Cryptocurrency, Bitcoin, and Fiat

Crypto: Everything Wrong With, and Right About it

I’ve held off on weighing in on the crypto craze because I was a little concerned about rabid internet trolls tearing me a new asshole. But no longer. I feel in order to be true to my principles, I must always display my favorite entrepreneurial trait, courage (thank you Peter Thiel), so it follows I have to give my unsolicited opinion regardless of how many petty arguments may ensue. So, here goes nothing, my take on all things cryptocurrency and Bitcoin.

Crypto: The Good

It does increasingly seem like cryptocurrency’s legitimacy as a store of wealth and investment vehicle is here to stay. Kevin O’Leary of Shark Tank fame has come around to investing in Bitcoin after spending a good amount of time being critical of crypto in general and Bitcoin in particular. His colleague on Shark Tank, Mark Cuban, has recently done the same with Ethereum. Wall Street firms have helped legitimize crypto investments. Morgan Stanley has begun offering Bitcoin funds to its wealthy clients, and Goldman Sachs has followed suit.

And why not? None of the criticism I’ll discuss, or any you might hear (it’s not real, it doesn’t do anything etc) really get in the way of it being an asset. Gold has all but ceased to have any actual function since the world got off the gold standard (and no libertarians, we’re not going back), and that hasn’t stopped it from being a highly sought after investment. Bitcoin, and crypto in general, just seem to be the next technological iteration of commodities investing.

I’m no techie, but from my surface level understanding, Bitcoin transactions are incredibly secure. As a payment system, it has no problems with fidelity, and fraudulent transactions are all but impossible.

Crypto: The Bad

Let’s get one thing out of the way. My critical take on Bitcoin and the cryptocurrency craze doesn’t come from a place of envy or malice. If you’ve made a lot of money investing in crypto, more power to you. I don’t have energy to waste being jealous of people who make tons of money. I’d die from exhaustion given all of the overnight uber-wealthy folks being minted daily thanks to insane IPOs and crypto.

Now that that’s been said, I must point out, I’m utterly unconvinced the “decentralized revolution” in currency, a greater economic movement away from fiat currency resulting in unprecedented freedom, financial independence from state overreach, peace and goodwill on earth, and all the warm and fuzzy feelings you can think of, is on the horizon.

One thing Bitcoin, nor any crypto for that matter, has evolved into yet is a functioning currency, which is the point. It’s volatility is the most obvious reason why. It’s not altogether very surprising why when you think about it. Bitcoin enthusiasts continue to point to its massive increase in valuation-in fiat currency terms. If it’s supposed to move us off of fiat currency, how does becoming worth more fiat equate to freeing us from the constraints of government issued currency? If anything, it only ties us down further to fiat.

Actually Buying Things With Crypto: Who Does it?

As it stands, about 2.3K businesses in the US accept Bitcoin as payment, just over 15K worldwide. In the U.S., there are about 7.7M businesses with at least 1 employee. The number increases to about 32.5M if you include freelancers, sole proprietorships etc. That means about .029% of U.S. businesses, if you accept the lower estimate, accept Bitcoin as payment. That’s not even a rounding error.

What most people don’t realize about Bitcoin is that merchants who accept it usually convert it to fiat, which not only gunks up the works a bit, slowing down the transaction and minimizing the advantage of speedy transactions some cryptocurrencies have, but also demonstrates their apprehension about using crypto as an unbacked currency, like fiat. The same is true for PayPal. They don’t send any BTC to merchants who use it for their own purposes. It all just gets liquidated and the fiat is forwarded to the merchants. Unless those same businesses accept crypto through their own channels, I see no reason to include them as businesses that formally accept cryptocurrency as payment.

In 2010, a guy named Laszlo Hanyecz bought two pizzas with 10K Bitcoins. This was of course when Bitcoin was still a novelty, long before its price skyrocketed. As of this writing, Bitcoin trades for $58,245.60, meaning Mr. Hanyecz paid $582,456,000 for two pizzas. He says he has no regrets, I say he’s full of shit.

Therein lies the problem with Bitcoin and crypto in general, the aforementioned volatility. Everyone keeps talking about how much more it’ll be worth next week, next month, next year etc (again, in fiat currency terms). If that’s the case, why would you actually *spend* it? You know, that thing you do with currencies? Sorry Elon, I’m not buying your $38K Model 3 with Bitcoin that’ll be worth $50K later this year. Makes no sense. Makes even less sense to buy Mavericks tickets with Dogecoin, for a variety of reasons.

…And The Ugly

This is akin to what economists are nearly unanimously united in saying is a bad thing: deflation. Deflation is an across the board drop in prices of goods and services. Seems great, who doesn’t like cheaper stuff? But deflation kicks off a deflationary spiral. People hoard money expecting further drops in prices, which leads to further drops in prices to try and incentivize purchases. The price of debt increases as its buying power increases, which isn’t good for business. As a currency, crypto can never work if it’s volatile in general, and certainly not if the expectation is for the buying power to increase. The economy would not function.

Ultimately, the underlying problem with crypto as the new way to transact is it’s supposed main strength, its decentralization and lack of government mandate. It’s certainly appealing to think we can have economic freedom independent of government constructs, but no amount of fetishizing such freedom and its implications, like no longer being burdened with the specter of Johnny Law coming to take your guns and make you gay marry an illegal immigrant or whatever, is going to make cryptocurrency work.

Fiat currency is a collective delusion. In and of itself, it isn’t worth anything. And that’s why people think crypto can work, since the same is true. But, paradoxically, despite the illusory nature of fiat currency, it is in fact, real. The reason why is the law. In order to do business in the U.S. you must accept U.S. dollars. You can’t refuse to. The U.S. also guarantees the payments of its public debt in dollars, not cryptocurrency.

Last Thoughts

None of that really raises any cause for alarm. One thing that is truly tragic about Bitcoin and crypto in general is the massive energy requirements for the compute power need to complete the calculations to mine Bitcoin. It seems like the use of countries as a benchmark for the scale of energy input into worldwide mining keeps rising in population, Argentina being the most recent. Should the price continue to increase, which is likely as it becomes harder to mine and the supply continues to approach its limit, this problem is only going to be exacerbated, as is the concurring problem of global warming. Even though more than 18 million of the total supply of 21 million Bitcoins have been mined, the rewards for successful mining will dwindle until all have been mined in 2140. So, we’ve got a long time to go.

Maybe there’s a silver lining to be found. Perhaps crypto will inadvertently spur a clean energy revolution that will save the world from cooking to death. If so, I’ll be eternally grateful. Let’s hope that, and not something far worse, is the main externality of the cryptocurrency “revolution.”

1 thought on “Crypto: Everything Wrong With, and Right About it”

  1. Pingback: SPACs: Worthless Wealth Transfers at the Expense of Retail Investors - The Mavens Havens

Leave a Reply

%d bloggers like this: