Crypto – Currency, Investment or Hot Garbage

Bitcoin – Arguably, the single most talked about instrument in financial markets (and the news) in recent years. There have been conferences, seminars and even ‘crypto experts’ claiming to be able to help you become crypto millionaires quickly. In essence, it is the gold rush of this century. So much so that it is now being compared to gold as an investment. My opinion may be unpopular but it is that crypto currencies are intrinsically worthless. If you need an argument as to why I think all this euphoria is baseless, keep reading. A crypto currency created as a joke due to all the hype around Bitcoin in 2018 now has a market capitalization of $8.8 Billion. It was a guy, a dog meme and an algorithm. A joke is now almost as valuable as Harley Davidson and Jet Blue Airways combined. Let that sink in for a second. The idiocy is unfathomable.

I’ve mentioned in past articles that I am definitely a believer in the value of blockchain as a technology but I do not believe that a currency token is where the utilization brings most value (unless countries start their own cryptocurrencies whose supply they control). However, countries creating their own crypto would defeat the purpose of a common decentralized currency, which is the allure of crypto in the first place.

My primary problem with crypto is summed up by a very simple question –

Is Bitcoin a currency to be used to make easy payments for stuff or is it an investment vehicle?

Let me know in the comments one way or another because the answers invariably lead to more questions. If it is a payment modality, how is it different from Venmo or Paypal? They charge you no fees for facilitating your transaction and are just as reliable. As a matter of fact, if you lose your phone, you can still recover your money by logging in from a different device unlike crypto. There are stories of millions of dollars of bitcoin landing in garbage because someone threw out the wrong hard drive. Having a significant portion of your net worth in a small device (which you are likely to carry with you) sounds like the dumbest idea to me. Imagine telling someone you lost $100,000 worth of bitcoin because you got mugged and the thug took your phone.

I refuse to accept the argument that crypto is an investment for the same reason I refuse to accept gold as an investment. The price of both of these items are purely driven by the demand for them. There really is no intrinsic value. This is probably why in recent times, crypto has been compared to gold. Gold, being a natural element still has some physical properties that make it unique to certain applications (not counting jewelry here) but other than being rare, which creates a sense of exclusivity, gold serves no real purpose.

Since crypto is often compared to gold, lets look at gold for a moment –

I urge you to imagine that for one day tomorrow, all the gold in the world disappeared and all the coffee in the world disappeared. Which one is likely to cause more immediate problems? Gold does have one claim to fame however. In a historical world where economic concepts were primitive and an evolution from the barter system was made, gold served a very important purpose. It was the perfect currency since it had limited supply and was difficult to counterfeit. It served as the economic cornerstone of this primitive economic system. As the world evolved further, the US dollar slowly became that economic cornerstone in an easy transition since it was pegged to gold. Nixon in 1971 took the US off the gold standard and the US dollar was no longer tied to gold at a fixed price. The world still agreed that the US dollar will remain the entity to which everything could be tied to. The US Dollar still remains the global currency standard.

Note that this historical position of gold, makes it unique to this day. When financial or political turmoil sets in, gold prices rise (due to heightened demand) because people still trust the time tested medieval concept of value in gold. Today however, we live in a far more stable global economic order. This is demonstrated by the fact that adjusted for inflation, gold has hardly appreciated in value over the last 50 years since Nixon took the dollar off the gold standard. In other words, gold has been a terrible investment compared to other vehicles such as stocks and real estate.

Inflation Adjusted Gold Price
Gold Price between 1970 and 2020 (Inflation Adjusted)

Below is a table that compares Gold returns to other vehicles if you invested $10,000 in 1971.

Gold Vs. Other Investments (Inflation Adjusted)

You might argue that gold is almost as good an investment as Real Estate based on the above data but you’d be wrong. Real Estate provides a very important utility of keeping a roof over your head while it appreciates as an investment. The financial value of that utility, I leave unto you to figure out.

Another way crypto differs from gold is that the value of gold rises in times of financial turmoil. In the graph above, notice that during the 2008 recession, gold prices spiked. It serves as a psychological safe haven for people when they think the world economy will cave (once again, if the world order actually collapses, I think food, water and protection are going to be far more important than gold but a historically evidenced argument for gold can still be made). Crypto however has spiked and peaked in tandem with the financial market. This phenomenon is likely explained by the fact that the psychological wealth factor created by strong financial markets seems to make people’s risk tolerance irrationally higher or some so called ‘investors’ projecting the value of bitcoin to reach $3 Trillion in the next 10 years just creates plain old FOMO.

