Cryptocurrency Mania, Part 2

Bitcoin has taken quite a tumble since we published my first essay on digital currencies

I promised you then that I’d follow up with some additional thoughts and perhaps an idea or two on how I might want to gamble some of my own money on this new factor in the economy.

Let’s recap:

Bitcoins (and other cryptocurrencies) are not investments. They are currencies. As currencies, they produce nothing and have no intrinsic value. This point – that they have no intrinsic value – is an argument that the anti-cryptocurrency crowd makes. Buying digital currencies is just plain dumb, they say, because they aren’t real. “They are fabrications,” one commentator said. “Just numbers in cyberspace. Their only value is as currency and that depends entirely on faith – on the faith of those that trade them.” What these hardcore foes seem to forget is that the US dollar and all other paper currencies have the same faults. They, too, have no intrinsic value. (Only about 10% of the US money supply – $1.5 trillion out of $13.7 trillion – exists as cash and coins. 90% of it is numbers in cyberspace.) And their value, too, depends on how many people believe in them.

The indisputable advantages

* The number of bitcoins (and the other major cryptocurrencies) issued is limited. That means the value of the currency cannot be destroyed, as the value of the dollar has been, by printing and putting more into the marketplace.

* Transactions take place on a digital ledger called a blockchain. These transactions are permanently embedded in the blockchain. If you want to trace all the buying and selling you’ve done with bitcoin, you can.

* Because these transactions are recorded and verified through a network of users, there is no need for a central bank. That means there is a potential for more privacy and independence for cryptocurrency users.

* As blockchain technology develops, the cost of transactions (buying, selling, authenticating, and recording) goes down, making the market more efficient.

The negatives

* Currently, the cost of buying and selling bitcoin is high – $3 to $4 per transaction, from what I’ve read. Obviously, this means it is not useful for most day-to-day transactions, such as buying groceries or gas.

* Despite arguments to the contrary, cryptocurrency is not safe from thieves. I’ve heard that digital wallets have been hacked into and pilfered. And holding cryptocurrency physically is no guarantee either. There have been physical hold-ups, as well, with the thieves forcing cryptocurrency holders to turn over their passwords.

* Contrary to what is popularly believed, bitcoin and other major cryptocurrencies are not totally anonymous. There are ways to track down holders. And when you do, you can see the holder’s entire transaction history. Something you can’t do with physical currencies like dollars and even gold.

(There are new cryptocurrencies that are apparently untraceable. These are evidently tailor-made for illegal activity. Thus, they are not the sorts of digital currency I’d want to have.)

The primary drawback

This brings me back to the concern I ended my first essay with: If cryptocurrencies became an actual threat to the dollar, the US government might make them illegal.

Ever since Nixon detached the dollar from gold, there has been an evil alliance between the government, the Fed, and large financial institutions to affect the economy (and thus elections and the financial markets) by manipulating the dollar. It is done through what they call “quantum easing.” (Which basically means printing more dollars.)

Right now, many people are using cryptocurrencies to do business underground and hide from the IRS. These are both insanely popular illegal activities, accounting for hundreds of billions of dollars in lost revenue each year. A blockchain-based digital currency monitored by the government would bring all those dollars back to the Treasury.

That could be one reason the Fed has not come out against cryptocurrencies. They may be thinking they can wait until cryptocurrency usage is more widespread,and then introduce a new one, issued by the government. One that would perhaps be the only digital currency allowed.

In any case, cryptocurrencies are already proving they have the potential to “destroy” markets. I’m sure you have heard that virtually all US credit card companies recently decided that they will no longer accept cryptocurrency transactions. There can be only one reason: They’ve just seen something like $600 billion in commercial transactions leave their market. They don’t want any more of that.

Right now, the only way to open a bitcoin account is to have your bank wire money into one. That’s easy enough. But what happens if the banks decide that digital currencies are crimping their profits? What’s to stop them, too, from refusing to deal with cryptos?

So… what am I going to do now?

I’m going to do two things:

  1. I’m going to buy several digital coins that, based on the research I’ve done, seem to have the best chance of being here in five years.
  2. I’m going to invest in the blockchain, a truly innovative technology that will provide substantially more value to the economy in years to come. (Investors from Wall Street to Sand Hill Road have already invested significant amounts of money, time, and effort in blockchain-based businesses that will surely benefit from this trend.)

In doing these two things, I’m going to keep in mind that this is entirely a speculation.

Do I believe that bitcoin will ever replace the dollar? My answer is no. I don’t even believe that cryptocurrencies will continue to be a viable currency in the future. But there is a small (a very small) chance that they will. And if they do, a modest stake in this possibility could turn into a great story to tell.

We may be in the early part of a major trend, but cryptocurrencies are not businesses. They don’t produce income. And they have no intrinsic value. So although I’ll be gambling on the trend, my total investment – as always with speculative investments – won’t be more than I mind losing. In other words, it will be considerably less than 1% of my net investible wealth.

For a lighter look at this subject…

First watch this:

Then watch this:

And this: