Cryptocurrencies make good currencies, but fail miserably
when trying to achieve the status of money.
Cryptocurrencies are both created and held electronically inside a virtual wallet.
These digital currencies use encryption techniques to regulate the generation
of new units and to verify the transfer of funds. Cryptocurrencies operate
independently of governments and are decentralized.
The most popular cryptocurrency now is Bitcoin. Bitcoin
has risen in popularity because, unlike government-backed fiat currencies, it
has a finite number of coins--21 million, 15.5 million of which are currently
in circulation--and user transactions remain anonymous. Thus, the argument
goes, it is superior to the fiat currency system and a viable replacement for
precious metals because of the limited supply, anonymity, and independence of
central bank authority.
Cryptocurrencies are driven by a technology called Blockchain that allows for
the transfer of stocks, bonds, property rights and digital currencies;
directly, in real time, and with lower fees, because there is no middleman.
The Blockchain technology itself is revolutionary and will make transactions
more trusted, transparent and immutable.
While the technology driving cryptocurrencies is very interesting, the
“coins” themselves are not equivalent with the Blockchain technology.
Cryptocurrencies are simply piggybacking on the blockchain as they masquerade
as real money.
To explain, we must first consider what the properties of
genuine money are. First and foremost, money is a store of wealth. For
centuries PM’s have been the premiere storage of wealth – they have no
challengers in this criterion. In order to be a store of wealth, money must have
intrinsic value. In other words, there needs to be a significant cost
involved in the production of new money: such as labor, equipment, and energy
expended. It costs about $1,000 to extricate an ounce of gold from the
ground. Gold simply cannot be produced by decree. {It is crucial to note that
while additional Bitcoins must be mined with great expense, the creation of
new cryptocurrencies is fairly easy to accomplish.}
Most importantly, money must also be virtually
indestructible and extremely rare. Gold and platinum are extremely rare and
do not corrode or oxidize. Essentially, they last forever.
However, unlike PM’s, fiat cryptocurrencies lose their
utility during a simple power failure or whenever the internet goes down.
People who put their faith in cryptocurrencies have to ask themselves how
confident they are that there will never be a victim of an Electromagnetic
Pulse bomb or a nuclear war that disables all forms of electronic
communication. Try bartering for a can of beans with a fried PC.
A more likely scenario is that governments or hackers
shut down Bitcoin exchanges. In fact, back in 2014, there was the infamous
Mt. Gox hack, in which over 800,000 coins were stolen and almost caused the
end of Bitcoin. The owners of cryptocurrencies must hope that governments
never shut down the exchanges or websites that enable these electronic
transactions. Governments can try to ban gold ownership, but that must be
done on a door-to-door basis and is extremely difficult to accomplish. But to
place confidence in cryptocurrencies is to put faith that governments cannot
control the internet.
Gold and platinum are very rare within the earth’s crust,
and the mine supply of these elements increase marginally each year. And the
number of elements that are rare and indestructible are known, fixed and
miniscule. If scientists routinely discovered new elements by the hundreds
that are virtually indestructible and extremely rare, the value of all
existing PM’s would become greatly diluted. That dynamic is exactly what is
happening with cryptocurrencies.
Both cryptocurrencies and fiat paper money share this
same inherent flaw: their supply is theoretically unlimited and can be
increased by fiat. Even with this, the money supply of U.S. dollars, as
represented by M2, has been increasing at a rate of about 5% per annum.
However, there are currently now over 1,000 digital currencies in existence,
up from just a small handful in 2009, and that number is growing by the day.
These currencies are mostly homogeneous and therefore
tend to act like a single commodity. Of course, there are some small
differences. Ethereum, the second most popular cryptocurrency, offers
self-executing agreements coded into the blockchain itself. But the core of
the technology—decentralized digital money—is the same throughout the
cryptocurrency world. Therefore, a more advanced currency with greater speed
and capabilities would greatly reduce the value of all other inferior digital
“money”; just as each new digital currency created greatly reduces the value
of those already in existence.
The advocates of Bitcoin believe they have the upper hand
to gold because it is limited to 21 million units. But what the holders of
Bitcoins don’t yet understand is that even though this one cryptocurrency is
limited in supply, the universe of commodity-like cryptocurrencies is
unlimited.
Because cryptocurrencies are driven by quickly changing
technology, you have no idea when your cryptocurrency will become obsolete.
Therefore, you can go to sleep believing your wealth is stored in the
equivalent of an iPhone and wake up realizing your life savings is parked in
an eight-track cassette.
Cryptocurrencies are an inferior form of money to PM’s.
After all, one has to question the durability and soundness of owning
electrons inside a digital wallet. It is also a currency that has attracted a
number of terrorists, black mailers, and child pornographers--giving
governments a great motivation to regulate it.
Precious Metals, such as gold and platinum, are the most
perfect form of money known to humans. This has been proven correct for
thousands of years. Indeed, history clearly proves that all currencies backed
by nothing eventual display that very same valuation--nothing. However well
intentioned, in the end, the creators of cryptocurrencies are really just
modern day alchemists; and what they ended creating is nothing more than
fool’s gold.
