Cryptocurrency and the underlying blockchain technology that powers it are amazing. Crypto will change commerce and global adoption of cryptocurrencies is, in my view, inevitable. But Bitcoin can never be one of those currencies. There, I said it. Here’s why.
In order to have a successful currency, it needs to have a number of elements. They include: scarcity, durability, divisibility, portability, acceptance and stability. Bitcoin lacks stability. Now it appears that it will never be stable, hence removing its chances of ever being the global currency it has been touted to be. Just today the price of Bitcoin has declined by 9% (at time of writing) and it’s not unusual for it to swing up or down by 20% or 30% over mere days. I once believed it would be our global currency – as I wrote in 2015 and in my first book, way back in 2013. But now its price shifts so radically, it would simply be too risky to ever price a forward contract in Bitcoin. Neither party would embrace such pricing risk in a commercial arrangement.
The most common argument for Bitcoin these days is that it is becoming what is known as a Store of Value. Many assets fall into this class: land, grains, commodities, precious metals and currencies. Bitcoin acolytes argue that its longer term upward trajectory makes it a store of value. Economically speaking, the opposite is true. Stores of value need to be just that – a store. It needs stay the same and be stable over long periods. Just like a silo of grain or an ounce of gold would remain unchanged over time. Even when something’s value increases, it does not make it a store of value. It makes it a speculative asset. The price of Bitcoin could well go over a million USD per coin and I actually think it will. But to invest in it, based on that belief, would be pure speculation. And this is exactly what people are doing with it. If you ask anyone why they buy Bitcoin today, the honest answer is this: because they think it will be worth more later. Hence: speculative asset, by definition. It’s not because they want to transact in it or protect themselves against systemic economic failure.
I’d even add institutions to this list. They are not immune to FOMO. Just because Tesla, MicroStrategy and others are holding part of their treasury in Bitcoin, it doesn’t preclude them from the lure of speculation. This is a worry when it is shareholder funds. We only need to revisit the GFC to see how some of our most respected institutions can get sucked into bubbles.
Of course, there are interesting counter arguments to the above. The most common from HODL enthusiasts is that Bitcoin (and other cryptos) are a safeguard against increased government ‘printing’ of currencies, such as the USD and an eventual debasing of national government-backed currencies. Surprisingly, we are yet to see the hyperinflation that usually accompanies excess liquidity. What we have seen this time is excess asset valuations, as well as booming equity and crypto markets. I can’t help but think the increasing income inequality is underpinning noted asset price increases.
Where to from here?
My view is simple. The technology is good. We will end up with all modern economies using crypto as their national currencies. But it won’t be an indy crypto.It will be government-backed cryptos – think US-Crypto or AU-Crypto. If they debase their dollars, a simple transition to a new government crypto could kibosh the debasing issue in one simple move. Australia had a currency change as recently as 1966 and the Euro arrived only in 1999.
I’ve been bullish on Crypto for almost a decade. At my first book launch in 2014, I accepted Bitcoin as payment. I sold three books with Bitcoin when the price was around $300 a Bitcoin. However, if I were to back a crypto as becoming the default ‘global crypto’ or the digital gold, it would be Ethereum. Simply because it can be programmed with smart contracts – something Bitcoin cannot do. In any case, the crypto we all end up using will be provided by our governments. Other crypto assets will trade as digital commodities, as part of the wider financial market mix.
But let’s remember this simple fact: in order for a government to remain sovereign, it needs three simple things:
- Set the laws of the land
- Enforce the laws (eg control a police force & military)
- Control its currency
Number 3 is very easy to execute – only accept tax payments in your local currency. Any government with a modicum of intelligence and an eye for history would never give up control of #3.
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Keep Thinking,
Steve.