Occam's Razor

Until recently you could buy a Tesla with BitCoin. Elon Musk though recently changed his mind because it was an environmentally unfriendly currency, since newer mined BitCoins are mined using tons of servers, many of which use electricity generated by fossil fuels. So Musk is going toward more environmentally benign cryptocurrencies. There’s a lot of them out there and anyone with the right software and hardware can create their own. To use a cryptocurrency though you have to convince others to buy, use and accept them.

To say the least, cryptocurrencies are highly speculative. Coins most often mentioned in the media seem to do the best, and these include BitCoin, Ethereum and a literal joke currency, Dogecoin. With Elon Musk going all in for cryptocurrencies, the rest of us are left scratching our heads wondering if we’re missing something. Maybe we need to start buying cryptocurrencies too.

I had a customer recently who wanted to pay me in BitCoin. I told him no thanks, but he thought I was foolish because BitCoin’s price was likely to keep going higher. Maybe he’s right. All fiat currencies are speculative too. The U.S. dollar depends on the full faith and credit of the U.S. government and nothing else. Given how fragile our democracy is at the moment, maybe I should be trading dollars for BitCoin, Ethereum and Dogecoin.

Governments seem to be accepting the inevitable. I noticed on my tax return I had to answer some questions about cryptocurrencies, to make sure they were appropriately taxed. Cryptocurrencies seem to be settling in as a thing.

With the exception of real coins, all money is an abstraction and a shared delusion. It solved the messy problem of exchanging goods and services conveniently. BitCoin is not convenient, given the time and hassle it takes to exchange them, although it is getting easier. Others may be more convenient for transacting business where they are accepted, but the general market remains a long way from generally embracing cryptocurrencies.

The faith in most cryptocurrencies is that they are either hard to manufacture or that their block chain technology helps instill some sense of trust. Dogecoins are relatively easy to create, but they sure don’t look like a hedge against inflation. Five billion new Dogecoins are created annually, which means 2.7 million new Dogecoins go into circulation every day. It hardly looks like a precious asset, but where they are accepted at least they should be easy to spend. You shouldn’t have to worry about running out of them. The U.S. dollar is backed up by the U.S. government. The U.S. government at least has people overseeing the management and distribution of dollars. The same can’t be said about many cryptocurrencies.

I notice that those most into cryptocurrencies tend to be those who are libertarian, at least in spirit. They want the best of both worlds: a currency that retains its worth over time but also has the advantage that money provides: an easy exchange of value. It’s highly debatable though whether a cryptocurrency can hold its value. The run up in cryptocurrency prices seems due to supply and demand: more people are buying into the idea/hype of cryptocurrencies, which drives up their prices. Cryptocurrencies strike me as speculative investments without any firm moorings. Much like the Dutch tulip mania of 1637 demonstrated, these currencies hold value as long as we agree with the illusion/delusion that they have value.

I can see investing in cryptocurrencies as a highly speculative way of reaping short term profits. If I believe that there are many more enthusiasts of cryptocurrencies out there to be persuaded, buying some of these and hoping their prices go up, then selling them when they reap a handsome profit, makes a certain amount of sense. I would look at any money invested this way as money I could live without if the tables on cryptocurrencies I bought turned. I would not bet the house on cryptocurrencies appreciating. I would view it more like going to Las Vegas and gambling $1000, but no more than $1000, just for the fun of it. I strongly suspect though that having this approach does not make me a good candidate for investing in cryptocurrencies. I suspect most of these investors are looking to become millionaires through this sort of investing. People like me don’t rush in where angels fear to tread.

As an asset though, I consider these decentralized cryptocurrencies fool’s gold. In that sense I think Elon Musk is being foolish, but as the world’s richest person he can afford to be foolish on a grand scale. That said, over time it may be that we will have no choice. Cryptocurrencies may gain such traction that they can’t be ignored. There may come a time when going to a foreign country might require buying a cryptocurrency, because it and the local currency will be the only currencies accepted.

If that happens though we may be in for a world of trouble. The U.S. dollar’s value is based on the full faith and credit of its government. But nothing is forever. The U.S. is likely not forever as well, so having most cash parked in U.S. dollars could be foolish if our government ultimately collapses. It’s just a safer best than most other non-cryptocurrencies out there, and that it is the de-facto cryptocurrency of the world makes it a reasonably safe harbor … for now.

Real assets though is tangible stuff you own. You don’t own your savings account. It seems like we do, but its value is wholly dependent on the institutions that oversee it. With cryptocurrencies there are generally no people regulating it. If there are, it doesn’t amount to the investment in people and resources that countries give to managing their own currencies. Inflation may be the penalty we pay to make sure our currency doesn’t collapse altogether, because if the U.S. dollar weren’t overseen and regulated, it would probably collapse pretty quickly.

The deed to my house and cars, the portions of my portfolio that represent a percent of ownership in various stocks and funds, these are real assets because they have true value. All forms of money have some risk associated with them. I think many drawn to cryptocurrencies are suffering from a shared delusion that they can take the risk out of money through computer algorithms. I think they are likely to be disappointed in time. I’d rather own currencies that are managed by people because as flawed as we are I trust economists managing currencies more than I trust a computer algorithm.