“A currency that appreciates too rapidly is eliminating the main purpose of its existence.” Howard Wang, co-founder, Convoy Investments.
Wikipedia defines currency as money in any form when in actual use or circulation as a medium of exchange. You have a dollar, you take that dollar to a store and buy anything that a dollar buys. So is it with the euro or the pound or a rupee. Almost all currencies in use today are fiat with no inherent intrinsic value. All we have is an agreement between the parties involved that makes a particular currency as a means of payment in exchange for goods and services. The means of payment does not have to be the money we know. Cigarettes for example, is a currency used in prisons as a means of payment. That’s bartering in theory but that’s no different than using dollars as a means of payment. Bartering is just plain inefficient. But there is a difference between say the perceived value of a US dollar versus say a Zimbabwean dollar. Both fiat money but US dollar is supposed to be a much better store of value because it’s backed by the full faith and credit of the United States government – its economic and military might, the rule of law and ultimately the wealth and resources of the United States economy. Zimbabwean dollar on the other hand is backed by, well nothing for now.
So is bitcoin money? Or are any of the cryptocurrencies money? The big argument in favor of bitcoin is that it is not fiat like the US dollar. But bitcoin I contend not only is classic fiat money but worse because it is a perceived store of value based on nothing other than ‘investor’ demand. There is no ‘there’ there. Greater fool theory states that the price of an object is determined not by its intrinsic value but by an irrational belief that a buyer exists who is willing to pay more for an asset than what the seller bought it for. And that buyer, the greater fool better exist. That’s all that is needed to create a market for bitcoins and other cryptocurrencies. Absent that buyer, all cryptocurrencies are worthless.
And if you don’t transact with it, it’s not a currency. Sure, there were a few bitcoin based transactions to buy a couple pizzas a few years back but if it were true money, the inflation adjusted price of those pizzas in bitcoins would not have changed much. But it did because the price of bitcoins has since then gone to the moon turning that exchange that was almost deemed inconsequential into a multimillion dollar windfall for the pizza seller (if he or she is still a holder). Because of this extreme and mostly upward price volatility, no one wants to exchange their bitcoins for anything. They prefer instead to hoard them with the expectation that it will be much more valuable tomorrow. That defies the classic definition of money.
And cryptocurrencies are definitely not investments. The closest resemblance there is to bitcoin is gold. Or art. Or any other collectible where you are buying an asset in the hope that there is this someone who will pay more for it down the road. It’s pure speculation. At least gold and other collectibles have some utility value but they don’t generate income in the present and are not expected to generate income in the future. No income means terrible investment. Actually, not an investment since there is no way to value them.
And there’s no doubt that there is a huge bubble in bitcoin and other cryptocurrencies. There’s no rational explanation for why prices have run up the way they have. The extreme volatility by itself is a warning that the bubble may soon burst. Like all previous speculative bubbles, the cryptocurrency bubble will end badly with substantial paper and real losses for potentially millions of people. It is only a question of when the bubble will pop. Folks who got in early and who have ridden the price up as the bubble inflated would likely only endure paper losses as did early investors in tulip bulbs and dotcom stocks. Recent investors though will suffer real losses.
That brings us to this very strong and highly emotional fear of missing out or FOMO on being able to capitalize and profit from the crypto boom. Seeing other people get rich or at least what they proclaim about getting rich and since you are not is classic FOMO. This is a self-invented psychological torture, a figment of our mind’s worst imagination. Charlie Munger with his Mungerisms teaches us a thing or two on how to deal with this FOMO effect…
“Here’s one truth that perhaps your typical investment counselor would disagree with: If you’re comfortably rich and someone else is getting richer faster than you by, for example, by investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy.”
“The idea of caring that someone is making money faster than you are is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”
So you have nothing to gain and everything to lose with this envy. But unfortunately, this is nature. Human beings are hardwired to feel this irrational fear. If Sir Isaac Newton, the father of modern physics couldn’t avoid falling victim to the FOMO effect, we then are mere normal earthlings. And this irrationality nearly wiped him out during the South Sea stock bubble.
So you got to tame this fear and not let it ruin your life, psychologically and financially not only with the current crypto mania but all other bubbles and manias you are likely to encounter throughout your life.
By now you might have guessed that there is no bitcoin or any other cryptocurrencies in the offing for me though I am still not done trying to read up as much as I can on this and the tech behind it but so far, I am not convinced. You want to dabble in it, sure go ahead. But do that with the intent of losing everything you ‘invest’ in it. If it goes up from here, fine. If it drops, no problem as the amount you invested was not a life changing amount anyway.
So there, one more in the litany of write-ups proclaiming it’s a bubble.
Image credit – Pixabay