YOUGHAL, IRELAND – Dear Reader, we are working on a shocking new insight.
It came to us yesterday as we were wondering about bitcoin, cryptos, and (a term new to us) “microcurrencies.”
The crypto sector has lost about $1.3 trillion since the beginning of May. Bitcoin itself has been cut in half.
But both colleagues and dear readers insist that the crypto class still has value.
“These are not just money substitutes,” said a colleague. “There are many microcurrencies that make business easier and less costly.”
But when we tried to pin him down on how they work, it was slow going.
“You see, they’re based on smart contracts that are registered on the blockchain and then bypass the middlemen.”
No Beer
All the foam was there; but where was the beer?
Perhaps we are just slow-witted. But the more he explained, the less we understood.
A smart contract, we discovered, is no different from a dumb contract. It can be a 200-page document… or a handshake… with as many “if X when Y, then Z” clauses as you care to put in.
If there is a dispute, it needs to be resolved. How the “smartness” part helps, we don’t know.
“You don’t understand,” an old friend added. “This is a whole new asset class. It is like the beginning of the auto industry. Most of the car manufacturers that started out failed. But those that remained were great successes.”
We still made no headway.
The auto industry produced millions of cars and trucks. It made huge profits. Its U.S. “headquarters” – Detroit… Motown – was once the richest city in America.
But crypto? What is the “asset?” Why is it an asset at all?
As far as we can tell, it is like Artificial Intelligence – one part new technology and nine parts old claptrap.
Grave Doubts
Which brings us to our point. We offer no opinion on the cryptos that claim to be useful for things other than money – except that we’ve seen no significant examples.
But as to the usefulness of cryptos as money, we have grave doubts.
And we were delighted to open the financial news this morning and see that our old friend, Nassim Taleb, shares them. Business Insider elaborates:
Bitcoin is worth zero and there is no evidence that blockchain is a useful technology, Black Swan author Nassim Taleb says
In a recent six-page draft paper titled “Bitcoin, Currencies, and Bubbles,” Taleb laid out four key arguments against the cryptocurrency, which he promoted to his 743,000 Twitter followers.
First, the author said that in spite of the hype, bitcoin failed to satisfy the notion of “currency without government.” In fact, he said, bitcoin proved to not even be a currency at all.
“The total failure of bitcoin in becoming a currency has been masked by the inflation of the currency value, generating (paper) profits for large enough a number of people to enter the discourse well ahead of its utility,” he said.
Taleb’s second criticism said bitcoin can neither be a short nor long-term store of value. He used the famous juxtaposition of gold versus bitcoin – which he said was poor comparison – to illustrate his point.
“Gold and other precious metals are largely maintenance-free, do not degrade over a historical horizon, and do not require maintenance to refresh their physical properties over time,” he said. “Cryptocurrencies require a sustained amount of interest in them.”
His final two points argued that bitcoin is not a reliable inflation hedge, contrary to some analysts’ views, and is not a safe haven for investments – whether meant to protect against government tyranny or other catastrophes.
Nassim reminds us that bitcoin was no protection in the panic of last year; it sank even more than the stock market.
And when the FBI was recently able to track ransomware payments made by Colonial Pipeline – reported to be in the region of $4.4 billion in bitcoin – it became obvious to everyone that the alleged privacy and security of bitcoin transactions was more wishful thinking than fact.
But the cryptos still have their fans and “hodlers” (people determined to hold on through thick and thin). Many of them began hodling when bitcoin was under $1,000. Even after getting cut in half lately, it’s still over $30,000 this morning.
“See,” begins a crypto enthusiast. “I told you they were valuable. That proves it.”
Usefulness of Money
That is what triggered yesterday’s wondering.
To make a molehill out of a mountain, what we notice is that the more a currency goes up (or down) in price, the less valuable it becomes.
Money – or anything that purports to be money – is not valuable in itself. You can’t eat it. It’s generally not much to look at. You can’t wear it or use it for transportation.
A dollar may be used to start a fire. A funny bunny crypto coin can be an amusing joke. A gold coin can serve as a paperweight.
But the only real usefulness of money is as money, nothing more.
Money helps us keep track of what other things are worth. And if it is to be valuable, it must be truthful.
If it gives us a false report, on the other hand, it is as dangerous as a double agent in wartime, giving out misinformation so that we will make a mistake.
A year ago, bitcoin said it was worth about a third the cost of a Ford F-150 pickup. Two months ago, it said it was worth two of them. Now, it says it is worth only one. Which is it?
And here’s the thing: When money can’t keep its story straight, it loses its value as an informant.
Take bitcoin, ethereum, dogecoin, et al.
People buy them because – they say – they are superior forms of money. Then, if they go down, they sell them… because they have proved to not be superior forms of money, after all.
But if they go up, they have proved to be untrue and unreliable.
Delightful Confusion
This puts the thinking speculator, if there were any, in an awkward situation.
He has taken a flyer on a new form of money… that has proven to be not very useful at all.
And yet, it has gone up in price. And now, other buyers are buying… because it is NOT a good currency. That is, they are buying because they think it is going up in price even more.
All of which makes our head spin.
But what a delightful confusion.
If you are buying a crypto, remember… Nassim Taleb could be right. It may have no value. Zero.
And the more it goes up, the less value it will have.
Regards,
 |
Bill
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