Daily Archives: February 19, 2021

Crypto Coins as Assets

The trouble with a cryptocurrency like bitcoin is that it is relatively easy to create new currencies.  The most obvious current example is the dogecoin that Elon Musk has been promoting.  Bitcoin is a potential store of value because there will be a limited number made, a total of 21 million.  However, it is possible using the blockchain security system and other algorithms to develop a new cyber currency with similar or different characteristics.

Bitcoin was originally developed to serve as a currency to pay for commercial transactions.  The blockchain process makes it relatively easy to make payments.  It appeals to dishonest actors (like drug dealers and hackers who hold data for ransom) because it is hard to trace.  But I don’t see anything particularly unique about bitcoin compared to any other cyber currency, except that the transfer mechanisms are in place and have worked for several years.  Some other organization – a country, a bank, a credit card company – could develop a new cyber currency that might have more political or financial weight behind it, and thus might pass bitcoin as the preferred cyber currency.

One problem for countries might be that a cyber currency would be harder to inflate.  The Federal Reserve can just print dollar bills (physically or virtually), but it might not be able to make new cyber coins, depending on how the coin algorithm is designed.  If a country mandated that everyone had to accept the new cyber coin, that would certainly make it displace bitcoin as a form of payment.

As a result, I do not see that bitcoin is an asset that will retain its value indefinitely, like gold.  There are other precious metals like silver, platinum, maybe copper, but they are also physically limited, and their value is determined to some extent by how much physically exists, plus or minus whatever speculative fever surrounds them at any given time.  Bitcoin might be more like gold if it had some intrinsic value, for example, if it were a store of energy that could light a house for year.  But currently, as a store of value, it is not even being used as a means of exchange.  Its skyrocketing value actually makes it a source of currency deflation; no one will spend a bitcoin today if it will buy twice as much tomorrow.  People will not spend them; they will save them.  This tends to be a drain on economic activity, which weakens the economy.