It should be com­mon knowl­edge by now that the world is mov­ing to­wards a cash­less so­ci­ety.

More and more, dig­i­tal cur­ren­cies will per­me­ate every as­pect of com­merce and oth­er as­pects of life. Where it gets tricky is when peo­ple who un­der­stand more about tech­nol­o­gy and less about eco­nom­ics start of­fer­ing fi­nan­cial ad­vice to peo­ple who un­der­stand lit­tle of ei­ther.

Since cryp­tocur­ren­cies ex­plod­ed in­to the glob­al con­scious­ness there has been a lot of spec­u­la­tion and sad­ly mis­in­for­ma­tion. There is ab­solute­ly no ques­tion that dig­i­tal cur­ren­cy will soon re­place pa­per flat cur­ren­cy but un­reg­u­lat­ed cryp­tocur­ren­cy is sim­ply not the an­swer. It is the Nap­ster to to­day’s iTunes and Spo­ti­fy; it has shown the way but prob­a­bly wont make the trip.

Most who ad­vo­cate un­reg­u­lat­ed cryp­tocur­ren­cy do not tru­ly un­der­stand the pur­pose or mech­a­nisms used by a cen­tral bank and/or have an­ar­chist lean­ings to­wards mar­gin­al­is­ing the “evil, mono­lith­ic bank­ing sys­tem.”

What ex­act­ly is a cen­tral bank?

A cen­tral bank or mon­e­tary au­thor­i­ty is a mo­nop­o­lised and of­ten na­tion­alised in­sti­tu­tion giv­en priv­i­leged con­trol over the pro­duc­tion and dis­tri­b­u­tion of mon­ey and cred­it. In mod­ern economies, the cen­tral bank is usu­al­ly re­spon­si­ble for the for­mu­la­tion of mon­e­tary pol­i­cy and the reg­u­la­tion of mem­ber banks. (https://www.in­vesto­pe­dia.com/terms/c/cen­tral­bank.asp)

Mon­e­tary pol­i­cy con­sists of the ac­tions of a cen­tral bank, cur­ren­cy board or oth­er reg­u­la­to­ry com­mit­tee that de­ter­mine the size and rate of growth of the mon­ey sup­ply, which in turn af­fects in­ter­est rates. Mon­e­tary pol­i­cy is main­tained through ac­tions such as mod­i­fy­ing the in­ter­est rate, buy­ing or sell­ing gov­ern­ment bonds, and chang­ing the amount of mon­ey banks are re­quired to keep in the vault (bank re­serves). (https://www.in­vesto­pe­dia.com/terms/m/mon­e­tary­pol­i­cy.asp)

Cen­tral banks man­age the sup­ply of mon­ey in an econ­o­my in an ef­fort to boost the econ­o­my when there are down­ward forces and to slow the econ­o­my when there are in­fla­tion­ary forces; they keep the econ­o­my on an even keel. How would any cen­tral bank man­age the mon­ey sup­ply through mon­e­tary pol­i­cy if pri­vate and cor­po­rate en­ti­ties or in­di­vid­u­als were able to move mon­ey out of the sys­tem un­fet­tered?

A tooth­less cen­tral bank is a recipe for eco­nom­ic chaos. Al­so, why would any gov­ern­ment al­low a sys­tem ca­pa­ble of un­der­min­ing its econ­o­my to op­er­ate? A sys­tem where trans­ac­tions could not be traced or taxed? Just doesn’t make sense. Un­reg­u­lat­ed cryp­tocur­ren­cies have al­ready been banned in Chi­na, Rus­sia, Viet­nam, Bo­livia, Colom­bia, Ecuador… note that many of these coun­tries have strict cur­ren­cy con­trols. If that isn’t bad enough cryp­tocur­ren­cy prices have shown a lev­el of volatil­i­ty that should com­plete­ly ex­clude them from be­ing con­sid­ered as a form of mon­ey.

