I am not sure how I got onto their lists but I have lately been getting many calls from telephone-marketeers trying to get me to invest in cryptocurrencies. I had rejected investing in these a few years ago but thought I would revisit the scene. It worries me that so many “financial journalists” put out stories in praise of cryptocurrencies which defy common sense. They often use jargon to try and hide the lack of substance in their stories. I would not be at all surprised to find that they are being paid for their advertising efforts.
No matter. My conclusion remains the same now as then. Don’t bother to buy into cryptocurrencies.
Economics 101 (another label for common sense) tells us that money is an intangible representation of wealth while a currency is a quantifiable manifestation of money. It used to be that currency was always some physical thing. Any thing – with the emphasis on thing – could be used as a currency. It could be gold or cigarettes or bits of metal or pieces of specially printed paper. Nowadays, the thing can even be abstract as a record in an accounting book or a computer. The purpose of any currency is only as a medium of trade. It’s stability as a medium of trade depends upon the stability of the issuing authority. When that authority is a state or government, the stability then depends upon the strength of the economy propping up that state or government. Here in Sweden, which has almost become cashless, my money is held as electronic records at a number of banks and financial institutions. It is already almost entirely digital and in the last 12 months (albeit corona restricted) I have used cash on just two occasions (once for ice cream and once for private parking in a field). My digital monies are fairly transparent to the institutions holding the records and to the state authorities (tax authority) who have legal access to certain information. The security of my wealth, and my ownership of that wealth, are entirely dependent upon the stability of the government and the legal system in place.
Now consider cryptocurrencies. Bear in mind that almost every currency today is already essentially digital. There are many financial journalists and other shady characters who write about the advantages of such and they fantasise about the high purposes of these schemes. But every cryptocurrency is fundamentally designed to hide wealth, hide transactions and to provide a channel for laundering dirty money. The value of any such currency is not grounded on anything more than supply and availability of itself. There is no legally accountable body or institution responsible for holding deposits of the currency. It is claimed that cryptocurrencies have many advantages over regular currencies, such as:
- Freedom and autonomy for the user
- Complete confidentiality
- No or low banking fees
- accessibility
- decentralised….
The “freedom and autonomy” they offer is to make clandestine payments (usually for prohibited goods or services) without regulation. For regular, lawful payments they provide no advantage whatsoever, and add a great deal of risk. For clandestine payments they reduce the risk of disclosure even if the currency-value risk remains high. The “confidentiality” claimed is a euphemism for “hidden from regulatory scrutiny”. The advantage is of value only for illegal transactions. There are always fees involved though nominally they are low. However the exposure to value fluctuations is total and cannot be hedged. The touted accessibility is no different to that in any regular, on-line banking system. Claiming “decentralised” as an advantage is entirely a PR invention. What is truly decentralised (and therefore absent) is any kind of accountability.
A cryptocurrency is not real money. It is, to be precise, a virtual, on-line claim to be money. The amount of the currency held is represented by an encrypted token. In theory the amount represented by the token can be used for a transaction with a new token representing the new value of the holding. The token can be “sold” at whatever value a buyer is prepared to pay in some other regular currency for that token. It has no other inherent value than what a buyer is prepared to pay. The value is open to heavy manipulation. There is no guarantee of convertibility.
Cryptocurrencies do not provide a more convenient medium for trade than conventional currencies, except for those wishing primarily to trade dirty money for dirty goods and services. They are not more digital than regular currencies. Drugs, stolen goods and hit contracts are obvious examples of trade facilitated by a cryptocurrency. Certainly they provide a means of hiding wealth away from prying regulatory eyes but at the cost of an increased risk on the value of that wealth. They provide a channel for secret transactions, without any regulatory oversight, across country boundaries. Of course, they are not without the risk of that wealth not being convertible to anything.
In my layman’s view, cryptocurrencies are designed primarily for hiding money and to facilitate unlawful transactions in secret. In fact, I would suggest that all cryptocurrency transactions be treated as suspect. Naturally all those holding cryptocurrencies should be tagged as potential law-breakers!
I will not be buying any Bitcoins anytime soon.
Tags: Bitcoin, Cryptocurrencies
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