In the last two weeks, a monetary concept called cryptocurrency took center stage of the financial world as “shares” of Bitcoin, the most popular version of the digital currency, rose above $17,500, dropped 30 percent on Dec. 22, and started to climb out of the hole again.
But, while the new currency is all the rage among many investors for its potential as a new wealth-generator untethered by poorly managed governments and their desire to regulate, it raises a slew of questions and major concerns about its real worth and viability.
The concept seems simple enough, sort of.
The denomination is defined as a digital “coin” and its value is derived by the people who own it, and the normal drivers of any other commodity: scarcity and demand. Not long ago, the most widely-known currency, Bitcoin, was worth a few dollars. Today, each “coin” is worth just over $15,000. Other cryptocurrencies vary in price.
Products can be purchased with cryptocurrencies at a limited number of locations that accept it. And, judging by Facebook groups dedicated to preparedness, many survivalists view it as a valuable opportunity to escape the global, government-run, conspiracy-ladened fiat system.
Can Bitcoin and other digital currencies live up to the hype?
Despite many legitimate concerns, many people are curious about cryptocurrency as a sovereign wealth generator. So, how does it work?
A Cryptocurrency Primer
Buffet, Musk and More Have Some Thoughts:
The Good, The Bad And The Ugly of Cryptocurrency
For most, the positives of Bitcoin seem pretty obvious:
- It’s completely sovereign, not created or managed by any government. Some claim its immune to government managed inflation.
- It’s borderless. Owners can send it anywhere, and it can be spent anywhere.
- You can’t cheat the network. Everyone will know.
- While there are transaction fees, it’s not taxable until owners take a profit in government-managed currencies (i.e. dollar, yuan, etc.).
- Quantities are limited. Bitcoin creators plan to distribute only 21 million coins. No uncontrolled money printing here.
- Anyone with the brains, desire and equipment can “mine” the currency for themselves.
But while the positives seem worthwhile, there is no doubt the value of this ethereal product is driven by the herd mentality, and some believe that’s risky.
- The value of almost all cryptocurrencies is completely intangible, which makes it volatile.
- There is no insurance policy. As an unregulated “commodity,” there aren’t even minimal protections for investors.
- Governments don’t manage it now, but how long will that last?
- You can’t shop at Walmart or any other “normal” establishment.
- It’s not hacker proof.
- No power grid, no money.
A Smart Investment?
Any investment is a smart one if you follow the age-old adage: buy low and sell high. If investors manage that with Bitcoin, or other cryptocurrencies, then everyone should be happy. But many investors are advising caution.
In a recent article chronicling the recent correction of Bitcoin’s value, the New York Times quoted William F. Galvin, the Massachusetts state securities regulator who has cautioned investors regularly. “Bitcoin is just the latest in a history of speculative bubbles that most often burst, leaving the average investors with a worthless product,” he said. “Recent developments indicate that this so-called currency is not a secure investment.”
If the 2008 financial crisis was instructive at all, it should be that investing in “products” without tangible backing, or are actually junk, or have no insurance, is risky at best. Consider once-valuable investments like the Dot Coms and Enron?
During the 1990s, investors gave billions of dollars to any software engineer with a halfway decent idea for a new website or computer application. During this “Dot-com Bubble” money was literally thrown at computer and software companies just for their ideas. Some people got rich without producing a single asset or earning a single dollar in revenue.
Some believe it was one of the bigger, legal frauds in history. Why? People with fiduciary responsibilities like investment analysts and hedge managers recommended and invested other people’s money in companies that had no product or asset.
In 2001, perhaps emboldened by the market’s willingness to engage in “irrational exuberance,” the smartest buy in the energy industry was Enron. Considered the sixth largest energy company at the time, the company was buying and selling energy assets like crazy. Investors saw their share prices consistently rise.
Then a brave executive and a business reporter exposed the company for what it was: a paper tiger with no real/tangible assets. Once people saw the light, Enron stock cratered; executives went to jail; and, average families went broke.
I’m From The Government, And I’m Here to Help
And then, there is the government angle in all of this. How many governments worldwide are leaning toward a cashless society? How many governments, like Cyprus, are more willing to take citizens’ money without permission to pay for poor management decisions or out-of-control entitlements?
Of course, the concept of a sovereign currency is exciting, but is the digital form untouchable by lecherous governments or cybercriminals?
Only time will tell.
(Editor’s Note: By no means is Paratus Business News endorsing this or any cryptocurrency. This article is purely for information purposes only.)