In 2017, the price of Bit­coin (the most pop­u­lar of un­reg­u­lat­ed cryp­tocur­ren­cies) went from be­low US$1,000 to near­ly US$20,000. An as­tro­nom­i­cal ap­pre­ci­a­tion con­sid­er­ing al­most any as­set class. In 2018, the price of Bit­coin col­lapsed by rough­ly 70 per cent with ad­vo­cates ad­vis­ing the un­in­formed to “buy the dip” or to HODL.

In the world of in­vest­ing, buy­ing the dip maybe some of the worst pos­si­ble ad­vice.

Buy the dip on what?

Would they have bought the dip in the stock price of En­ron, World­com, or Lehman Broth­ers as they sank in­to obliv­ion? Of course not. HODL is slang for hold­ing on to your stash of cryp­tocur­ren­cy re­gard­less of how low the price goes. You would have been bet­ter off drink­ing Jim Jones Kool-Aid than hold­ing on to your cryp­to in the past year as many lost the ma­jor­i­ty of their val­ue. The great­est chal­lenge is in un­der­stand­ing ex­act­ly what pur­pose cryp­tocur­ren­cy is sup­posed to serve. What is it?

Mon­ey has his­tor­i­cal­ly served four ma­jor func­tions: medi­um of ex­change, mea­sure of val­ue, stan­dard of de­ferred pay­ment and as a store of val­ue. Un­reg­u­lat­ed cryp­tocur­ren­cies fail all of these tests. Due to spec­u­la­tive in­vest­ing, most cryp­to own­ers have not been us­ing them as a form of ex­change; why would one spend some­thing that could dou­ble in val­ue to­mor­row?

Al­so, why would one ac­cept pay­ment in some­thing that could see its val­ue cut in half overnight?

Ei­ther sce­nario is un­ac­cept­able. Cryp­tocur­ren­cy ad­vo­cates, re­al­is­ing the fol­ly of claim­ing cryp­tocur­ren­cies as an ac­tu­al cur­ren­cy and form of ex­change, be­gan re­fer­ring to it as dig­i­tal gold (a store of val­ue), where more prob­lems en­sued.

Gold is an in­dus­tri­al met­al with wide­spread use that has the abil­i­ty to main­tain a sta­ble val­ue over an ex­tend­ed pe­ri­od of time.

Many of the old­er folks in T&T un­der­stood this ba­sic con­cept when they reg­u­lar­ly con­vert­ed their cash sav­ings in­to gold for long-term stor­age and safe­ty. Many so­phis­ti­cat­ed in­vestors use gold to pre­serve their gains and re­turns when mar­kets be­gin to de­cline in what is called a “flight to safe­ty”.

Gold is con­sid­ered a safe haven due to its re­turns be­ing un­cor­re­lat­ed to the gen­er­al broad mar­ket of se­cu­ri­ties- when the mar­kets are go­ing down gold usu­al­ly main­tains its val­ue and in some cas­es even ap­pre­ci­ates. It is gold’s lack of volatil­i­ty that gives it util­i­ty (use) as a store of val­ue. Which cryp­tocur­ren­cy can make this claim?

Re­cent mar­ket de­clines have shown that the val­ues of cryp­tocur­ren­cies are very much in step with the over­all mar­kets (cor­re­lat­ed re­turns), so what’s the point? Cryp­to does not have the at­trib­ut­es re­quired for them to func­tion as dig­i­tal gold.

Un­reg­u­lat­ed cryp­tocur­ren­cies aren’t cur­ren­cy or dig­i­tal gold, so what are they?

This is ex­act­ly the prob­lem; due to the ab­sence of util­i­ty most cry­tocur­ren­cies lack in­trin­sic val­ue. Most in­vestors de­cide whether to buy, hold or sell an as­set by cal­cu­lat­ing its in­trin­sic val­ue and com­par­ing it to its mar­ket val­ue; if mar­ket val­ue is be­low in­trin­sic val­ue it’s a buy, if more than in­trin­sic val­ue it’s a sell, and if sim­i­lar it’s a hold. Leg­endary for­mer US Fed Chair­man Alan Greenspan stat­ed “The no­tion that cryp­tocur­ren­cy doesn’t need in­trin­sic val­ue is non­sense, be­cause mar­ket val­ue al­ways de­pends in part up­on in­trin­sic val­ue. Cur­ren­cies to be ex­change­able have to be backed by some­thing. With­out in­trin­sic val­ue, no­body would have as­signed Bit­coin a val­ue in the first place.”

