Does a day go by without “cryptocurrency”
making the news? It is the trendiest
thing in the investing world, and everyone wants in on it. Well, not everybody. Not me, for one; and I’ve got some good
company.
So what are my objections to cryptocurrency? Glad you asked.
1. I am not going to take the time to explain the
whole concept of cryptocurrency. That’s
because I cannot confidently (and completely) do so. And that’s the first problem; I doubt the
vast majority of wanna-be investors in cryptocurrency could adequately explain
the “mining” process, block-chain technology, or much else about the
investment. And one of the first rules
of smart investing should be that the investor knows what he is investing in
and is able to explain the investment to his spouse or good friend so she also
understands.
2. Cryptocurrency has been hyped as a solid
alternative to other investments and serves as a diversifier in a portfolio,
having a low correlation to the stock market.
In other words, when stocks are suffering, cryptocurrency should be
thriving. When the stock market zigs,
cryptocurrency zags. Reality says otherwise. We all know the stock market is down these
days. Cryptocurrency is down even
more. Bitcoin, the best-known
cryptocurrency, is down more than 50% from where it was just six months ago. So much for “zagging”.
3.
The so-called mining process to create some
cryptocurrencies consumes an inordinate amount of electrical power. According to an estimate quoted in the New
York Times the annual electricity consumed creating Bitcoin is more than
the electricity consumption of the population of Finland. It is not an environmentally friendly
process.
4.
Think of the name. Whether intentional or not, “cryptocurrency”
seems to denote secrecy, and in fact these alternate currencies do serve to
easily move money across borders with less chance of detection and easily lend
themselves to use in criminal enterprises, money laundering, and fraud.
5.
Because of reasons #3 and #4 above, I suspect
more and more governments are going to move to regulate or ban the mining or
even the use of some or all cryptocurrencies.
We’ve already seen this happen in China.
The Biden administration has formed a study group on the topic. And El Salvador’s launch of a national
Bitcoin wallet, recognizing Bitcoin as legal tender in the nation, has proven a
dismal failure. Even with the incentives
offered its citizens to use Bitcoin, one survey showed that 61% of Salvadorans
had ditched their Bitcoin accounts after withdrawing the $30 incentive money
that came with it.
6.
So why did so many Salvadorans abandon Bitcoin? Maybe they felt like Warren Buffett, arguably
the most famous (and quite successful) American investor alive today who said
that he would not invest in cryptocurrencies because there’s nothing backing
them up. They are not investments in something
that has intrinsic value, like oil, gold, a rental property, or a growing
company. As an investment, your Bitcoin is only valuable
as something you can sell to someone else and only worth what the next guy is
willing to pay for it—if anything.
7.
Cryptocurrencies (and they number over 17,000
now) are speculative ventures, not investments.
They remind me of the period in American history (the 1800’s) when local
banks and industries issued their own currencies before the U.S. dollar became
the standard with the growing strength, integrity, and backing of the U.S.
government. If the bank failed or the
company folded or people just lost confidence in the locally issued currency,
then that currency became worthless. Does
last week’s headline about Luna, a cryptocurrency created several years ago,
remind you of that? In 72 hours it fell
99% in value. As one media source
reported, “Twitter and Reddit were inundated with messages from investors
describing how they lost most of their savings in the blink of an eye. On Reddit, which is widely used by small
investors to talk about their operations in the financial markets, many claimed
to have lost tens of thousands or even hundreds of thousands of dollars in the
crash. Some of the comments expressed
such desperation that forum moderators have pinned the number of suicide helplines
at the top of the thread.”
I feel that the only thing
driving up the value of cryptocurrencies (when it IS going up, and not down) is
FOMO—“fear of missing out”. There has
been so much hype that people are afraid they are going to miss getting in on
the ground floor of the equivalent of the next Netflix or Apple stock that will
turn their ten thousand dollar investment into millions. Yes, Bitcoin has been around 13 years or so,
and some people have made money. Bernie
Madoff’s Ponzi scheme operated for 17 years and at least one person made money
before it all came crashing down. As one
MarketWatch reporter wrote: “Call me in four years.”
Until next time,
Roger
“When the woman [Eve] saw that the fruit of the tree was good
for food and pleasing to the eye, and also desirable for gaining wisdom, she
took some and ate it. She also gave some
to her husband, who was with her, and he ate it.” Genesis 3:6 NIV*
*Scripture quotations taken from the Holy Bible, New
International Version® NIV® Copyright © 1973,
1978, 1984, 2011 by Biblica, Inc.™
Used by permission. All rights
reserved worldwide.
