Bitcoin. Ethereum. Litecoin. Ripple. Stellar. Dogecoin.
The list goes on.
The list is 4,000 names long as of January 2021, according to Investopedia.com.
Cryptocurrency is sexy.
Q: Why?
A: Not entirely sure. Perhaps because it’s new. Or maybe because it’s not regulated by the government.
Q: Don’t you think the U.S. Government will have its own digital currency soon?
A: I do. Further, it is my opinion that the U.S. Government really wants to do away with cash entirely. I do know that one Michigan University is currently in the process of doing away with all cash transactions.
I don’t like proceeding down rabbit holes, but I do like sharing my opinion. The text on a one-dollar bill in my wallet says, “This note is legal tender for all debts, public and private.” To do away with cash is to do away with the financial foundation this country was built on.
Q: Didn’t the “Doing away with the financial foundation that this country was built on” start in 1971?
A: Yes, on a warm summer night (August 15th) in 1971, U.S. President Nixon announced that the dollar would no longer be backed by gold, thus making our currency the equivalent of “fiat money”, or money that “is because we say it shall be.”
Let’s review the most commonly accepted attributes for something to be considered a currency:
1. A store of value. It has to be worth something. We already know that the U.S. dollar is worth something mainly because “everyone agrees that it is.” When everyone stops agreeing, we will have a problem.
Cryptocurrency: I don’t see any intrinsic value here.
2. A unit of account – in essence, a measuring stick by which we ascribe value to
a transaction, even if the measuring stick has no value backing it.
Cryptocurrency: It seems to me that cryptocurrency could also measure value. Then again, so could grains of sand.
3. A medium of exchange – the government protects our right (for the time being) to use the U.S. dollar to pay for goods and services. (If I were a student at the aforementioned Michigan University, I would point this out).
Cryptocurrency – there is no such protection Constitutionally. (How could the government protect over 4,000 different types?)
In addition, there are other features of currency that I feel are important:
A. Being easily divisible into smaller units. OK, my total is $9.53. If I pay with $10.00, I know that I will receive $0.47 change. We have the smaller units available to make change in that manner.
If I pay for a $9.53 item with bitcoin (which as of this writing is worth $45,045.80 per), I will consume 0.00021156 bitcoin – well, close. That much bitcoin takes me to within 111/1000 of one cent of $9.53. How many decimals places do we really want to deal with? Is there a provision to account for “hundred millionths” of a bitcoin? Because the $0.01 value of a penny is 22 of that. Actually, 22.1996279.
B. Universal. I may feel smug if my digital wallet is flush with crypto, but that doesn’t help me put food on the table if, for example, the grocery store doesn’t accept it.
C. Stability. Although the U.S. dollar loses value over time, a concept known as inflation, it does not undergo wild price swings. On the other hand, crypto gains or losses are often in the double digits when the latest business magnate states (he/she) (will/will not) (continue to accept/begin to accept) cryptocurrency as a form of payment.
Q. Are there any attributes of cryptocurrency that you feel are useful?
A. Yes. The blockchain, the centralized digital ledger used to record transactions for all parties in real time, has the potential to revolutionize the speed, cost, and accuracy of transactions involving multiple parties such as a real estate purchase. However, maybe my readers can correct me if I’m wrong, but I’ve read about the blockchain for years and I still don’t see it being used in actual practice.
The U.S. dollar may or may not be considered “tangible” as it hasn’t been backed by gold for nearly 50 years, but at least it can be used a medium of exchange for tangible items. Such as gold, milk, a cow, and real estate.
Late-Breaking Update: Shortly after this article was written but before its distribution, we witnessed bitcoin lose 20% of its value overnight, then rebound halfway back. In fact, ycharts.com tells us that since April 14th of this year (a period of only 37 days), bitcoin has seen a high of $63,233.03 and a low of $37,287.39. I don’t know about you, but to me that kind of investing starts with “G” and ends with “ambling.”
As you think about that, pay attention to what the masses are doing. Often times we can learn something from them – whether or not we choose to participate.
Until next time,
Dr. Lee Newton
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References:
- https://www.cnn.com/2021/05/17/investing/bitcoin-price-elon-musk-tesla-intl-hnk/index.html
- https://wwmt.com/news/local/cash-wont-be-king-at-grand-valley-state-university
- https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money
- https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/#:~:text=One%20reason%20for%20this%20is,communities%20of%20backers%20and%20investors.
- https://www.investopedia.com/terms/c/currency.asp
- https://www.investopedia.com/terms/m/money.asp
- https://www.ft.com/content/cf378147-1c60-4d60-96fb-bacbfad840fe
- https://ycharts.com/indicators/bitcoin_price
