Cryptocurrencies are an old fashioned Ponzi scheme wrapped in a cocoon of technobabble and festooned by faux libertarian jargon about a battle against fiat currencies.
Cue the loud protests from the crypto-faithful who are shocked — shocked, but not surprised — that ignorant, old-school skeptics simply don’t understand the revolutionary nature of blockchain technology.
The USD 2 trillion valuation of cryptocurrency markets must mean of course that the crypto-gurus are right and the crypto-skeptics are wrong. Never mind that by the time you read this article, that value may be 50 percent higher or lower, depending on what Elon Musk has just said or tweeted or the latest restriction imposed by the Chinese Government.
So, ‘How Much Is That Doge in the Window’?
The ultimate irony is that the very real issue of helicopter money printing by central banks, that cryptocurrencies claim to address, is also exactly the reason why these currencies are inflating and gyrating in price. Idle sit-at-home workers are splurging their unemployment checks, funded by deficit financing, on buying joke coins created in the name of Shiba Inu dogs.
When Elon Musk tweets “How much is that Doge in the window”, the answer is, whatever the next damn fool is willing to pay the original damn fool. Though in fairness, anyone selling and cashing out of the madness is probably the smarter one.
There are many potentially useful applications for blockchain technology, though it is pertinent to point out that in all the years since the technology first came to the forefront, hardly any killer apps or practical applications have emerged. Cross-border payments, trade finance, supply chain monitoring, etc are some of the ballyhooed applications that have been touted — but real successes seem limited in the real world.
How Has Cryptocurrency Fared in the Inflation Department? Terribly!
A blockchain is an open, distributed ledger or database, and the data contained within the blockchain is distributed and duplicated across many computers in a decentralised manner. This decentralisation is what makes blockchain unique unlike a centralised database controlled by a company or a government.
The independence of the blockchain from central control is supposed to be the magic that makes Bitcoin unique.
The promise around Bitcoin is at least partially a result of very valid and real concerns about overly liberal central bank policies.
The economic theory du jour in developed markets is to rely on Modern Monetary Theory (MMT), which essentially says that countries like the US, UK, Japan, and Canada — which spend, tax, and borrow in a fiat currency they fully control — can spend freely, since they can always print more money to pay off debts in their own currency.
While this may be true up to a point, like almost anything else in the real world, an excess of a good thing almost always leads to bad outcomes. MMT carried to an extreme will almost certainly lead to inflation.
And yet, how exactly have cryptocurrencies done in the inflation department in their short period of existence? Much worse than boring old fiat currencies, those terrible anachronisms! Cryptocurrency, as an asset class, has experienced rampant inflation.
Of Dogecoin, SHIBA INU and ‘Meta’ Jokes
Behold the collection of cryptocoin castles floating in the air with a total value of more than USD 2 trillion, up from USD 260 billion a year ago. Dogecoin, the joke currency, by itself has, or had — when last checked — a market value of about USD 67 billion, which is more than 75 percent of the companies listed in the S&P 500.
Is Bitcoin Supply Limited — Just Like Gold or a Picasso?
The true believers often start with the claim that Bitcoin supply is limited, just like gold or rare art from the likes of Picasso and Monet, and “only 21 million bitcoins can be created” is touted repeatedly. And yet, even the defenders of this claim admit in the footnote that in spite of many countervailing incentives, a supply cap change is still theoretically possible.
Several groups would have to collaborate, including developers who would have to propose and write code to implement this change, followed by community discussion, after which the changes would be integrated into ‘Bitcoin Core’, followed by a hard fork.
One could argue that the original Bitcoin community could still maintain the cap of 21 million, but the very fact that there are over 5000 crypto coins in existence is evidence that the scarcity argument is a hoax.
Even if one accepts that Bitcoin issuance remains limited to 21 million, note that it is possible to purchase as little as one Satoshi, which is the equivalent of 1/100,000,000 (one hundred millionth) of a Bitcoin. This means it’s already possible to use a currency with 2,100,000,000,000,000 Satoshi coins, and if you compare that with the mere billions of ounces of gold in the world or the few thousand paintings by Picasso and Money, the scarcity argument falls apart.
The Extreme Volatility of Cryptocurrencies & ‘Myth’ of Bitcoin as ‘Currency’
The last myth to dispel is about Bitcoin being a currency. The extreme volatility of cryptocurrencies is evidence that they are, at best, a speculative risk asset, and maybe not even that — since there is nothing underlying these assets other than the ‘greater fool’ theory. Since the value of a cryptocurrency is highly uncertain day-to-day, using it as a medium of exchange is highly impractical.
Any vendor accepting payment in cryptocurrencies will first sell it into ‘real’ currency before acknowledging payment. The vast majority of turnover in crypto is trading and speculation. Chainalysis, a crypto security company, has reported that total crypto paid to ransomware addresses increased by 337 percent in 2020. Many Americans paid more and waited longer for gasoline because of the Colonial attack for which the company had to pay ransomware in cryptocurrency.
For all the claims of replacing the much-maligned inflation-prone ‘fiat currencies’ and displacing the US Dollar and other hard currencies as a medium of exchange, cryptocurrencies have been a poor inflation hedge, and are not even remotely close to being used as a real currency.
Are Bitcoin & Other Crypto Coins a New ‘Investable Asset Class’?
When the South China Morning Post, likely speaking for the Chinese Government, says that “cryptocurrencies have no future as a medium of exchange in China”, the message is loud and clear.
The last refuge of cryptocurrency defenders is that Bitcoin and other crypto coins may not quite be currencies, but they are nevertheless a new ‘investable asset class’ like gold or fine art.
In this context, it has to be noted that gold and precious metals have been a store of value throughout history, because they were also at times a medium of exchange, since coins were once minted from gold.
And paper money, for all the justifiable criticism about the risks of inflation and debasement, was originally backed by gold till a few decades ago and even now comes with the legally enforceable writ of sovereign nations.
So, What Exactly Are Cryptocurrencies?
If cryptocurrencies cannot find acceptance as a medium of exchange, and are not particularly attractive as an investment asset class given the extreme volatility and regulatory risks, what exactly are they? A Tulip Mania for the ages that, to be clear, could continue for a long time until there is no ‘greater fool’ left to buy tulips from the smarter ‘lesser fool’.
(Ram Kelkar is a Chicago-based columnist, and works for a privately-held investment firm. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)