5 July 2022
Will Crypto-currencies Survive? 💸
Much of the early discussion on crypto currencies was whether it was a currency or an investment? This debate appears over and now the debate is whether crypto currencies will survive as an investment class?
Crypto currency: Is it a currency? No.
Simply, they are not currencies for many reasons, including they are all effectively priced against USD and governments globally will not countenance private currencies usurping their national currency. There are still some advocates claiming that crypto currencies will replace fiat currencies and the USD as the world’s reserve currency. This is fantasy! Despite the deficiencies of fiat currencies as yet there is no better model. These deficiencies are really a result of the failure of governments and central banks in not adopting sound fiscal and monetary policies over the long-term debt cycle and short-term business cycle. For example, there is empirical evidence that national debt to Gross Domestic Product (GDP) ratio should not exceed 130%, because of the destructive economic impacts, e.g., inflation, stagflation, etc. Unfortunately, high levels of national debt and low economic growth is now a global phenomenon.
Crypto currencies: Is it an asset class? Yes.
It is an asset class. When reviewing commentary on them, most commentators now refer to them as an asset class, i.e., as an investment with frequent comparisons with gold; however, they have little, if any intrinsic value. Bitcoin with its wide distribution network and limited number available (although it can be split infinitely which draws into question the claimed benefit of limited supply) provides some basis for a valuation.
As with all new successful products and ideas comes a proliferation, and as at 1 January 2022 there were over 10,000 crypto-currencies with an estimated market value of USD3trillion. About 6 months later the value is less than USD1trillion and all crypto-currency types, e.g., stable coins, have incurred significant losses. Bitcoin, the best known crypto currency is down 55.88% while the S&P 500 index is down 21.08% in the period 1 January to 30 June 2022. So, their investment performance is very poor during tough economic times which is when good investments do well compared to other asset classes. Another benefit claimed was they would be an inflation hedge which is obviously not the case.
Blockchain: Evolutionary not revolutionary
Double entry book-keeping (balanced ledgers) was invented by the Monk, Luca Pacioli in 1494. With the implementation of the Marshall Plan after World War 2 came the development of the Eurodollar market (system) which is where banks outside their national geographical boundaries can operate free of central bank regulation. Institutions that operate in the Eurodollar market maintain private distributed ledgers of holdings in USD, EURO, JPY, CAD, CHF, etc., but no physical cash. Blockchain is a further evolutionary step in ledger systems with the blockchain technology facilitating what previously was private now being publicly disclosed.
What does the future hold?
There will be a clean out of most of the 10,000 crypto currencies, as has happened with other asset classes over the years, e.g., Dot Com bubble. Another benefit that crypto currency advocates have strongly argued is its regulation free environment. How times have changed! Since the 2022 stock market correction there are cries from those in the industry and folks that have lost money for regulators to step in and “protect” the industry. Regulation will constrain development, increase costs and limit access which will likely be the final nail in the coffin for most crypto currencies.
More countries may follow China’s lead and ban them, as they will be issuing Central Bank Digital Certificates and will not want any form of private competition given it is already a very difficult task in managing a national currency in this highly competitive global fiscal and monetary environment. Regulation and banning may drive crypto currencies underground back to its “silk road” roots, where it was used as a medium of exchange (currency). This is where Bitcoin initially gained traction.
Despite these challenges crypto currencies will likely survive because of its wide distribution capability, the utility that the technology provides, its ability to disintermediate and the global interest in blockchain technology which will likely mean that second generation products will evolve.