Unless you've been living under a rock, you know cryptocurrency is all the rage. Bitcoin, Dogecoin, JoinCoin (okay, made that one up) are the hot new place to invest with the hope of striking it rich. While I’m intrigued by the concept of digital currency, the execution seems suspect. Rather than take a position, I’m going to make an argument for and against cryptocurrency and let you – my respected readers – decide for yourself.
What would you call a dime with legs? Just a little walking-around money.
What Is Cryptocurrency?
As usual, I will have my chums at Investopedia explain the concept of cryptocurrency. And I quote “A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.”
Cryptocurrency is built on blockchain technology. If you are unfamiliar, think of blockchain like if an object came with its own chronological history. For example, the banana you’ll eat tomorrow came from Ecuador two weeks ago, where it boarded a ship and came into a port in Miami. Next, it was trucked to Nashville, where it was graded and shipped to your grocery store’s distribution center. From there, it was sent to your local store, where you bought it yesterday. With blockchain, your banana could be tracked through all of those transactions – with location and time – from the tree in Ecuador to your kitchen.
Case For Crypto
I can see three major pros for cryptocurrency’s existence and eventual ubiquity in our world. First, it’s the technological aspect. With the whole monetary system – banking, commerce, and investing - going digital, why do we still print paper money and mint metal coins? The authority on all news coins reports it costs 1.76 cents to produce one penny! And we are still doing this why?
Second, it’s the traceability factor. Because blockchain can verify origin, you know if you’re getting authentic currency. Broadening the argument to digital currency, there are additional positives. From a government’s perspective, they could easily track spending, prevent counterfeiters, and ensure all citizens are paying their taxes. Think that’s far-fetched? China is close to doing so already!
Third, it becomes a question of inherent value. In previous lifetimes, currency was often tied to a hard asset. For example, the U.S. issued money as a gold or silver certificate, where your $5 bill was backed by a physical holding of gold or silver worth $5. Today, it is backed by nothing but the faith in the actual currency and its ability to be exchanged for goods and services. Sovereign governments (ahem, America) are printing trillions of dollars to cover rising expenditures. Inflation is a major concern, so your dollar will not get you much anymore. The idea of a cryptocurrency decentralized from a government removes some of the bureaucratic hurdles and can be designed to retain value. For example, there are supposedly a fixed number of Bitcoins in existence, so there is certainty to the supply.
Case Against Crypto
Without a doubt, there are concerns about cryptocurrencies. First and foremost, it’s the wild west right now. Almost anyone could create one. No real regulation, oversight, or certainty outside of the standard supply/demand market to guide their “value”. Don’t believe me? Look no further than Dogecoin. Created as a spoof of crypto, the market capitalization is comparable to Fortune 500 companies (about $70 billion as I type this). Think about that – a made-up digital coin is worth more than a major corporation.
In fact, some major corporations like Facebook, Amazon, Wal-Mart and Google have dipped their toes into either supporting or creating their own cryptos. Step back and think about that – is that essentially like buying a gift card? Could you use Amazon crypto to buy something at its biggest retail competitor, Wal-Mart? I doubt it. Could you pay your taxes with Google currency? Doubtful.
Additionally, there's always the accessibility/practicality factor. Could everyone utilize a digital currency like they can use cash today? Not everyone has a cell phone, bank account, etc. This is not to say digital/crypto couldn't be a part of the monetary system, but for any currency to be a standard-bearer, it must be widely accepted and usable for everyone. Just picture the neighbor kid's lemonade stand accepting Ethereum.
Then there’s the valuation concern. What is the intrinsic worth of a digital currency, or any currency for that matter? It’s what you can buy with it. In the case of cryptocurrencies, they are starting to gain some commercial utilization, but are otherwise just traded amongst others investing in cryptocurrency. When you invest in one, you are counting on someone else seeing its value at a higher exchange rate than you bought it for. Unlike other investments, it’s not backed by a tangible asset. If you buy stock, you get a very small slice of the company’s ownership, and are entitled to the proportional amount of the company’s earnings, dividends, etc. If you buy a house, you get all the land, lumber, drywall, toilets, and (let’s face it) headaches that come with it. This makes cryptocurrency a true gamble on market demand. If you follow the valuations whatsoever, you know they fluctuate tremendously based solely on sentiment. A single tweet from a billionaire can send it shooting up, and that same cat could sour on it and tank its value. I know that stinks (perhaps musky), but it's the reality of this nascent investment. For every Bitcoin or Dogecoin, there are a thousand that have failed to get off the ground. So how do you know which will succeed and which will fail? I have no clue, but if you do, please shoot me a message so I can hit the lottery!
Conclusion
Digital currency, including cryptocurrency, shows some promise as the monetary system of the future. Just like other aspects of the financial world going digital, it just makes sense currency could follow this path in the future. However, decentralized currencies are riddled with concerns, and it’s hard to know which will survive over time. My advice would be to invest at your own risk, and only a small percentage of your overall wealth. If you don’t invest, you should at least stay aware of the crypto markets and understand what’s happening. You never know, your paper money may be worthless someday! Tell you what – get ahead of the curve and send me that useless paper and metal, and I’ll send you DoughNutCoin. It’s 100% certified to be have immense (sentimental) value and is widely-accepted at any Sears, Fazoli’s, or Cinnabon (non-airport) location.
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