How does one cal­cu­late the in­trin­sic val­ue of an in­vest­ment with no util­i­ty, cash flows or enough trans­paren­cy to de­ter­mine true equi­lib­ri­um of de­mand and sup­ply? Fig­ure that out and you would prob­a­bly be in line for a No­bel Prize. Se­cu­ri­ty is­sues have al­so be­come a ma­jor con­cern.

Ac­cord­ing to Car­bon Black Inc, one of the largest cy­ber­se­cu­ri­ty firms in the world, rough­ly $1.1 bil­lion worth of cryp­tocur­ren­cy was stolen in the first half of 2018. They con­tin­ued, “crim­i­nals use what’s known as the dark web to fa­cil­i­tate large-scale cryp­tocur­ren­cy theft. There are now an es­ti­mat­ed 12,000 mar­ket­places and 34,000 of­fer­ings re­lat­ed to cryp­totheft for hack­ers to choose from.” The nec­es­sary mal­ware costs an av­er­age of US$224 but can be priced as low as US$1.04. That mar­ket­place has emerged as a $6.7 mil­lion econ­o­my, ac­cord­ing to the study.

Ex­changes were the most pop­u­lar tar­get for cy­ber­crim­i­nals, mak­ing up 27 per cent of at­tacks this year. The dark web is a part of the World Wide Web ac­ces­si­ble on­ly through spe­cial soft­ware. It lets users re­main anony­mous and large­ly un­trace­able­…just like many cryp­tocur­ren­cies.

What good can come from that?

What re­course is there for those who have been hacked?

Can un­scrupu­lous in­di­vid­u­als ma­nip­u­late cryp­to prices?

A 2018 study stat­ed that at least half of the jump in bit­coin prices in 2017 was due to co-or­di­nat­ed price ma­nip­u­la­tion. Uni­ver­si­ty of Texas fi­nance prof John Grif­fin, who has a 10-year track record iden­ti­fy­ing fi­nan­cial fraud, con­duct­ed the study.

Prof Grif­fin and his team ex­am­ined mil­lions of trans­ac­tions on cryp­tocur­ren­cy ex­change Bitfinex. They de­duced that an­oth­er cryp­tocur­ren­cy (teth­er) was used to buy bit­coin af­ter large price falls. His team al­so dis­cov­ered pe­ri­ods of sus­pi­cious bit­coin price ac­tiv­i­ty tied to the is­suance of teth­er.

“It was cre­at­ing price sup­port for bit­coin, and over the pe­ri­od that we ex­am­ined, had huge price ef­fects,” Grif­fin said. “Our re­search would in­di­cate that there are so­phis­ti­cat­ed peo­ple har­ness­ing in­vestor in­ter­est for their ben­e­fit.”

In oth­er words, there are tech savvy peo­ple in the world prop­ping up the price of bit­coin in an at­tempt to de­fraud oth­er in­vestors. This is a jail­able of­fense in many de­vel­oped coun­tries.

Cryp­tocur­ren­cies lack a true eco­nom­ic pur­pose or in­trin­sic val­ue. Most of its val­ue is based on pure spec­u­la­tion giv­ing the in­stru­ment more of a Ponzi scheme feel than that of a true fi­nan­cial in­stru­ment. In a Ponzi scheme ear­ly in­vestors are paid with the con­tri­bu­tions of those en­ter­ing the fund af­ter them. With cryp­tocur­ren­cies spec­u­la­tive in­vestors earn a re­turn based sole­ly on the in­crease in de­mand caused by those pur­chas­ing af­ter them. Not much of a dif­fer­ence. At this point, cryp­tocur­ren­cies cre­ate more ques­tions than they an­swer.

Next time there will be an ex­pla­na­tion of the ma­jor cryp­tocur­ren­cies and what at­trib­ut­es dif­fer­en­ti­ate them. Till then, just say no.