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Sunday, June 30. 2019
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.
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.
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Until the volatility dampens dramatically, cryptocurrencies will remain mostly speculative vehicles.
The only examples of cryptocurrencies being accepted I've heard about involve extortion or some other illegal activity.
Being a child of the 20th Century, the idea of a bunch of electrons having value is a concept that is exceedingly hard to wrap my feeble mind around.
In addition, I don't know how to obtain them or where I can spend them. Nobody I do business with takes them.
It strikes me as a very dubious storehouse of value. There is nothing backing them up. Why would I want to sell a car for electronic bitcoins?
And eventually, someone very smart, will come up with a new technology that could topple the bitcoin house of cards overnight.
Having said all that, the idea is intriguing. If bitcoins were universally accepted, and in widespread use, what is Uncle Sam to do if the dollar is no longer the common currency? How does one formulate monetary policy if one's currency has fallen into disuse?
Governments will never cede the power of controlling the currency and monetary supply to a decentralized system. They just won't.
Any fiat currency is basically worthless...
That includes the Euro and US Dollar, neither are backed by anything really except the trust people place in them.
That said, they have something that cryptos don't have: some form of official oversight. Whether we really can trust the central banks and governments providing that oversight I won't debate, but enough people do that the value of these fiat currencies is not excessively volatile at the moment.
Cryptos? Not so much. Indeed way too easy to manipulate and scam, and mostly used for extremely shady criminal purposes up to and including money laundering towards organised crime and terrorist organisations, both foreign and domestic.
If you're anything like me, and you likely are, you use electrons instead of money all the time- but the electrons you use are denominated in dollars and cents.
Swipe that debit card- electrons move from one place to another, and whatever you're buying is paid for- and you didn't handle any money. Oh, look, someone just emailed me an Amazon Gift Card! Enter the numbers at Amazon, electrons move around, and I can make a purchase for real goods- without handling any money.
The value of all the bank and credit union deposits in the US, along with all the outstanding gift cards, far exceeds the amount of money available in bills and coins. And all that money is in the form of electrons, waiting to shift positions.
Lot's of stores in the U.S. routinely do over one million in business a week. Without electrons handling most of the transactions, they'd be drowning in paper currency. Or worse yet- coins.
This will be and has been scammed. You would have to be naïve to take part in crypto currencies. Further more they are being used to commit crimes. I don't see anything about crypto currencies ending well.
The statement that "cryptos can't be counterfeited" is visible and obvious nonsense. Just wait til the wide boys really put their minds to that probably trivial problem.
It is just barely possible to say that "cryptos can't be hacked", provided one also says that's with with today's decryption algorithms limited to today's hardware and always assuming someone doesn't get the encryption algorithms or keys or basic info from a drunk secretary or pissed off employee.
People are ingenious. The idea that crypto’s can’t be counterfeited seems absurd.
How do I get my bitcoin out when the hurricane comes here in Florida? I don't have the link but someone at one of James Grant's last financial conferences did a power point presentation on how over hyped is blockchain.
Another area I'm led to believe blockchain is used is the Canadian meat industry. China just blocked their imports, Canada says they think the certificates were forged.
What was that about not being able to cheat? If it was truly less hackable, this never should have even made it to the news. Would have been dealt with nation to nation.
Unless a player just wants to get political.
On a side note, the problem was pork, but they blocked beef too.
Canadian farmers are crying, but it's 2% of their beef exports?
. . . people have commonly said items like gold, silver, or even cryptocurrency are not 'money'.
When TEOTWAWKI comes, gold or silver will not buy food. Water, ammo, and, considering Venezuela, toilet paper will.
Gold and silver are not money or valuable until a society is stable.
You miss the point. Perhaps When TEOTWAWKI comes, gold or silver will not buy food. But when the economy collapses it will buy anything and everything. When the housing bubble bursts it will buy a house at half it's value. When the next recession comes it will buy food and other goods. The odds of a TEOTWAWKI are very slim but the likelyhood of a recession are a sure thing. SO you buy toilet paper and I will buy gold and silver.