About a year and a half ago, in the midst of the last Bitcoin bubble, I wrote about how cryptocurrency will eventually become meaningful. You probably haven't noticed it yet, and over the last year and a half, you've probably felt that article was a one-off. But what you haven't seen is how blockchain is slowly entering your life. Not visibly, but managing things you may purchase and providing a store of value while others are less available.
To be 'money', a product needs to be many things. First, it needs to be a Unit of Value - meaning it needs to be generally acceptable for use in purchases and exchange. For this reason, primarily, people have commonly said items like gold, silver, or even cryptocurrency are not 'money'. But they are. Each one is accepted, maybe not widely, but generally enough to qualify. Some examples of cryptocurrencies being accepted have popped up frequently enough over the last year and a half for this one item to apply.
Another quality is portability. It goes without saying cryptocurrencies are portable. Their digital nature assures this. As long as you have access to your digital wallet, you can make a payment using cryptos. They are also, by definition, less expensive to create than standard currencies. All currencies (paper, coin, check, bonds, etc.) carry a price of creation. They can also be destroyed (and replaced). But because they can be created, hard currencies can suffer from Gresham's Law. Unlike hard currencies, cryptos can't be counterfeited. Cryptos are also indestructible. Most hard currencies are "indestructible" because a government, somewhere, backs its value. But governments fall, and central banks print more than should be printed, and in the process destroy the currency. A visit to Venezuela, or even revisiting Zimbabwe (which seems to be reigniting its inflation) are recent example.
'Money' also needs to be scarce. This is a bit of a misnomer. After all, salt was 'money' at one time, and it's not exactly scarce. But it was recognized as a need for life, and it was portable. In some nations, at one point, cigarettes (Marlboro, in particular) were 'money'. Cigarettes weren't scarce, but good Western cigarettes were - fulfilling (oddly, since smokes aren't required for life) the same role as salt. But scarcity is really another way of saying it's a store of value. It's here that cryptos are fulfilling their primary role. The bubbles that are happening with cryptos (and we may be in the midst of another one) happen because currencies of varying kinds are suffering from a failure, somewhere, or a lack of faith. The problems of which are currently preventing wealthy Chinese from accessing their accumulated capital are leading them to buy cryptocurrencies. Why not gold or silver? Because Russia and China have driven that price very high, and you can't take possession as easily as you once did (most gold purchased is just a piece of paper with a claim on gold being held somewhere - not exactly real gold). Opportunities to find something which can retain value are rare...and cryptos are an inexpensive and easy option for two reasons. They are available worldwide, and they are scarce. Adding to the current chase of value, the Euro has been slipping for the last 2 years, and is down substantially over the last 5, as it faces more headwinds. Brexit looms, and a 'no-deal' Brexit will hurt both the Pound and the Euro.
It's really the store of value point, right now, that defines cryptos. This is how most 'money' starts. People realize a product can retain value, and utilize them quietly at first, until they become more widely accepted. The main concern I've heard is "I've never seen or heard of anyone using, or been inclined to use on my own, a cryptocurrency." Perhaps. But do you know anyone who buys art, or antiques? There are many investments which retain value because there isn't more being made. A Picasso is a fantastic investment for one reason - he's not around anymore.
I made my first purchase of cryptos in the middle of the last bubble. I saw my investment double, then halve. It wasn't enough of an investment for me to panic and sell, plus I'm acutely aware of where this is headed. It's not down - as some imply. Or let me be more clear. Bitcoin, LiteCoin, Ethereum, Ripple - any one of these may be headed downward, that's always possible. It's possible all of them may collapse. But there will be another in their place. Still, these are widespread enough to last for quite a while, as systems begin to accept them. Already in my business I'm seeing blockchain being utilized to reduce fraud. While use of blockchain isn't necessarily use of a blockchain currency, backing the blockchain systems is essential because it proves out the value of the currencies in those particular blockchains (much like salt or smokes). Blockchain is increasing its value due to its use in supply chain management.
I'm not going out on a limb like McAfee and saying it's going to a million (um, he's more than a little nutty). I'm not advocating for purchase or investment, my investment remains very small (it's not even $1,000), though I've averaged down and am near break even. I think blockchain is misunderstood, as are these currencies. The first step toward understanding their value is asking why they bubble, and if there's something behind the bubbling. There is, and usually you just can't see it. Not so long ago, Hayek pointed out that currencies would be replaced by private currencies that compete. In fact, that was how the US started - with competing private currencies which were managed by individual banks and their gold reserves. This was during a time when people felt government is what supported money, and some private monies proved unreliable, leading to wider acceptance of government backed money. Even today, though, private monies pop up from time to time, most well known was the Ithaca Hours. This post is designed to point out that currency is whatever you believe it is. Every person has a different understanding of value and as a result different monies may have different values to each of us. As a result, cryptos are worthless to many people while dollars are more valuable. But if you ignore what is happening and you intend to be around the next 30 to 50 years, ignoring cryptos may not be a good idea. At least read up on them, and learn why people are beginning to use them. It's no surprise they become popular in unstable regions. When you factor in how blockchain is going to alter how business is managed, the inherent value becomes apparent. They will continue to expand. Slowly and quietly, as they have over the last year. At times, when currencies or exchanges fail, the change will be fast and loud as they bubble up.
