The Devil’s Advocate – Jack Donaghy

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A view of cryptocurrencies from the demon on your shoulder.

Fair warning, this is not your typical fluff piece that tells you that cryptos are going to make you a millionaire if you just hold them for long enough. So, buckle up for an anti-advocacy article.

I would like to point out before I begin that I am no Roubini. I have been involved in cryptocurrency since 2015 and have made a fortune investing in bitcoin. I cheer wildly for its success. My barber will tell you that I’ve been begging him to buy since it was $500. However, the last few months I’ve taken a backseat as cryptocurrency has raged back and forth across the price spectrum. In that time influencers have come and gone, screaming their undying love for varying cryptocurrencies and their use case.

This has given me the opportunity to reflect on the values often considered inherent in this relatively new asset class. Today, I’m going to present several counter arguments to those perceived values. The fan-favorite “store-of-value” argument, the “anti-government” argument, the “technology” argument, and the “anti-recessionary” argument.

Before you begin, I would like to point out that I use the terms “bitcoin” and “cryptocurrency” interchangeably. I use bitcoin to refer the whole asset class of which bitcoin presents the most dominant player. In addition, I do not go into blockchain as I believe it is a valuable technology and have no arguments with its implementation in modern business. This article solely focuses on monetary systems built with cryptocurrencies.

The Store-of-Value Argument

Historically, precious metals signaled scarcity, denoting wealth and class. No matter the conflict, catastrophe or calamity, gold was globally recognized for its value and accepted unconditionally. (Excepting gold plundered from various cursed sources but that is merely superstitious deviation from the mean.)

Stores of value in economics, is an asset that will retain the majority of its value despite outside interference. Many “influencers” and diehard cryptocurrency fans will tell you bitcoin is a great store of value and compare their physical wallets to the original gold and silver of bygone eras. While I hate to be the bearer of bad news, this comparison is bogus. Let me fill you in on a little secret.

Without internet, cryptocurrency means nothing.

Now, let’s break that down. In time of conflict, catastrophe and calamity what is the first thing that civilized countries lose?

Power. No power means no internet and no internet means no cryptocurrency. Now I understand that a wallet is cryptographically secured and can be transferred from person to person without internet. if you physically give them the wallet or the address. In reality however, that becomes impractical for the majority of transactions and unless it’s recorded on the blockchain… well…. you just lost the entire value of blockchain.

What good is a store of value if you can’t use it in difficult times? It has an effective value of 0. Ask any Syrian.

If the economy is going well and you just need a place to park cash for an increase in value, well let me tell you the most unguarded secret in history.

Compounding is king.

If it can’t be a store of value like gold or other items, can it be a store of value production? Wealthy individuals find investments that create compoundable revenue. Stocks, bonds, rental property, business ownership, etc, etc. Bitcoin for the average investor doesn’t produce value, and outside of trading, it produces no compoundable revenue.

Of course, less initiated neophytes will tell you that bitcoin is a chance for people to “invest like billionaires” and that modern-day monetary policy makes the poor poorer and the rich richer. This argument shows that bitcoin is no different from any other trade-able asset. If anyone tells you that bitcoin is a “free market” which make it superior to traditional markets, then they are an idealist and not a trader (and not even a competent business owner in most cases).

So… with that said. Back to our topic. These items show that Bitcoin is a risk asset. Risk assets are characterized by massive swings in price and a risk asset is not a store of value.

Conclusion: Based on all logical criteria, Bitcoin is not a store of value.

(Please note: Someone will invariable argue that gold has risen and fallen in $ value in the last 50 years. However, as bitcoin is a similarly global asset with thousands of times greater volatility, I argue it is an invalid measure.)

The Anti-Government and Privacy Argument

On a certain social media sites there lies a group of borderline anarchist influencers that verbosely expound on how cryptocurrencies are a safeguard against corrupt governments and protects their privacy.

