Cryptocurrencies: A Pipe Dream Investment

Investors across the globe have invested nearly $57 BILLION into cryptocurrencies

Among the 100 cryptocurrencies that make up this total market capitalization, Bitcoin, the most popular of these alternative currencies, makes up roughly 50% of this entire volume (over $28 billion).

Bitcoin’s market cap is so large that if it were a country, it would take its place among the top 50 nations in the world, according to World Bank statistics.

But despite the increasing popularity of these alternative monies, the question remains: are they sound? Can they even be considered as legitimate money? Sure, cryptocurrencies obviously have “money-ness,” at least enough to be used as a medium of exchange. But placing the speculative impulse aside, are cryptocurrencies sound money investments?

Before we answer this question, let’s think for a moment about why cryptocurrencies exist, how they actually function, and why their emergence has been greeted with such an immediate surge of interest and hasty investment.

Cryptocurrencies reflect a genuine need that fiat money cannot satisfy

Cryptocurrency demand has seen a tremendous rise, and for a good reason: people want to use money that  cannot be manipulated so easily by governments; money that cannot be artificially created or inflated; money that is not subject to coercive government taxing and control.

It’s about exercising free choice and possessing assets that exist beyond the reach of government control. People are simply tired of the Federal Reserve’s ineffective monopoly over the US Dollar. They want something better; something that stands apart from government’s interventionist tendencies.

In short, cryptocurrencies exist because people have lost faith in government-issued and government-controlled fiat money. People want “good money.” And there’s no other compelling reason for this rise in cryptocurrency demand.

But are cryptocurrencies money?

Here is where cryptocurrency experts have it all wrong: electronic money will most likely never replace fiat money or sound (commodity) money. People who think otherwise have a gross misunderstanding of the nature of money, how it functions, and how it becomes a common medium of exchange.

Throughout history, robust forms of money started as an actual commodity with a pre-existing exchange value. From its value as a barter item, a commodity then became a medium of exchange. It still had its value as a commodity, but it now has a second value to facilitate transactions for other commodities. The main point, all robust forms of money started as a commodity with a pre-existing exchange value.

Fast forward to the future, some commodity money--such as gold and silver--became more frequently used for their purchasing power rather than for their original commodity use (e.g. to make jewelry or to use for industrial purposes). This is why paper money, such as the US Dollar, is still used as a means of exchange despite it not being an actual commodity: people are aware of its purchasing power from when it once represented gold. Consequently, government manipulation of paper money has also weakened people’s view of this historical link in value.

In stark contrast to commodity money, cryptocurrencies have no form, shape, or weight--they are neither visible nor tangible. They have no pre-existing exchange value nor do they have a pre-existing use value (they are not, nor were they ever, “commodities”).

The only real measure of cryptocurrency value is its convertibility into paper currency. And paper currency itself is already an unsound medium of exchange.

So are cryptocurrencies money? The answer is a resounding NO! Instead, cryptocurrencies are merely a way of deploying paper money.

THIS MAKES CRYPTOCURRENCY INVESTMENT NOTHING MORE THAN A MERE PIPE DREAM.

Enter the Colored Bitcoin - a gold substitute

Recently, collective efforts have been made to create a gold-backed bitcoin. They are called “colored bitcoins.” To buy colored bitcoins, you have to first buy the gold to back it. Again: you first have to buy gold. A colored bitcoin is a “gold substitute.” Of course, you can imagine that transactions of various sizes or amounts may prove challenging, especially if physical gold has to be delivered for payment.

Better to stick with the real thing

If bitcoin’s reliability as money is held up by people’s faith in its ability to deploy or convert into paper currency, then its extreme volatility demonstrates the instability of that faith. And if bitcoin is the most liquid of all cryptocurrencies, then how much more unstable might be the other 99 competing cryptocurrencies?

Perhaps gold- or silver-backed cryptocurrencies may one day become a more reliable form of sound money. But you have to remember that its reliability will stem solely from the value of gold and silver--metals that you have to own in the first place in order to convert into something less stable.

But why would you want to do that when your gold and silver holdings already possess stability?