Crypto? Digital Beanie Babies?
Cryptocurrencies are a clear and present danger to the US dollar. There is a very high probability that the US government will outlaw the use of cryptos as currencies. Sounds far-fetched?
By Capital Thinking • Issue #878 • View online
In mid-April I picked my 15-year-old daughter Hannah and her friend Sarah up from school and took them to Barnes & Noble.
Sarah found out that I “do stocks” for a living and immediately asked me about crypto. She wondered what cryptocurrency she should buy and if she should open a Robinhood account.
Curmudgeon on Cryptocurrency
Vitaliy N. Katsenelson | Contrarian Edge:
I’ll tell you about the advice I gave her in a bit. But a few days later I got three calls in one day from my wife’s side of the family – from my sister-in-law (a pharmacist) and my wife’s cousins (both are barbers).
They were all asking me about crypto. I told them, you don’t ask my advice on which number to put your chips on when you play roulette in Vegas; cryptocurrencies fall into the same category.
No matter what asset class you are discussing, it feels a bit “toppy” when people far removed from investing start asking you for advice about it, all at once.
I feel like an old curmudgeon writing this. I know “I don’t get it.” Crypto lovers look at me as if I am defending silent movies and treating “talkies” as unwelcome, short-term imposters. Curmudgeon I am.
When we discuss crypto, we need to separate blockchain technology from the so-called currencies. Though I have yet to see a mainstream application of blockchain, I get a feeling they are coming.
However, just because a technology is useful, has a lot of applications, and is widely accepted doesn’t automatically mean that you can use it to create a genuine currency.
Here is an example.
Venmo, which is owned by PayPal, is a very useful technology that many Americans use weekly or even daily. The benefits of widespread usage of Venmo, however, accrue to PayPal’s shareholders and don’t lead to appreciation of the US dollar or whatever other currency it transacts in.
When we talk about cryptocurrencies we have to make clear which one. Many consider Bitcoin their god and savior. However, there are thousands of these “currencies” out there, with dozens created every week.
Until recently Bitcoin looked like a clear winner; even Elon Musk was touting it, and Tesla bought $1.5 billion worth of it. Then Musk also shared with us his love of Dogecoin – a joke of a currency (literally, it was created to mock cryptocurrencies), and Dogecoin exploded in price.
A few weeks later Musk realized that Bitcoin is “Beanie babies powered by coal.” Because of Bitcoin’s decentralized nature, solving useless math problems to mine more bitcoins consumes more electricity than Argentina.
Musk announced that until Bitcoin starts consuming less energy, Tesla will not be accepting it as a payment for cars. If you are an ESG-oriented pension and don’t want to own Exxon (“evil Big Oil”), I want to see how you justify owning Bitcoin.
Arguably, Bitcoin is worse for the environment than internal combustion engine cars if you adjust for CO2 production in relation to societal utility (at least cars get you places). For the energy cost of processing one bitcoin, VISA can process 810,000 transactions, about 370 times faster.
I’ve spilled a lot of ink explaining that one of the biggest assets the US government has in its arsenal is the US dollar being the world’s reserve currency.
Control over our own currency gives politicians the ability to make promises and not keep them, by constantly running budget deficits and printing and borrowing money to pay for these promises.
We are able to run trillion-dollar deficits because the US government has a dollar-printing press. The US government will not give it up without a fight. We’ve started wars over less.
Vitaliy Katsenelson
Photo credit: Jievani Weerasinghe on Unsplash