Some Thoughts on Cryptocurrencies

Recently, we have received several questions regarding cryptocurrencies from our clients. The questions are typically whether or not they are a good buy at the current price or not. Here are some thoughts.

There are attractive features of cryptocurrencies. They are infinitely divisible, easy to carry (they are online), and pretty much impossible to steal. Of course, the main benefit is they do not rely on a bank or government to make it work.

There are several drawbacks as well. They require a ton of electricity to maintain the network (enough to power a small country). Transactions still carry large fees associated with them and can take a long time to settle. We do not yet really understand what the effect would be of the government banning or restricting them but it is likely not good.

All those details aside, the main issue I have with the cryptocurrency debate is that it only really occurs when the price is hot. The amount of people talking about bitcoin, for example, was quite small a little over a year ago when the price was in the $5000 range. Now that the price has soared to as high as $63k, everyone is suddenly interested in cryptocurrencies.

This is not unlike any speculative investment, but what is unique to bitcoin are the narratives that are formed after the price has gone up. For example, I’ve heard it said that it is not bitcoin that is volatile, but the US dollar. This is a common argument many bitcoin bulls make. “If the fed/government keep printing money, it’ll crash the dollar and bitcoin will hold its value.” In fact, some say that is what is happening now…that it is in fact the dollar that’s depreciating, rather than bitcoin appreciating over the last year. This to me is an insane thought. If you go to the store to buy some tangible good, say a chair from the furniture store, the price of that chair is not fluctuating in dollar terms. The argument over which currency is more volatile should end there.

For those that buy that narrative, I would be curious what their opinion of Dogecoin is? If you do not know, Dogecoin is a cryptocurrency that was made as a joke in 2013 that uses a dog as its mascot (pictured in the thumbnail). It literally has no utility, as it was designed. It is not accepted as payment anywhere and can’t be used for anything. After a furious rally of about 6500% ytd, this coin is now the 5^th largest cryptocurrency in the world, valued at over $50 billion. Did Dogecoin appreciate rapidly or did the dollar depreciate relative to dogecoin?

I do not mean to sound negative on crypto assets. It is the narratives surrounding crypto while it is hot that gives me pause. It is clear by now that bitcoin and some other crypto assets are not going away. Several large institutions have adopted it, banks are offering it, payment platforms allow you to transact in it, coinbase has recently IPO’d and has a higher market cap than Goldman Sachs. So it likely is something you can buy and hold for a while with a reasonable return while more platforms adopt it. But to peddle it today as a “safe” asset that’s protecting against the imminent collapse of the US dollar, is, in my opinion, dishonest at best. Today, crypto is still primarily a vehicle for speculation, but I am an interested observer of whether its going to evolve into something more than that in the future.