Monday, May 16, 2022

My Non-cryptic Thoughts About Cryptocurrencies


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,


“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.