Back in 2017, when Bitcoin exploded to nearly $20,000, investing in cryptocurrency was gaining credibility. After all, who didn?t want to be ?in? on what might be the biggest speculative investment success story of the 21st century?
But the magic began to wear off after the peak of December, 2017, when cryptocurrency prices came crashing back down to earth. In 2019 however, they?ve once again begun to show signs of life. So, should you ? or shouldn?t you ? be investing in cryptocurrency?
There are no hard and fast answers here, so let?s begin with the following parameters:
- The cryptocurrency system is still evolving, so little is definite.
- I do not own cryptocurrency, nor have I in the past. I might in the future, but that remains an open question.
- I?m not an expert on cryptocurrency, but I don?t think such a person exists.
- Cryptocurrency is an open book. Not only is the currency itself a true speculation, but so is any contemplation of its future. There simply are no certainties here.
- Finally, though there are many cryptocurrencies, this discussion will be focused on Bitcoin, since it?s the bellwether of the group.
So, with those caveats in mind, let?s look at both sides of investing in cryptocurrency.
Why You Should be Investing in Cryptocurrency?
Cryptocurrency is Gaining in Status in the Investment Community
Prior to 2017, cryptocurrency was dismissed as a fad by the mainstream investment community. It?s gained at least some level of acceptance in that group today. For example, Yahoo!Finance now includes Bitcoin in its top bar list of significant global financial indices, along with various stock markets, major currencies, gold and silver, oil, and the US 10 year Treasury note.
It?s been widely recommended, but mostly among independent financial bloggers that tend to favor alternative investments.
Cryptocurrency May be the Latest Innovation in the Long Evolution of Money
Few people alive today remember the world that existed before government-issued paper currencies (now mostly electronic) were the sole legal tender for transacting business. But prior to 1933, there were various forms of money. Gold and silver were frequently used, but so were bank notes, foreign currencies, and even barter. In fact, up until that time, US dollar value was actually based on its convertibility into gold and silver.
The point is, the current concept of what is popularly accepted as money ? government-issued sovereign currencies ? is a relatively recent phenomenon. Throughout history, money has taken different forms. It remains a work-in-progress, and cryptocurrencies may very well be the next monetary iteration.
Cryptocurrency Seems to Have Some Speculative Value
Whatever anyone?s opinions or doubts are about the investment value of cryptocurrency, there?s no question it has speculative value. Collectively, cryptocurrencies experienced a rise in value of historic proportions in 2017, and a much more subdued increase in 2019.
While those upturns certainly can?t predict future price performance, they definitely confirm there?s some substantial interest driving these price run-ups.
Government Currencies Can?t be Entirely Trusted
One of the reasons for the popularity of cryptocurrencies is the fact that they aren?t controlled by governments and their central banks. It?s an open source system that derives its value from participants within the network. That?s a major part of the appeal cryptocurrencies have, and not without good reason.
A poorly understood reality of government-issued currencies is that they?re not backed by anything. For example, some people have a vague concept the US dollar is backed by gold reserves held at Fort Knox, but that?s entirely untrue.
First, former President Richard Nixon officially ended gold-backing of the US dollar in 1971. Second, the US government doesn?t have nearly enough gold reserves to back the many trillions of dollars currently in circulation. That was the main reason Nixon ended gold-backing in the first place. The situation is even far more imbalanced today than it was in 1971.
Under the current financial regime, the Federal Reserve can create as much money as it deems necessary to efficiently run the economy. There?s even a financial theory floating around called Modern Monetary Theory (MMT), that basically holds that central banks can create unlimited quantities of money.
That?s actually been happening for at least the past 50 years, and it?s the real reason why we have inflation ? despite the many other causes so frequently touted by ?official sources?. But suffice it to say a full conversion to MMT could put inflation into high gear.
Should that happen, consumers may begin to distrust government-issued currencies, and look for alternatives. Cryptocurrencies could be a winner here.
A Financial/Currency Collapse Could Make Cryptocurrency the Investment of Choice
Let?s dare to take the last point to what could prove to be a logical extension. Several liberal candidates currently running for the Democratic nomination for president espouse MMT. They see it as a way of financing massive, currently unaffordable spending programs, like the Green New Deal and Medicare For All. Since the cost of these programs will add trillions to the annual federal budget, the only way to fund them will literally be to print money.
