Note from Senior Managing Editor Christina Grieves: Today, Alexander Green is pausing his series on the essential steps to financial freedom to share an updated commentary on cryptocurrencies, which he refers to as “a ticking time bomb.”
You may have noticed that our strategists within The Oxford Club have differing views on crypto… In fact, they had a hearty debate about that topic – and other disruptive investments – at our Investment U Conference earlier this year. (If you want to make sure you don’t miss any of the excitement next time, click here to register for our 2022 conference.)
Give Alex’s thoughts on crypto a read below… And let us know in the comments: Where do you stand on the crypto debate?
Over the last few months, there has been a raging debate – around the world and within The Oxford Club – about Bitcoin.
Some of my colleagues – especially the younger ones – genuinely believe that cryptocurrencies will transform the way we bank, borrow and spend.
Others believe that’s a load of hooey. I’m one of them.
It’s not that Bitcoin and the blockchain – the decentralized ledger of transactions – aren’t genuine innovations. They are.
Governments have a long history of debasing fiat currencies with unjustified spending – and accompanying deficits and inflation.
An independent currency can’t be debauched by the state. That’s a noteworthy development. And digital currencies will be with us for a long time to come.
But that’s no reason to believe that Bitcoin is worth anywhere near its current market price of approximately $40,000.
Don’t get me wrong. Everything is “worth” what someone is willing to pay for it.
But opinions change. And quickly.
How do you make an independent valuation of Bitcoin?
Unlike other investments, it doesn’t have sales, earnings, cash flow, book value or dividends. It doesn’t provide interest payments or rental income. It has no tangible value.
Other forms of currency – like gold and silver – are also limited. But they have drawbacks. Precious metals are hard to divide, costly to store, difficult to transfer and susceptible to theft.
That’s why cryptocurrencies are often referred to as “digital gold.”
But while the issuance of a cryptocurrency may be limited – just as gold and silver are – a key difference is there is no limit to the creation of cryptocurrencies themselves. Indeed, there are already more than 6,000 of them.
That makes Bitcoin subject to risk of replacement.
It can be surpassed by a new digital currency that is less volatile, easier to transact and/or more environmentally friendly.
(Bank of America reports that Bitcoin mining has caused carbon emissions to rise by 40 million tons over the last two years, the equivalent of 8.9 million cars added to the road.)
Some insist that Bitcoin deserves its sky-high valuation – one-third lower than it was in April – because it’s the most widely accepted digital currency.
But economic history is full of first movers that wound up on the ash heap. To name just a few…
- Motorola had the most widely used cellphone.
- Netscape had the most widely used web browser.
- AOL was the most widely used internet portal.
- Yahoo had the most widely used search engine.
- BlackBerry had the most widely used smartphone.
Bitcoin, like everything in the free market, is vulnerable to innovation and competition.
But an even bigger risk to Bitcoin is regulation.
Some countries have banned cryptocurrency payments. Others are considering it.
Why? One reason is their widespread use for criminal activities. If you are a terrorist network, human trafficker, heavy weapons dealer, drug cartel, extortionist or tax evader, cryptocurrencies are a godsend.
All ransomware attacks demand payment in crypto, generally Bitcoin. This has gone from costing society hundreds of millions of dollars annually to billions of dollars annually.
Does anyone really believe that major governments will just sit back and continue to do nothing?
Cryptocurrencies provide a vehicle for speculation. But they don’t solve most people’s real-world problems.
For example, it was recently rumored that Amazon would begin accepting payments in Bitcoin. The rumor turned out to be false. But what if it had been true?
The fact that Amazon – or Tesla or anyone else – would accept my payment in Bitcoin is meaningless.
What difference does it make? What problem does it solve? How does it make my life better or easier?
Oh, right. It doesn’t.
Others point to the 1.7 billion unbanked people around the world who don’t trust their corrupt governments or local currencies. Could Bitcoin fill a need here?
Not anytime soon. Cryptocurrencies’ wild gyrations make them uniquely unsuited for bank transactions. Bitcoin can lose – and has lost – as much as a quarter of its value in a matter of hours.
Still, El Salvador recently required merchants to accept Bitcoin as legal tender. Is this the beginning of an exciting new trend? Hardly.
Late last week, Moody’s downgraded El Salvador’s credit rating, specifically citing the new Bitcoin law and the country’s “deterioration in the quality of policymaking.”
Consider the lot of the average Salvadoran, as well.
Imagine you had a hundred bucks to your name and saw it turn into $75 between breakfast and lunch… Bitcoin might not strike you as a life-changing innovation.
(Although it could be if you owed that money to the wrong group of people.)
The most laughable justification for cryptocurrencies is that Wall Street banks are getting on board, recommending that investors include them in their portfolios.
Let me provide a little insight here. I worked on Wall Street during the dot-com bubble.
Merrill Lynch, Morgan Stanley and Goldman Sachs all had strong “Buy” recommendations on everything from Enron to WorldCom to JDS Uniphase, right up until they blew up in their customers’ faces.
If you wanted to buy eToys or Pets.com, the folks on Wall Street were happy to sell them to you.
And if you want to buy Bitcoin or Ethereum today, they’re happy to sell you those too. (And good luck. You’re going to need it.)
Still not convinced that cryptocurrencies are more hype than substance?
Consider the ridiculous Dogecoin, a cryptocurrency created as a joke and useful for absolutely nothing. It recently had a market cap of nearly $90 billion – more than Ford Motor Company or Marriott International.
How could that not be a bubble?
A few years from now, Dogecoin will be exactly the sort of thing people cite when pointing out the obvious absurdity of today’s cryptomania.
A final note…
While hosting Saturday Night Live three months ago, Tesla founder Elon Musk famously referred to Dogecoin as “a hustle.”
That’s not a bad description of the whole cryptocurrency space, in my view.
Techno-optimists, anarcho-capitalists and true believers will scoff and insist that some people just don’t get it.
Berkshire Hathaway Chairman Warren Buffett and his partner Charlie Munger – arguably the greatest investors of our era – are two of them.
They refer to Bitcoin as “rat poison.”
That’s something you may want to consider if it’s sitting in your portfolio.