First. The decentralized nature of bitcoin means that production can and will be sold to the highest bidder. While idealism creates new ideas, life doesn’t continue on hopes and dreams. Currently, certain governments have taken the initiative to fund and produce bitcoin farms that control an enormous percentage of the global bitcoin production. Any currency that runs from a cryptographic mining system can be taken over, either by force or through economic means. Which means that the decentralization does not save it from a malicious government.

Second. People argue that they want privacy and cryptocurrencies promote their individual freedom. This is not a problem of assets. This is a problem of politics. If you cannot trust your government to not interfere with your privacy, then you need new government. Not a new technology to hide from it. I compare this argument to those who complain that their boss is a micro manager. Walling off your cube so they can’t see what you do does not resolve the problem. Reason, logic and even job changes correct this problem.

Conclusion: Bitcoin is not anti-government. It will not stop a corrupt government from coming for its citizens and a functioning government invalidates its privacy argument.

Technology Argument

Anyone who is familiar with cryptography will tell you that cryptocurrency is a miracle of modern technology.

While this is true, Bitcoin, for all of its potential benefits, presents a significant problem for the technically challenged, young and old. While enormous efforts have been made to educate and promote literate bitcoin use, the very nature of its technology-centric ideology makes it nearly impossible for some users to understand and malicious actors from all sides can perpetrate actions on users with near impunity.

Per Coin-desk, it is estimated that the stolen cryptocurrency on the market amounts to nearly 10 billion dollars(as of October 2019) with no hope of recovery. It is nearly impossible to retrieve funds once lost and there is little to no recourse open to victims of theft or potential violence. While some users scream for their privacy, many of those same users are the one that scream for government intervention when they lose their fortunes to a malicious actor.

Conclusion: Cryptocurrency is held back by its own complexity and as a result, is useless to the common user. There are far faster and easier methods of instant payments that render cryptocurrency obsolete. (Example: Venmo, Zelle, etc.)

Anti-Recessionary Argument

Cryptocurrency is touted as a global asset class with worldwide acceptance which promotes a recession-proof currency that is unlinked to any economic cycle.

While I could craft a long-winded explanation of the behavioral economics of people in dark times, I cannot imagine writing something that better destroys this argument than Thursday, the 12th of March in 2020. Faced with global market failure and impending catastrophe in the form of the coronavirus, people fled a volatile asset.

Even aside from the pending pandemic, the global markets collapsed by over 30% in less than a month. If bitcoin was an anti-recessionary asset, then it should have risen in value by a comparative amount. Instead it slowly crumbled down by 20% of its yearly high and then promptly plummeted an additional 50% in a 24-hour span. (Meanwhile gold has risen slowly in the face of these difficult circumstances.)

This circles back to its store of value. It has 0 global acceptance. No one considers cryptocurrency to be a safeguard and instead, they spurn it as a risk asset and dump it in favor of what they know will be a store of value. Treasury bonds. shudder

Conclusion: Cryptocurrency is not anti-recessionary. It is subject to the same behavioral patterns of any other risk-based asset.

Summary

Bitcoin has proved an incredible piece of technology but what I believe will rise from the cryptocurrency phenomenon is the even more valuable blockchain technology that provides companies an endless supply of improvements in all aspects.

However, for those looking to increase their wealth, I have another little secret for you. Come close.

Billionaires make money because they know when to seize opportunity and when to abandon it. They didn’t spend their day chomping potato chips, playing video games and hoping for the best. They put their best outfits on and bang on doors morning until night until the right one opens and then squeeze every ounce of potential out of it and move on.

Albeit, this takes practice, trial, error and I have by no means mastered it, but the cryptocurrency phenomenon was and still can be a literal once-in-a-lifetime opportunity. Are you waiting for the opportune moment to cash in and move on to the next opportunity? Or are you screaming about its store of value as one day you are worth millions and the next you are penniless?

Remember, take profit, diversify and don’t limit yourself.

Disclosure

The opinions and investment strategies of the author are their own and not to be construed as investment advice. With any type of investment, the potential exists to lose some or all of your investment. The author makes no guarantees of gain or increased profit and cannot be held responsible for losses incurred.

Credit to various photographers on unsplash.com for photos.

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