Value of My Crypto Account 2017-2022.
I have been intrigued with cryptocurrency since I first heard about it. Even the story of how the first cryptocurrency, Bitcoin, came to be is shrouded in mystery and drama. Created in secret by a still unidentified developer known as Satoshi who unleashed it to roam the world without further intervention of the creator, Bitcoin, like Frankenstein’s monster, is its own beast. The way fortunes were created from nothing and lost again (sometimes literally lost in a dumpster), has all the makings of B grade movie. I am thinking of something along the lines of Bride of Tulipomania Meets Bladerunner.
Then there is the powerful underlying technology which has potential to disrupt the financial industry as we know it, by eliminating middleman institutions like credit card companies and banks.
But like any new concept or technology, it is hard to understand and see its potential until someone else has really made it ‘work.’ Crypto doesn’t quite work yet.
I am what is called an ‘early adopter.’ (euphamism for ‘person who wastes money on unproven technology’) I had one of the early cassette recorders in the early 1970s when many were still rocking reel to reel if they had a tape recorder at all. I talked my mom into buying the first Macintosh computer in 1985 (I couldn’t afford to buy one myself) and I had one of the first Newton MessagePads (the precursor to modern smart phones) back in 1995. I bought one of the first iPhones. Likewise the iPad. I bought the first Apple Watch sight unseen from behind the firewall in the Apple Store where I worked at the time when it went on sale at 3:00 a.m. in March of 2015.
I buy these things less for what they can actually do, since early models often don’t do very much, but more to understand how they work and what their potential might be in the future. That is to say, I like to play with toys.
It was that kind of curiosity that led me to buy some cryptocurrency in 2017. I did not buy it because I thought it would be a good investment. On the contrary, I expected that it might well become worthless and that I would, or at least could, lose every penny.
I had wanted to own some Bitcoin for a while but what pushed me over the edge was the formation of a new kind of company, the ‘crypto bank.’ Previously, owning crypto meant needing to store your crypto in digital form on some kind of device. Preferably a hard disk or thumb drive that was not on a computer connected to the internet and ideally physically secured in a fireproof safe. If someone could gain access to the code that represented your crypto, they could steal it. It all seemed a bit too fussy for me and I was pretty sure that I would misplace the drive or lose the key to the safe.
That changed when crypto banks created the equivalent of a brokerage account that could hold ones crypto in a password secured online account. One account could hold multiple currencies the way a Charles Schwab account can hold stocks in multiple companies. Yes, that account could be hacked just as any online account can be but I figured a big company would probably be better at managing security than I. They at least seemed like they knew what they were doing. I opened an account and bought:
$200 of Bitcoin
$250 of Etherium
$250 of Litecoin
Today there are dozens or even hundreds of cryptocurrencies, but in 2017 those were the big three. I figured if I actually owned some of the currencies I would be more likely to pay attention to what was happening as the technology changed and developed and perhaps even be able to explain it to others at some point. Here is my attempt to do just that.
Cryptocurrency uses something call blockchain technology, which works something like this. When a transaction or a transfer takes place with bitcoin, that transaction is recorded over the internet on tens of thousands of computers at the same time. That makes it almost impossible to falsify or ‘counterfeit’ a crypto transaction. In the Bitcoin model, the same process that records and verifies the transaction also ‘mines’ or creates new crypto for the computers doing the verification, thus incentivizing the owners of those computers to do the necessary work of recording the transactions. The fewer computers doing the work, the greater the chance of success each individual processor has of earning more Bitcoin. This tends to keep the level of processing high enough to sustain the system.
Currencies other than Bitcoin may use different systems but the basic idea is the same. The fact that the transactions are recorded publicly means that it is virtually impossible to falsify them. This has a huge advantage over paper money, which is relatively easy to duplicate. Those issuing paper currencies (governments) are constantly trying to stay one step ahead of the counterfeiters as printing technology gets continually better and cheaper.
Blockchain technology can substitute for the ‘trust’ institutions that we pay large sums to use. Credit cards are an example. When I walk into a Starbucks to buy a coffee, I have two choices. Pay now or pay later. There might be many reasons I might want to pay later. Maybe I don’t have any cash on me or maybe I don’t have any money until next week when I get paid.
But Starbucks could be reluctant to accept an IOU backed by the full faith and credit of the Bank of Cherrytree. Also, it would be a huge pain to have to make the rounds on payday and settle my debts at establishments all over town. Enter the credit or debit card. This bit of plastic assures the seller that there is an institution standing behind me that will ensure they will be paid for the goods they are handing over to me. In exchange for this assurance, the seller pays a fee of around 2.5% of the transaction, which ultimately, I pay as it is factored into the cost of what I buy. Additionally, if I choose not to pay my balance in full every month (God forbid!) I pay interest on the balance of between 13-25% annualized. Needless to say it is an extremely profitable business for the credit card issuers.