Now let?s dare to take another bold step. Let?s assume that the political brain trusts are wrong about MMT, that is not benign. But they implement the massive spending increases anyway, revving up the NMT printing press, and rolling out trillions of dollars in new spending.
Now keeping in mind that these newly minted dollars are not backed by anything tangible, and are not supported by an equivalent increase in economic activity, the end result could be not just inflation, but hyperinflation.
Simple inflation is where prices rise in a relatively controlled fashion, such as 2% or 5% per year. Hyperinflation is inflation on steroids. It could mean an annual inflation rate of 50%, 100%, or 500%.
It won?t be an intended outcome, but rather the result of an ?unexpected? systemic failure of the theory. Hyperinflation is a fancy term for a currency crash, a situation in which money essentially becomes valueless. Examples include the current state of affairs in Venezuela, recent history in Zimbabwe, and the Weimer Republic in Germany in the 1920s.
Should anything close to that happen, people will flock to alternative monetary systems, including gold, silver, barter, and ? you guessed it ? cryptocurrencies. It?s even possible that such an event will trigger the ultimate transition of government-issued currencies to cryptocurrencies
Why You Shouldn?t be Investing in Cryptocurrency?
Though it may seem ? based on all the facts above ? that cryptocurrencies are becoming a legitimate investment, there are at least as many arguments going in the other direction. None should be ignored.
It?s Still a Relatively New and Unproven Concept
The first cryptocurrency was launched in 2009. That leaves us with a history of no more than a decade.
While we need to acknowledge that technological and economic change are happening rapidly, it?s equally true that some technologies and economic developments have notoriously short shelf lives. As much promise as cryptocurrencies may be showing right now, there?s simply not enough history to bet serious money on it.
There?s Nothing Backing Cryptocurrencies
We just discussed how government-issued currencies aren?t backed by anything. The same is true with cryptocurrencies. But that doesn?t mean the two monetary systems are equal.
For good or for ill, anything with government backing has instant credibility. People believe in government, there?s physical evidence of it all over, and the voting process even gives us a sense of participation.
There?s no equivalent legitimacy with cryptocurrencies. It?s a decentralized network backed only by the trust the participants have been the system.
That?s actually equally true of government-issued currencies. But government does an outstanding job of presenting at least the illusion there?s something behind its currency, even though there really isn?t. Cryptocurrencies lack the apparatus to even create an illusion.
There Are a Lot of Cryptocurrencies ? It Can be Like Picking Stocks
Since the number of available cryptocurrencies now approaches the number of publicly traded stocks, picking which cryptos will actually survive ? let alone thrive ? is even more speculative than picking winning stocks.
The fact that thousands of cryptocurrencies have come ? and gone ? in a space of just one decade, is a sign of instability. Ultimately, it?s likely most will disappear, taking billions of dollars in investor capital with them.
Price Swings are Dramatic
I loosely track the price of Bitcoin, mainly because I?m still trying to figure it out. But one fact is glaringly obvious, and that?s that price swings can be substantial from one day to the next, and very dramatic over the course of a few days.
Currently trading at around $9,000, it wouldn?t be surprising to see the price fall by $300 tomorrow, or $2,000 by the end of next week.
Along the way, there certainly are equally dramatic price upticks. The price may increase by $3,000 in a week, which tends to draw investors in.
But the unfortunate reality of all markets is that people tend to buy at market tops ? which is exactly when they should be selling ? and sell at market bottoms ? which is exactly when they should be buying.
Since most people lack the emotional control to properly manage that reality, the average investor is doomed to get clobbered in these price swings. As well, price swings that dramatic and swift are extremely difficult to capitalize on. There isn?t even any certainty as to what drives cryptocurrency prices.
There?s one other critically important revelation in the dramatic price swings. They confirm that cryptocurrencies are in fact a pure speculation. After all, not only are the currencies not backed by anything tangible, but there aren?t even any fundamentals, like cash flows or profits, that might provide predictable price patterns.
Cryptocurrency is Already Failing Miserably in its Stated Mission
The basic purpose of cryptocurrencies was to act as an alternative medium of exchange, particularly for online and international transactions. If that?s taking place, it?s only at a snail?s pace.
Take ATMs. Bitcoin has something like 5,000 ATMs globally, including about 3,000 in the US. That number may sound impressive until you consider that there are hundreds of thousands of ATMs in the US alone.
