improving standards of living. There is no progress deriving from driving up the market valuation of homes or crypto-currencies, investing in it is socially irresponsible. While shares can deliver dividends and houses rent, cryptos have no intrinsic value. At the current levels of money being absorbed in cryptos it may not be a problem, but in some medium size economies with large markets for digital currencies – like South Korea – the crypto bubble may already have taken on dangerous proportions.
Could a crypto-currency replace the US Dollar?
If the creator of a crypto-currency can overcome the value fluctuation problem and finds a way to make payments traceable for tax purposes and for the control of illicit trade (and the control of embargoes) etc can be found, the crypto-currency could challenge the US-Dollar in its dual role as currency for the payment of commodities (oil, gold, wheat etc) and as the world’s leading reserve currency. Even if a crypto-currency gets to challenge the greenback in those roles, and that is a very big IF, the US government and financial interests will defend the Dollar. The fight will be worse than the campaign against the so called toilet currency (that was the name given to the Euro) – and just think of for how long the Anglo-Saxon press has been forecasting the Euro’s demise….
I will continue to check the market for crypto-currencies and try to extract some profit when I see feasible. But I am sceptical about cryptos as a means of storing value in the medium to longer term.