The only way bitcoin reaches $50,000 from $40,000 is if more people buy into it. Let’s for one second assume that the dollar price of Bitcoin freezes where it is today. $48,000 is the last number I heard. How many people are so convinced with its utility as a global currency that they will buy into the idea and sign up to own a device that will hold all their currency to be hacked, stolen or plain old lost on a subway? What happens when governments across the world step in and decide that the prospect of a monetary instrument they cannot control the supply of is more trouble than it is worth? Lets make the same assumption for the other two investments. What if your house stopped increasing in value. Would you still want it? Does it still provide you with enough utility for you to want to own it? What if you bought stock in The Home Depot today and then stock prices were frozen. You’d essentially be left with partnership in the company. Meaning every dollar in profit from every barbecue grill and lawn mower Home Depot sells from that moment forward has a small fraction in it that has your name written on it. In financial terms, we call them dividends. Would you want to be a long term claim holder in Home Depot’s profits if stock prices stopped going up? I know I would. Even bonds will pay its holder an agreed upon interest as long as you hold it.

Simply put, every financial instrument should have enough utility and/or future cash flows tied to it for you to want to buy/own it at the price you are paying for it.

Crypto is a financial vehicle where more buyers are required tomorrow than there are today in order for today’s buyers/holders to cash out profits. When today’s holders cash out and flaunt their returns (All those 18 year old bitcoin millionaires flaunting their Lamborghinis), more buyers jump in. They don’t ask the questions. More people call their investment banks to see how they can purchase crypto. Banks evaluate their options – provide the service or lose customers. Banks announce they will support crypto buying. News breaks about big banks supporting crypto. People feel it must be legitimate and become believers. If it is good enough for big banks, it has to be good enough for them. FOMO takes over. Lot of people buy in. Some cash out but most people decide they will leave when they get their Lamborghini. One day, there aren’t more buyers than yesterday. Price falls. Panic begins. The dominos start falling. Big banks start bowing out. Rookies stay the course thinking it is just temporary since the experts said it is going to $3 Trillion. Banks made money while it lasted. Some early buyers and early sellers made money. Everyone who jumped in seeing the young studs and their Lamborghinis is left holding the bag.

This has happened before. We’ve all seen it. It was called something different. A Ponzi Scheme. We knew who to blame then – Bernie Madoff. No-one has admitted to being Satoshi Nakamoto. Because history books are ripe with people unwilling to take credit for their most world changing accomplishments.

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4 comments

  1. Good stuff. There’s a duality here for me where I completely I agree with your skepticism about the future value of most (all?) of these crypto/alt currencies, but also believe there is likely to be significant intrinsic value in at least one (or more) of the crypto/alt coins. Setting aside whether one believes there is any value to an alternate form of currency in general (FWIW, I do), the underlying technology is what is more interesting and where I see real value. By no means for all of them, but in the end there will be a company (or a handful of them) which prevails. And that’s exactly how I look at each of these cryptos, as a company. And anybody investing in them should see them as such and seek to understand which of them has developed (or is developing) the most interesting code, and what the long term value of that code will be. Especially with all of the money pouring into them, this creates incredible incentive for someone to innovate in a world-changing way, which leads me to assume someone will do just that. Whoever does will be the winner(s) in the end and the value of the corresponding coin will be reflective of the value of the technology itself. Whenever that happens the bubble will pop for anybody who is still holding on to investments in the other hype-driven coins that have escalated in value to date. My eye is on $IOTA.

    1. Good thoughts. Blockchain based business models are invariably going to be valuable. I just dont think that the currencies are the right use for this technology or that they sit well long term. If Bitcoin was the global currency, there would be no pandemic relief. No ability for the governments to have a monetary policy. That proposition is scary.

  2. Why on earth would someone lose their phone and be out of their bitcoin? Who is storing bitcoin on their iPhone. Most are either leaving it in their online apps provided wallet for ease of trading or they are storing it offline on hardware wallets (that you could very well lose but most people i know are not doing that anymore)

    1. You’re right. My intention was to compare this to the people who had their encrypted keys on hardware devices like phones or hard drives. That problem is slightly easier to get around by storing your key on the cloud. Although that still leaves them susceptible to hackers as has happened on multiple occasions.

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