Wednesday, October 18, 2017

"Why Crypto-Currencies are the Next Dotcom Bubble"


That's the title of a very interesting article by Aaron Clarey, a.k.a. Captain Capitalism.  If you've been wondering about Bitcoin (the original "cryptocurrency"), "Initial Coin Offerings" and the like, he provides a great deal of information of which I hadn't been aware.  In particular, he highlights the risks involved in dealing in such pseudo-commodities.

... unlike say, a bond, a stock, or a rental property, currencies (crypto or not) do not produce income.  They are a tool of economic exchange, a store of value, and naturally forming and evolving economic phenomenon since humans existed.  Silver bars do not poop out little silver coins and gold coins do breed to make little gold coins.  And since all currencies produce nothing, there is no means by which to value them.  The value of currencies are therefore determined by their rarity relative to one another, whether they have intrinsic value (precious metals), utilitarian/commodity value (silver is used in electronics), purchasing power (the Big Mac Index) and the amorphous, whimsical, and impossible-to-measure trust and faith of the entire world's people.

. . .

I'm no economist, but as far as my logic takes me, the world should only need ONE cryptocurrency.  Maybe three or four in order to account for the fact people would want to diversify out of being reliant upon just ONE cryptocurrency.  But when I did the research for my client...now approaching 4 months ago...there were....(drum roll please)

967 cryptocurrencies!

But wait, it gets better!  In those four short months the number of cryptocurrencies has increased by 200!

Do not tell me this isn't Dotcom II all over again.

. . .

Very simply "The We Accept Index" reconnects and measures the only thing that matters with a currency - whether it is accepted as such.  Whether you can use that currency to purchase ACTUAL TANGIBLE PHYSICAL THINGS IN THE REAL WORLD.  Whether other people deem it to have value.  And it is here we find out just how few cryptocurrencies have value.

In all honesty, only two, MAYBE four have value:
    Bitcoin
    Litecoin
    Ethereum, and
    Dogecoin (and this was started on a lark!)

The remaining 99.7% of cryptocurrencies, in literal economic terms, have no value.

There's much more at the link.

This is a very informative and useful guide to the area of cryptocurrencies, and the explosively expanding market for them.  I'm forced to agree with Mr. Clarey;  this looks like yet another bubble, one that may take the fortunes of many investors with it when it (inevitably) implodes.  There is no real, tangible value underlying it at all.

Peter

12 comments:

Margaret Ball said...

Good. I can continue not understanding cryptocurrencies.

Scott H said...

I find that I must disagree with the venerable captain. Many many years ago I was taught and believe that a candidate for a hard currency must have real value. While it is true that gold and silver do not spawn more gold and silver, they are both important, in fact vital industrial metals and have just increased their importance over time. Thus I would say that no crypto-currency is a safe store of value, because sooner or later the marks wise up.

Sherm said...

Another way to look at it - is there any steak behind the sizzle?

Will said...

I'm thinking that an important measure of the worth of a currency is whether it can be used to pay any government taxes.

Theother Ryan said...

I have been working on issuing Ryan Bucks. Seriously though from a currency angle it's best to keep it simple and in dollars. If your goal is to use a currency as a hedge maybe go with Swiss Francs. If your goal is a true worst case physics gold and silver still rule.

Some folks made a pile on it but I fail to see the allure of a non state issues fiat currency at all.

Jaime Centurion said...

It is rather complicated but to simplify it boils down to supply and demand. Hard currencies such as dollars, euros, yens, etc., are in universal demand and stable supply. Plus they are back up by governments whose survival is dependent on the well-being of these currencies, otherwise you would see their violent overthrow. Cryptocurrencies on the other hand are largely based on demand and supply provided by private citizens. Buyers beware. No guarantees.
Me, I would prefer to invest in gold or silver coins. Safe, universally accepted, convertible to other currencies, barter-friendly, tangible.

harp1034 said...

I am like Jamie. I'll stick with my gold and silver coins.

Tirno said...

As much as gold and silver coins attract... copper plated lead in brass cylinders with highly exothermic chemical payloads and a small amount of primary explosive maintain both a trade value and a practical value.

In fact, if you want a backed cryptocurrency...back it with ammo. Call it Ammocoin.

Holy crap, my biggest worry now is that the NRA will catch on...

urbane legend said...

Hard currencies such as dollars, euros, yens, etc., are in universal demand and stable supply. Plus they are back up by governments whose survival is dependent on the well-being of these currencies,. . .

So-called hard currencies are backed these days only by the willingness of people to accept them as a medium of exchange. That is what defines anything used as currency.

. . . otherwise you would see their violent overthrow.

Governments get violently overthrown when oppression reaches a tipping point and the citizenry has the means to overthrow that government. Currency rarely has anything to do with it. Hyperinflation was only one of the things that led to Hitler's rise to power in Germany, and he became chancellor without a violent overthrow of the government.

Zan Lynx said...

The important thing about a currency is that it is difficult to get more of it and that people agree to use it.

Once you have one pretty shell, gold coin, paper dollar or BitCoin then you can offer it to someone else in exchange for something you need. And if the other guy can give it back to you in exchange for something *he* wants, now it's a currency.

As long as someone can't easily create more of it then you know that it's still worth roughly what you exchanged for it last time.

The neat thing about crypto-currencies is that they are easily movable. Unlike gold, which requires large ships or trains and lots of armed guards, crypto currency is simply information, easily moved, and locked against bandits through the use of cryptographically-locked wallets.

Yeah, if some bad guy is running a key logger while you open your wallet, then he can take all your virtual money.

It's harder to understand for many people, because it's math and information security instead of a physical safe, but if you have a lot of BTC or other types, it has to be protected with a digital safe isolated from the networks full of evil strangers.

And some of those evil strangers are the ones creating new types of coins: in order to use them safely you or someone you trust has to understand the math behind them. And like he said in the article, lots of people won't *admit* that they don't understand it. They're going to get taken advantage of.

ravenshrike said...

Unlikely that any of the ones noted by him will be on the top of the pile in ten years except possibly Litecoin. Instead you'll see something like Monero which anonymizes each transaction.


Overload in Colorado said...

I think of money as a measure of labor. I work 8 hours and receive Something for the value of that work. I can take that Something and exchange it for something else I feel is worth 8 hours of labor.

Is crypto-currency any different than a Walmart gift card or an Apple Store card? You might think so in that the CC can gain and lose value vs the dollar, but I've bought a $100 Apple Store card for $85.

Heck, given that the US Dollar isn't backed by anything other than the trust of the US Government, why is a dollar worth a dollar? With Fractional Lending, banks are creating millions of dollars every day.


If you were in Puerto Rico, without power and cell phone service, that CC would be useless. Would ammo be of value? Only if you need to defend yourself or were going to use it to get stuff. Dollars, gold or silver might be accepted in return for goods. My guess is the gal who had months of food in storage would be able to trade it.