Crypto: Too Cool for School

Crypto currencies, along with digital applications, are now all the rage.  The last man who bragged that he bought his Lamborghini with Bitcoin clearly thought the method of payment “way cooler,” than the vehicle he bought. Journalists boost crypto less from understanding what it is than because it discomforts the banking establishment that they love to criticize.  Before succumbing to the hype, Bite-Sized Investing advises consideration of a few sobering points:

• The relationship between money and digital services is nothing new.  Transactions in dollars, yen, euros, and tokens of every stripe were fully digitized decades ago.  Because of these digital arrangements, bank accounts can be accessed electronically anytime and anywhere in the world.  All credit and debit card transactions are digital, as are those with your Apple Wallet.  When the Federal Reserve (Fed) buys bonds on financial markets, the transaction is done digitally, and the accounting is done digitally –– and has been since before most people in the U.S. were born.
• Central bank digital currencies – including the one recently issued by the People’s Bank of China –– would change banking arrangements but have little effect on how people transact business.  People would still need a credit card if they wanted to avoid an instant debit.  Central banks that put such systems into effect would, of course, have a centralized record of everyone’s every non-cash transaction.  I am not sure if that feature counts as “cool.”
• Not all digital currencies are alike.  Some are simply “credits” issued by merchants.  They may have a cool technological patina, but are little different from frequent-flyer miles or a host of similar “loyalty building” gimmicks.  They even look separate from national currencies – you’re offered travel or gifts for the “points” you’ve amassed––points to which a clever vender may have given a cool, “space-agey” name.
• Some crypto currencies are more independent.  Bitcoin is one of these.  They are tied neither to a national currency nor a merchant.  They offer the promise of an alternative money and also appeal because they are not associated with any government or bank. 

It is not clear that crypto currencies will live up to their promise.  So far, they have failed to acquire the two essential characteristics of money:

1. Money must be widely accepted for all sorts of payments.  On this, the dollar, the yen, the euro, and sterling (among others) do qualify.  By law they must be accepted for payment in the countries where they are issued, and many are readily accepted elsewhere as well.  Where such law does not insist, all one needs is agreement on a medium of exchange and then settling on a price.  Theoretically, you could use tin or gold or beads or peanuts if you could agree — that is, accept — them as currency.  In this regard, some crypto currencies have made strides, Bitcoin premier among them.  Some smaller governments now accept Bitcoin for tax payments and many (mostly prestige) merchants, accept it as well.  But it’s still difficult to get the local dry cleaners to accept this method of payment, much less the local diner or a MacDonald’s.   
2. Money must offer a reasonably stable store of value.  The holder of money must have a good idea what their holding is worth, as measured in the things of quotidian life – rent/mortgage, groceries, airline tickets, gasoline, and so on.  If a crypto currency –– as has been the case with Bitcoin over the years –– soars in value and then crashes, it may make a fine speculative vehicle, but it fails this crucial characteristic of money. To be sure, during periods of inflation, such as the United States is suffering currently, the dollar has fallen down in this respect:  It is losing purchasing value.  But even at tines of severe inflation, such as the 1970s and early 1980s when prices sometimes rose by 10 percent a year, the dollar has offered a more stable store of value than Bitcoin and other crypto currencies – at least so far.

If it cannot yet fully claim the mantle of money, Bitcoin and its competitors are still interesting financial products.  In recent months Bitcoin especially has made a lot of people a lot of money (mostly counted in, and accounted for, it should be noted, in dollars.)  For the time being it is less a substitute for money than it is an investment vehicle.  Because it pays neither interest like a bond, nor has exposure to corporate earnings like a stock, crypto is probably closest to a commodity, like gold or copper or pork bellies, with its investment interest tied entirely to its price appreciation or depreciation.  And because it does not come from nature, you might term it an artificial commodity.

It is in this capacity as an artificial commodity that banks and major financial firms have developed an interest in crypto currencies.  Many of these companies are setting up trading facilities for Bitcoin and other crypto currencies, as well as creating investment funds tied directly to crypto currency prices, or indirectly through financial derivatives such as options the value of which in turn are tied to crypto currency prices.  This behavior  has been described by some as an embrace by financial institutions of crypto as money, but their interest is less in the success or failure of Bitcoin and other cryptos as money, and more in the fees they can harvest by facilitating current crypto investor enthusiasm.

Crypto currencies also have  a darker side that merits consideration.  Part of their appeal to some is that crypto currency is pretty much untraceable, akin to a suitcase of $100 bills, though way cooler and less bulky.  That makes crypto currencies especially convenient to people who want to evade taxes or engage in other less than entirely legal activities.  (But this same secretiveness makes it cumbersome if one wants to claim crypto currency as an asset, because it is hard for someone to prove they own the stuff.  No doubt some enterprising entrepreneur will solve this problem –– for a fee of course.)