Cryptocurrencies = Oxymoron

Mary Suplee |

Jumbo shrimp, Civil War and deafening silence are traditional examples of oxymorons. I think we can add a new one - crypto currency. We’ve been getting a few questions about “cryptos”, particularly Bitcoin, and how people should think about them. The first thing you should realize is that in no possible circumstance are these things currencies or investments. They are flat out speculation. Here’s a few things to ponder the next time somebody says to you these are currency alternatives.

  • Currencies should have a value against a basket of goods. All of these cryptos swing wildly up and down so you can never be sure of your purchasing power from one day to the next.
  • An investment has a positive expected return by definition. You expect to earn interest, dividends (or future dividends) and have a claim on the income stream of whatever you’re invested in. Bitcoin and the others have no income streams or no such future streams of payment.
  • Currencies are backed by the full faith and credit of the sovereign government behind them. This is how they can be used as a medium of exchange. Who backs Bitcoin? Do you have any idea? I certainly don’t.
  • In “Extraordinary Popular Delusions and the Madness of Crowds” by Charles MacKay, we can read how the Dutch Tulip Mania destroyed investors as they bid up higher and higher prices for specialty tulip bulbs. Crypto could easily be the Tulip mania of the 21st century.
  • Consider this, Janet Yellen said that Bitcoin is used “mainly for illicit financing”.
  • Who is out there mining Bitcoins? According to Cointelegraph.com China controls over 50% of Bitcoin mining (originations) while close to 90% is controlled by China, Russia, and Iran. You need to ask yourself this question - If I am investing in crypto because I have lost faith in western democracies’ financial institutions, do I have more faith in China, Russia and Iran’s financial integrity?

As always, if you would like to discuss this or any other items, please feel free to reach out to me at wzs@samasset.com.