Cryptos will live on, because ideas can’t be killed in the global war over currencies
Bitcoin’s death has defied naysayers because every bull market must overcome a wall of worry and capitulation. But like all revolutions, ideas can’t be killed.
Bitcoin is dead. Long live bitcoin. Its ardent supporters are behind the struggle between an array of government and private cryptocurrencies.
Bitcoin proponents are as vociferous as Morpheus in The Matrix. After they’ve taken the “red pill,” bitcoin evangelists have seen the truth and heeded their calling.
The range of opinions is both wide and emotional: the cryptocurrency will either change the world, or it’s the biggest fraud ever.
Since China banned private ownership of bitcoin, rumours have emerged that the Chinese and the Russian governments are in hog, preparing to launch the prototypes of their own state cryptos. The main difference between a state sanctioned bank crypto versus the bitcoin is absolute versus relative anonymity offered to holders.
The appeal of bitcoin is it’s false promise of absolute anonymity, but that isn’t true because information is available on each ledger and exchange.
Banks can only offer enough relative anonymity in their crypto products because current financial know-your-client and anti-money-laundering regulations won’t allow for absolute anonymity.
Yet, I haven’t seen any definitive study that defines with authority the degree of privacy and secrecy consumers really desire.
Funnily enough, banks must find a way to reckon the technological paradox of cash actually being the original cryptocurrency.
Like bitcoin, cash can be held and transferred anonymously. Except that cash is physical and bitcoin is digital. You can hold all of your bitcoin assets in a small device while few people nowadays want to hold cash under their mattresses.
State controlled cryptocurrency is a march toward a digital economy and a cashless society. Once the masses have accepted the cashless society, governments will possess absolute power. Without cash, there can be no bank runs. Or imagine the sheer, dystopic evil of embedding an expiry date on digital currency forcing consumers to spend it within a certain period to compel the population to spend more and stimulate the economy.
But, what if bitcoin and private cryptos are scams - a massive bubble that, while making some people multimillionaires, still a relentless Ponzi scheme? If so, then forget all the MBA babble about its “technology adoption curves.” All the fancy charts shown at conferences must vanish because you can only apply them to real technologies or products.
Nothing wrong with speculation, especially in Hong Kong. But don’t confuse it with a medium of transaction or a store of value that you can stake your life savings and an entire economy upon. That’s the harsh dichotomy that fuels the war. Either it’s enshrined by followers as a technological revolution, or it’s derided by bankers as an outright fraud.
If cryptocurrencies are a bubble, then it’s largely a pump and dump game sucking in the gullible masses. And the most effective salespeople are those who actually and fervently believe what they’re saying. So investors need to decide if it’s merely a bubble punt or a serious contender to replace the dollar. Or speculate on re-bar futures contracts in Shanghai.
Then, there are those who bend the laws of finance by arguing about owning bitcoin for diversification or hedging. The problem is that unlike other financial assets, bitcoin doesn’t negatively correlate to other financial assets, so it cannot act as a reliable hedge or diversification.
Goldman Sachs recently released a report that supports gold as a reliable store of wealth rather than bitcoin, which is untested in market downturns. It emphasised that cryptocurrencies are vulnerable to hacking, arbitrary government regulation and infrastructure failure. In dollar terms, bitcoin has been seven times more volatile than gold this year.
However, there is no effective way to fully enforce a global ban on cryptocurrencies. They will find some way to operate in the black market.
Perhaps some governments with especially weak currencies will embrace cryptos to access stable money. Historically, users seek fiat currencies they trust.
Just ask anybody what would they accept in exchange for their output of labour. Don’t confuse cryptocurrency with legal tender fiat. Then, you will see that the crypto is not supposed to be real money. It is a cipher, a medium between real money and value.
Yet, cryptocurrencies represent a technological expression of what the economist James Tobin argued should be a “reliable platform” whereby citizens could deposit or withdraw their savings without assuming the risks of a fractional banking system.
Banks are challenged by the need to control the unpredictable aspects of their own crypto. For example, during a bank or liquidity run, depositors who rapidly convert their fiat currency to crypto end up creating liabilities on the books of the central bank which places more parallel pressure on the fiat currency.
The death of bitcoin has been predicted over and over again. Part of the reason is that every bull market needs a wall of worry and capitulation to overcome. But like all revolutions have proved, you can’t kill ideas.
Peter Guy is a financial writer and a former international banker.