Occam's Razor

So my $88.31 or so that I was paid in BitCoin on July 1st is now valued at $174.20, according to BlockFi, where it still sits because I’ve been too lazy to sell it and turn it into U.S. dollars. Looks like my natural lethargy worked in my favor as if I had sold it for on August 2^nd, when I last blogged on this topic, it was worth $109.71. I’d be out the $64.49 in extra value it has accumulated since then. If the “currency” continues to rise as it has since I acquired it on July 1^st, I’ll get a 666% return on investment and it will be worth $587.95 on July 1^st, 2022.

The people who study this stuff think that maybe one BitCoin will hit $100,000 soon, perhaps because it looks like a BitCoin futures electronic trading fund (ETF) will soon be approved by regulators. Anyhow, the guys I follow on YouTube are still all agog on digital currencies. Graham Stephan is upping it to five percent of his portfolio.

Should I do the same? With our portfolio hovering close to $2M, that would be $100,000. No, I don’t think so. But since I have only $174 of digital currency at risk, I see no harm in keeping the BitCoin I have to see how it does as a speculative asset. It will be interesting to track it at yearly intervals.

These digital “currencies” are clearly becoming a new market, like it or not. Lots of people like me continue to feel largely baffled by these virtual currencies. It’s easier to get behind them though when you consider that most currencies are like BitCoin: virtual. That’s true of the U.S. dollar because it’s a fiat currency.

In my last post on this topic, I lamented that there were no assets behind these “currencies”, unless you count the value of the electricity that it took to “mine” one of these “coins”. The U.S. is now the largest miner of digital currencies, and most of it is occurring in Texas where electricity is cheap, at least until there is another winter storm that knocks out most of its power grid. Since most of this power comes from non-renewable sources, owning currencies that are energy intensive to mine, like BitCoin, should come with a carbon tax. Maybe that would deflate its surreal valuation.

Its value is based purely on supply and demand. Which makes me wonder if these currencies are the latest version of a Ponzi scheme and I now own a tiny fraction of an electronic tulip. If it’s a Ponzi scheme, you want to sell your crypto before the market collapses.

What perhaps can be said is that this new “market” is still getting established and time will tell if it’s got legs. But on the other hand, BitCoin has been around since 2009. It’s hard to see it collapsing altogether, if only because so many people have vested wealth in it, and won’t want to lose their investment in it. These “currencies” though are so easy to create that clearly not all them will survive.

I do think that these “currencies” that more closely imitate real currencies are likelier to survive. A lot of work is going into creating versions of these “currencies” that act as currencies. For example, you can buy so-called stable coins whose value is tied to currencies like the U.S. dollar.

These stable coins are generally underwritten by private insurers. Governments are thinking of putting banking-like regulations on companies offering these stable coins, emulating FDIC-like protections. It will be interesting and confidence building if governments but their good faith and credit behind these stable coins by essentially underwriting them. By doing so though they tend to undermine the foundation by which digital currencies were unleashed: to detach themselves from the shackles of traditional currencies. It’s unclear why these “currencies” based on stable coins should be preferred to currencies already in circulation.

I wonder if there will be a Black Tuesday for these currencies. Black Tuesday was the event that kicked off the Great Depression. One of the lessons from Black Tuesday was we needed to keep banks from collapsing, so we formed the FDIC. Because of their decentralized nature though, there’s nothing to prevent a Black Tuesday for crypto, and no organization to prevent it or from happening again.

What’s more likely in my mind is that the block-chain technology rather than these “currencies” will prove to be where its true value lies. Nonfungible tokens, for example, offer proof of ownership and transfer, and work on block-chain technology pioneered by “currencies” like BitCoin. If the goal is to do away with traditional banking, these miners may be onto something. I’m much more skeptical that they can succeed in creating currencies that will be as ubiquitous and fluid as traditional currencies like the dollar.