Occam's Razor

As Rod Serling might have put it: submitted for your consideration: the value of BitCoin and Ethereum (actually Ether), two prominent digital currencies, over time since 2016, compared to the U.S. dollar:

The dollar of course hasn’t increased in value since 2016: inflation has eroded its value. Since 2016 though both BitCoin and Ether have returned astronomical returns: over 11,000% for BitCoin and nearly 22,000% for Ethereum.

So congratulations to you savvy speculators who bought both of these currencies back in 2016. Hopefully you were smart enough to buy them in large quantities because you knew they would be the winners in this space. I imagine you are independently wealthy now. Perhaps it was your enormous private yacht I saw in Barbados in December, though I heard it belonged to a Russian oligarch.

I’m betting though that, like me, you didn’t own either of them back then. Until last year I owned neither. Had a client not paid me in BitCoin, I’d likely still not be in that market. Anyhow, I was paid $86.14 in BitCoin in early July 2021. To sell it, I set up an account on BlockFi, deposited $100 and bought $100 worth of Ether on November 1, 2021. So I invested $184.14 and at the moment it’s worth $176.69. So I’m losing money.

Chances are if you invested in crypto you’ve lost money too. I’ve lost a whopping $7.45 and that’s after a lot of interest credited to my account by BlockFi. Obviously, if I invested a lot more, my losses would be greater.

These so-called digital currencies were supposedly created to save us from the ravages of inflation. I sometimes think crypto currencies were invented by nerdy libertarians. To libertarians, Ronald Reagan and much of the Republican Party, government is the problem. While waiting for glorious freedom via anarchy, they can at least move their money into these new digital currencies and beat inflation, which they largely attribute to wasteful government spending.

Except, at least so far, crypto doesn’t seem to be living up to its promise. The value of crypto currencies seems to have tanked along with stock markets in general. You might want to attribute it to Russia’s invasion of Ukraine, but even before Russian troops amassed outside its borders, both Ether and BitCoin were down with the equities markets. This happened both recently and in 2018 when markets were down. So apparently crypto is subject to the laws of supply and demand just like everything else. Who would have thought?

The good news is that when markets rose, BitCoin and Ether rose too, disproportionately so. If there’s an upside to these currencies it is that so far at least it is likely to appreciate faster than markets. The downside is that so far it appears to depreciate faster than the markets too.

From this I can infer that these two “coins” are more volatile than the market in general, which doesn’t surprise me because there’s nothing behind them. If I buy a share of Amazon stock, I own a piece of the company. If I buy some BitCoin, its value is irrelevant until I go to sell it, then it’s whatever someone else is willing to pay for it. In some sense I own some part of the value of creating the coin in the first place, which you can assume was done with a lot of dirty energy. But it’s not tangible. I can go to a local Amazon warehouse and imagine my stock in Amazon is worth the value of one of its loading docks. Should Amazon go under, at some point I will at least get a check for my portion of its value. With BitCoin though, its value is entirely virtual.

The case for digital currencies seems to be that if you invest enough in an emerging currency that takes off, you can become extremely wealthy. Also, if it’s a reasonably popular currency, if you buy low and sell when markets are going up, you’ll probably do very well, assuming you are fortunate enough to time the market well.

So it’s definitely a risky form of investment of something with absolutely no intrinsic value, no matter how much the huskers want you to believe otherwise. Like the U.S. dollar, it’s a fiat form of currency because its true value is based on supply and demand. Unlike the U.S. dollar though there is no Federal Reserve entity to prop up its value.

I can see if these get used enough that central banks may decide to prop up these currencies so their economies are impacted less. So maybe rather than being an escape from the tyranny of governments, it will eventually be governments that keep these things going.

In any event, governments are onto you. President Biden is likely to sign an executive order shortly directing the federal government to look into regulating crypto. Lots of other governments are doing the same, recognizing that these currencies have national security implications as they gain wider adoption.

If you are hoping to escape capital gains and interest on your crypto, you are likely to be disappointed. Apparently, there is no free lunch when it comes to crypto, particularly since you are likely to pay a fee to those who process blockchain transactions when you buy, sell or exchange crypto.

Crypto is also useless if you can’t buy stuff with it. Russia is now largely disconnected from the world’s financial networks due to its invasion of Ukraine. This makes it a herculean endeavor for ordinary Russians to buy anything made elsewhere. They can try to buy stuff with rubles, whose value has plummeted about fifty percent since the invasion. Maybe some vendor will accept their Ether to buy some electronics not made in Russia. It’s unclear if they can get it shipped to them in Russia.

It turns out money is pretty meaningless if you can’t get a physical product or a service from trading it. It’s likely that Russia’s control of the internet is pretty severe, probably making trading crypto not an option for most Russians. China has already figured out digital currencies are a threat, and simply disallows them.

So crypto isn’t now and is unlikely to be your hedge in our new inflationary times or for your distaste for government. If at some point it becomes that hedge, it’s likely to be because governments facilitate its use.