Blockchain technology has the potential to disrupt this business by providing real time assurance that the money has been received for the goods at the moment they are handed over and at a very low cost per transaction. The seller knows instantly that they have been paid, and I walk out the door with coffee in hand. No cut for Mr. Visa or Ms. Mastercard. The money saved should theoretically end up back in your pocket in the form of cheaper goods.
But like the widely mocked Newton MessagePad, in 2022 block chain technology is not quite ready for prime time as cash. Nor does, crypto does not stand up to scrutiny as an investment into which any sensible person should invest a meaningful portion of their assets.
Let’s tackle the “Is it money?” question first. Well, what is money?
According to widely accepted definitions, money has three characteristics.
It serves as a medium of trade and is widely accepted in exchange for goods and services.
It serves as a store of value and can function as a way of holding the value of my work or productivity for the future when I need to use that value to buy things I need like food or clothes or to pay the guy who mows my lawn.
Finally, money serves as a unit of account so that we can measure the relative worth disparate goods. Using units of currency, I can compare the price of a share of Apple to the earnings of the company. Or I can compare the cost of a pound of rice to a pound of potatoes, or precisely answer the question,’How many hours do I need to work to buy 100 grams of saffron?’
Major cryptocurrencies like Bitcoin are increasingly being accepted as a medium of exchange. Though far from universally accepted, if you are determined you can pay for some things with Bitcoin. Likewise, as there is an exchange rate for cryptocurrencies, you could value anything you wanted in whatever currency you like.
But, the big problem with crypto as money is that it is much too volatile to serve as a store of value. Even with inflation running at 8%, the US dollar is far more stable than Bitcoin. Even the Russian ruble, as beaten down as it is now, is more stable than Bitcoin.
Bitcoin is just too volatile to be super useful as money right now.
But is it a good investment? First of all, I am probably the wrong person to ask this. Over the course of my investment life, almost every decision I have made to invest in an individual stock has been a poor one. Just once, I made a good decision but that must be chalked up to pure luck. So, to determine if crypto makes sense as an investment let’s turn to someone who could probably lay claim to being the greatest investor of all time, Mr. Warren Buffet the CEO of Berkshire Hathaway.
Buffet says that crypto is a poor investment because it has no underlying value. It produces nothing and is only worth what someone thinks it is worth at a particular moment.
If you invest in a farm or a factory, for example, you can evaluate the value of what those things produce. Not to say, that the value can’t change over time, it certainly will but you can evaluate that value at the time you invest and decide if it is worthwhile or not.
When you buy crypto (or a tulip bulb) as an investment you are counting on ‘the greater fool’ theory for your profit. Crypto has no value in and of itself (even a tulip bulb at least has a nominal value). Rather, your profit depends on you finding someone who is a greater fool than yourself to buy it from you at a higher price than you paid. Sooner or later, the world may run out of fools and someone will be left holding the bag. It might be you.
Buffet and his partner Charlie Munger have notable reputations as Bitcoin haters. Both in their 90s, it would be easy to dismiss them as cranky old men who don’t understand the 21st Century. But to be clear, the Oracle of Omaha has never said that the technology that runs Bitcoin isn’t useful, only that Bitcoin itself is not a smart place to invest any money that you aren’t prepared to lose.
Gold, incidentally, is an asset a lot like crypto. It has very little intrinsic worth. To be sure, it has some industrial uses and is valued as jewelry and ornamentation. But it produces nothing and it doesn’t really appreciate. In real terms an ounce of gold has about the same purchasing power today as it did in ancient Rome. (Warren doesn’t buy gold either.) But at least gold has a track record of being valued by people that goes back thousands of years. Cryptocurrency and its bastard cousin the non-fungible token don’t have that history and you can’t make either into a pretty chain to wear around your throat if the price goes south. In addition, mining Bitcoin takes heaps of computer power which uses tons of energy most of which is being produced with fossil fuels. So unlike gold which doesn’t tarnish, Bitcoin is tainted with the environmental damage it is causing. (Mining gold causes huge damage to the planet also.)
So crypto doesn’t work well as money and it’s not a sensible investment. It isn’t even much use as a toy unlike my 27 year-old Newton Message Pad, which still works! So, what is it good for?
As of now, cryptocurrency and NFTs simply serve as a proof of concept for these innovative technologies. When the World Wide Web appeared around 1994 most of us couldn’t have begun to imagine how this technology would transform the way we shop, learn, and consume news and entertainment.
A digital currency issued by the US Government or the EU could one day solve some of the problems related to money in its current form. It could eliminate counterfeiting, dramatically reduce the cost of transactions, and allow central banks like the Federal Reserve to respond with more agility to recessions and to inflation by changing the money supply more quickly.
The US Treasury is looking into developing a digital currency but the day when all our money is truly digital could be years away just as my MessagePad proceeded the iPhone by nearly 15 years. No doubt there will be incredible applications of this technology that my poor imagination cannot begin to fathom.
Meanwhile, as of this writing I can, according to current prices, sell the crypto I purchased for $750 to a bigger fool for $6,859. But I have no plans to sell. I am holding on to hope that there is a still bigger fool right around the corner.