My Thoughts on Crypto Currencies

I have been asked by many different sorts of people on what I think about Crypto Currencies. What is it? Is it a good investment? How does it work? Are you buying it? Which one should I buy? The list of questions is lengthening by the day. I’m going to preface all I write here with a couple statements:

1.) I don’t currently own any cryptocurrency

2.) I don’t pretend to be any form of expert on crypto—these are just observations and opinions I have based on my knowledge sphere. And they are very subject to change when I’m presented with compelling and thoughtful evidence.

3.) I believe there to be some true value to what crypto currencies are and what they can do, but I currently feel the present financial value of crypto currencies is vastly accelerating past its true value—which is something I am very concerned about, and hence statement 1.

Read on if you dare. I again want to reiterate statement 2. 

The first question I’m going to pose seems very simple on it’s surface, but is actually a bit more complex and nuanced than I think enough people give thought or credit to. The question is simply put, “what is Crypto?” I ask this question, because people are investing significant sums of money into something they may not even be able to define. I personally don’t see Crypto as a currency. Currencies are tied to institutions and states. They’re tied to gross domestic product. They’re tied to trade. The deficit. To policy. To government. Crypto is very purposefully tied to none of these things—which is what gives it it’s true value, as I’ll discuss later. 

I’m neither a scholar, nor do I have a background in economics—with that said here’s a laymen’s attempt at defining currency: currency is generally considered money. Well duh, right? Tautology aside—this is an important distinction. Economy is an exchange of goods or services. Money or currency, is a notation of value which creates a common platform to trade goods or services. It’s a benchmark. I know a candy bar is worth $1—but do I know how many picture frames 10 candy bars or worth? No. Now I know a picture frame costs $30, and that 10 candy bars costs $10—so based on my benchmark, I could say one picture frame is worth 30 candy bars—but without this benchmark, solving this problem would actually be dependent on what the two parties trading see as valuable and also the supply and demand of each commodity they have. Why do I bring this up? One of the challenging concepts of a crypto currency is the fact that it isn’t a physical thing. it’s digital—meaning it doesn’t fit in your bill fold. It simply floats around the ether of the cloud in mystical and confounding ways. Money is much the same. Money is a fiction. It’s a very powerful and world-shaping fiction—but a fiction nonetheless. Money is used to exchange. It holds no true intrinsic value. It’s a fiction that enough people subscribe to for it to maintain its value. If money vanished tomorrow—our cooperative structures would fall into disarray and people would be buying 10 picture frames for 2 candy bars. Money holds no meaning outside of ourselves. If we disappeared, so too would money—again, it is a fiction of absolutely no intrinsic value. It is something that WE created that is incredibly powerful—but a fiction. Crypto Currency is exactly this.

I don’t think Crypto Currency is a currency because it isn’t regulated, managed, governed, priced, or controlled as one. I believe the phrase “crypto currency” was very purposefully coined in order for people to mentally be more comfortable attributing a currency value to it. It’s a simple semantic. Marketing. It’s a way of shaping a perception right form the get go. Crypto Currencies to me act more like a form of commodity. Commodity trading is based upon the use of the commodity and the demand / scarcity of the commodity. If a commodity is scarce, but important for use, it will be very expensive. Uranium-235 is a very valuable commodity because of what it can be used for and the scarcity of the material. Oil is a relatively abundant commodity and a very used commodity. It is necessary to the everyday workings of life. Oil is very valuable, relatively abundant, and needed—as such, it fetches a fair market price. If that price fluctuates too high, then people begin investing more in non-petrol based technologies—which is not in the interest of the oil cabals, which is why they try to keep prices down (and other competitors out!). As you can see, even commodities are regulated by those who own them—much the way that crypto currencies are. Crypto currencies (or at least the reputable ones) are self-regulated by Blockchain, which is a framework and digital architecture that creates a platform of trust and economy. Bitcoin, for example, has a terminal number of coins. This helps create a scarcity in the commodity—which helps drive value to it. if there is a limit of something and a desire for that something, then it becomes more valuable. 