Meanwhile, the number of major retailers and other vendors who accept Bitcoin, let alone other less well-known cryptos, is pathetically small. You can?t go into Walmart, Target. McDonald?s, Delta Airlines, Marriott Hotels, or your local bank or credit union, and transact business in cryptocurrencies.
The purpose of cryptocurrencies was to be a medium of exchange, not a speculation. But speculation is what it has become. And as the price of Bitcoin in particular has grown, its suitability as a medium of exchange has become even more impractical.
It would be like buying groceries with a one-ounce gold coin. Even if the grocery store accepted it, they?d balk at the idea of giving you back $1,389.11 in change on a coin worth $1,500.
It?s hard to see any type of currency having a true investment value when it doesn?t even serve as a medium of exchange.
It?s Not an Investment in Any Sense of the Term
This is the frequent argument against gold and silver. They produce nothing, generate no revenue, and don?t pay interest or dividends. However, gold and silver are real assets ? physical commodities with intrinsic value. Each has extensive industrial uses, as well as thousands of years of recognition as monetary assets.
Cryptocurrencies have similar investment limitations. They produce nothing, generate no revenue, and pay no interest or dividends. But unlike gold and silver, they lack any kind of intrinsic value. In fact, they aren?t even physical. Much like electronic currency, they?re simply numbers floating around in a digital universe. (Those pictures of ?bitcoins? you see in cryptocurrency articles are plastic slugs or computer graphics; there are no physical Bitcoin coins.)
Governments Don?t Like Cryptocurrencies
If you?re wondering how governments have become all-powerful in the past 100 years or so, it has less to do with guns, laws, and prisons than it does with money. The combination of the ability to have a monopoly on the creation of money, as well as to be able to create it in unlimited quantity, creates essentially unlimited power.
No government wants to give up that power. Should they lose it, governments would go back to being the loose fiefdoms they were back in the Middle Ages. The grand spending plans, the massive military machines, and the control over the everyday lives of the citizens would evaporate. There?s simply too much at stake.
The proof of this is already playing out. First, no major government has embraced cryptocurrencies. A few are experimenting with creating their own versions, but those will be tied to their existing currencies and not true cryptos.
Some governments, like China, are working hard to impose strict limits on cryptos.
The Facebook Libra Example
An even more interesting development surrounds the attempted rollout by Facebook of its Libra cryptocurrency. Now Libra is interesting crypto ? if it even is one. Structurally, it?s been set up like a cryptocurrency. But since its value will be tied to major world currencies, particularly the US dollar, it?s hardly independent. In fact, it looks a lot more like a variation of PayPal than a true cryptocurrency.
But even as a watered-down crypto, Libra is facing significant obstacles in getting regulatory approval in the US. An even more direct problem is that France and Germany will not allow Libra in their countries because ?it could threaten the Euro’s value and unlawfully privatize money?.
So, there?s the biggest indication of where governments stand on cryptocurrencies. And if cryptos don?t get major government approval as mediums of exchange, they?ll never be more than fringe speculations.
How the Cryptocurrency Game Could Play Out
If you?ve gotten the impression in this article that I?m either for or against cryptocurrencies, you?d be wrong on either front. In theory, I like the concept of the network-driven independent global currency, one not controlled by governments and central banks. While not perfect, I think it would have a better chance of controlling the financial imbalances that have become a virtual epidemic throughout the globe.
But the practical reality is that cryptocurrencies are now existing almost entirely as investment speculations. Their acceptance as mediums of exchange ? their primary stated purpose ? is happening only very slowly. And that can be interrupted very suddenly by a total ban by a major country, particularly China, the US, or the European Union.
While there?s certainly money to be made by speculating on the price swings, it?s a dangerous game. You?re as likely to lose a lot of money as you are to gain it.
The game changer could be the rollout of MMT in the US. Should that happen, hyperinflation is highly likely. In that case, people will be getting out of dollars and into any suitable alternative. This could be the event that launches cryptocurrencies as the next globally accepted monetary system. Should that happen, you?ll win just by converting your dollars into cryptocurrencies.
But in the meantime, cryptocurrencies are purely a speculator?s game. If I ever do get in, it?ll be with no more than 5% of my assets, and only after a major decline in value.
What are your thoughts on investing in cryptocurrencies? Do you see any long-term potential, or do you agree that it?s little more than a speculation?