Using the above commodity example, we have to ask ourselves what value does crypto currency offer its owner? It’s not a material good, so it can’t be used for textile or construction. It’s not an energy source, as the above two are, which can be used to exert some form of work. Crypto Currencies are a digital token that can be safely exchanged between parties. That’s it. The fiction of value attributed to the token is based upon a community of people attributing a value to the commodity. With that said—so long as there is a financial market for crypto, it offers a huge benefit—and that benefit lies mainly in the cutting out of third parties or intermediaries. For example, if I wanted to send money to somebody in Mexico, there would be a host of transactions necessary (and fees). I would need to pay taxes on the money being sent, I would need to pay for conversion of currency, I would need to pay a trusted third party to actually carry out the transaction, etc. For every dollar I wanted to send down there, it would probably cost around 25 or 30 cents. Instead, if I wanted to send somebody a bitcoin, worth $10,000—I could do so without paying any taxes, transfer fees, currency exchange, etc. I could send them the bitcoin, and then if the person wanted to, he or she could sell it for the present value in their currency on their marketplaces. Laws have not fully extended into he digital realms yet. If you bring something of value into a country and sell it (say iPhones), then you get taxed by that country on the profits made from those transactions, you may also get hit by trade tariffs and other fees associated to the commodity being traded. But because there is no tangible thing being transferred in a digital token, how then would governments tax it? How would trade agreements include or exclude it into its tariff or relief? 

Crypto Currencies also have an immense value in countries that do not have stable currencies. Imagine living in Zimbabwe being born in 1950. You send 40 years of your life saving—you’re responsible with your money and live within your own means. Over 40 years you accumulate $1,000,000. Then hyperinflation in the 90s hits. Your cash is essentially worthless. That’s okay, you’re a hard worker—you rebound, despite having 2000% year over year inflation, you work your tail off and save back up. It’s now 2007—and you’re ready to retire feeling confident you’ve saved enough. Nope. By 14 November 2008—inflation reaches 89,700,000,000,000,000,000,000% year over year. I’d be lying to you if I actually knew what to call that number—but I can tell you exactly what that inflation did to the money you owned. It regulated it as worthless. One million dollars with this type of inflation would be worth far, far less than one penny (1.11X10^-14). If only I had some other means to carry the value of my currency with—some other secure source of commodity to hold the value of my money despite the inflation of my local currency. With Crypto Currencies—people in countries with unstable currencies now do have a means of regulating their finances through an international market, and this international market doesn’t have a gateway of big expensive banks or law firms to set up off-shore companies to regulate your currency. 

Why haven’t I invested in Crypto Currencies? No doubt about it, Crypto has been an incredible investment opportunity for many people. Perhaps I’ve read one too many Warren Buffet books or shareholder letters, or perhaps I have a few too many highlights in my copy of the Intelligent Investor—but I have a tough time getting myself to treat this as anything other than a bubble, and I’m not comfortable with trying to speculate on timing bubbles. I’m not a day trader, and ethically I can’t treat my investments as gambling, which is what speculation is. I absolutely see value in crypto currencies—as the above examples elude to. In terms of a money transfer, it’s valued at about 20%-30% depending on how and where I’m sending money. In terms of a hedge against inflation in the example of Zimbabwe—it’s incredibly valuable, with that said, there is a lot of competition for this (gold, silver, stock markets, other currencies, cows, goats, etc), so it’s not a unique solution to that problem—just an elegant and safe one (cows and goats can die, gold can get lost or stolen, etc). Most fundamentally, I haven’t invested in Crypto Currencies because I can’t estimate or understand what controls the value of the commodity. Stock prices are based on profitability, market opportunity, market share, etc. Commodities are based on supply and demand. Currencies are based on global deficits and regulation. Digital currency is based on what? It’s based on the value or fiction that people believe. And as an owner—it’s not important whether or not I think it’s valuable, it’s dependent on what people who don’t own it perceive. I could think that my signature on a piece of paper should be worth millions of dollars—guess what? It doesn’t matter that I think that, there is nobody else that does (if by some incredibly off chance somebody does think that and would offer me a million dollars for my signature, I will graciously oblige). Crypto Currencies are the same way. The value of Crypto Currency is solely dependent on what people who don’t own it think it’s worth. Why? Because when it comes time to sell it for real currency—that transaction requires a buyer… not just a seller. 

Do I think the fiction of Crypto Currency is strong enough to sustain its current growth? No. Do I think the fiction of crypto currency is strong enough to displace modern currencies? No, not in the short term. Do I hope that Crypto Currency will survive the inevitable bubble it is about to face due to its financial value far exceeding it’s intrinsic one? I sure hope so, because I see it as being an incredibly important technology and transaction means for the modern era. Do I view there as being very powerful and potent forces rallying against crypto currencies? Again, think of all the money being made by intermediaries. Yes, there are. Much the way that OPEC drowns out investment into other renewable technologies, I think established financial institutions will do all within their power to battle this disruption and threat to their business. That will be an ultimately losing battle—but time and bubbles are tough things to judge.

Hopefully, we can begin to embrace crypto currencies more for the value they bring rather than treating them as a gamble to make a quick buck. I may very regret it later on in life, and I may re-read this article and curse the gods for my lack of imagination or stupidity—but for now, I’m not feeling compelled to invest my dollars into this market. I’ll stick with boring indexes, my mortgage, and 401ks for the time being.