By Dr. James M. Dahle, WCI Founder
Cryptocurrencies such as Bitcoin are all the rage. Most white coat investors have questions about cryptocurrencies but do not know where to turn for reliable answers. What is cryptocurrency? Should you invest in cryptocurrency? What is the best cryptocurrency?
In this post, I will address all of these questions and more. Buckle your seatbelt, though. It will be a long post. If you just want to skip around, take advantage of the Table of Contents.
- What Is Money?
- What Is Cryptocurrency?
- What Is a Blockchain?
- How Does Cryptocurrency Gain Value?
- Why Is Cryptocurrency So Volatile?
- What Are the Most Popular Cryptocurrencies?
- Uses of Cryptocurrency
- Is Cryptocurrency Legal and Safe?
- How to Invest in Cryptocurrency
- Which Cryptocurrency Will Win?
- How to Create a New Cryptocurrency
- How Is Cryptocurrency Taxed?
What Is Money?
Before we get to cryptocurrency, we need to talk about money as a concept. Money serves two purposes. The first is a medium of exchange. Societies without money are limited to the barter system. If you want to trade something you have for something that someone else has, you had better hope that 1) they want what you have and 2) they are willing to give up what you want for it.
Needless to say, this is an incredibly inefficient system, and it will dramatically hold back an economy. The invention of money as a concept is, in large part, responsible for the fact that you don't live in a cave and spend all your time trying to find something to eat. Historically, metal was used as money as early as 5000 B.C.E. By 700 B.C.E. the Lydians were using metal coins in Western Turkey. Paper money showed up in China in 960 A.D. For many centuries, money was “representative,” in that it could be exchanged for something that actually had value, such as silver or gold. These days, most money is considered to be “fiat,” in that it is made of paper or coins that don't have much value by themselves but are declared by a government to have value.
The second purpose of money is to store value. Your daily work has value. Your employer or your clients give you money in exchange for it. Rather than being paid with chickens, which have to be fed and might die anyway, you can be paid with something now, you can store it for many years, and you can then spend the earnings from your daily work.
In reality, money is whatever people say it is. Whether a bag of salt, a piece of metal, gold coins, paper bills, zeros and ones on an electronic bank ledger, or anything else, it can only be used as a medium of exchange or a store of value so long as people agree to use it.
What Is Cryptocurrency?
In its simplest form, cryptocurrency is software used as money. Crypto refers to the encryption algorithms and techniques that provide security for the currency. Rather than fancy printing techniques (you'll know what I'm talking about if you've visited the US Bureau of Engraving and Printing in Washington DC or Fort Worth), cryptocurrency uses fancy software techniques to safeguard the currencies.
The dictionary defines cryptocurrency as a digital form of money in which transactions are verified and records are maintained by a decentralized system (the blockchain) using cryptography, rather than by a centralized authority. So, a cryptocurrency is digital. It cannot be held in your hand, and it requires a decentralized method to record and monitor any transactions done. Digital currency is nothing new—the vast majority of your wealth and mine are simply “1”s and “0”s sitting in a bank or investment account. The real innovation behind cryptocurrency is the decentralization of the record-keeping. There are now thousands of identical records of the transaction. Blockchains have some confidentiality features that help, but it's not quite as “hidden” as the name would imply.
The bottom line is that cryptocurrency is software. It's code. But it's code that people value, so it can be used as money.
What Problems with Money Are Cryptocurrencies Supposed to Address?
The vast majority of money in use in the world today is fiat money, backed by the government that issued it and useful only because the majority of people believe it has value. Fiat money is subject to government mismanagement. Perhaps the biggest temptation for a government is to print more money. This results in inflation, a decrease in the purchasing power of the money you have. Sometimes inflation is well-controlled—for example, the US Federal Reserve aims for inflation of 2% a year.
Sometimes inflation is too high, like inflation of more than 5% in the US in the fall of 2021 or in the double digits in the 1970s. Occasionally, a country suffers through hyperinflation where people are using wheelbarrows of paper currency to buy their groceries. Inflation is one of Bill Bernstein's Deep Risks, along with Deflation, Confiscation, and Devastation. These are the true long-term risks that investors face because they result in a permanent loss of capital. They should be distinguished from the “shallow risk,” or volatility, that most investors think about when considering the risk in their portfolios.
Fiat money is also centralized, meaning a few people have a large amount of control over it. If those people cannot be trusted, the currency cannot be trusted. While those people are incentivized to maintain trust in the currency, they also face lots of other incentives.
Fiat money and even precious metals are also relatively hard to store, hide, and transport. They can be stolen and destroyed, and there are costs to protecting it. As money moves through the banking system and the world reports are made to governments in an effort to prevent criminal activity, this also reduces privacy and increases the risk of confiscation. Likewise, if you suddenly had to flee your homeland. It is easy to find coins and bills on your body, and bank transactions are easy to monitor.
Sometimes it is very cumbersome and expensive to send money from one place to another. For example, sending $50 into or out of Russia via Western Union costs $8.75. That's 17.5%! Imagine if you lost 17.5% of your money every time you transferred it from one place to another.
Some people are dishonest or have legitimate disagreements about what they agreed to do. Imagine if the money itself had the power to enforce the agreement that was made?
Fiat currency is also subject to counterfeiting. The complexity involved in making a $20 or $100 bill to prevent counterfeiting is impressive, but remember that there is apparently $70 million or more in counterfeit US currency in circulation at any given time. Cryptocurrency is far more difficult to counterfeit.
All of these problems have been addressed by one type of cryptocurrency or another. Cryptocurrencies have their issues for sure, but it is great to see the technological advancement of money continue.
How Many Cryptocurrencies Are There?
It depends on who you ask, but most sources suggest there have been more than 8,000-10,000 so far. There were more than 6,500 cryptocurrencies by the fall of 2021. As of May 2021, over 2,000 cryptocurrencies had failed. Why do some fail and others do not? They may not be very useful, they may have no community supporting them, or they may not be very secure. Or they simply were not the “first mover,” i.e. the first cryptocurrency with a given advantage. Popularity and marketing matter.
Blockchain and Cryptocurrency
One of the most important new technologies of the 21st century is the concept of a blockchain. The blockchain is the decentralized ledger that keeps track of cryptocurrency transactions. This typically occurs across a linked network of multiple computers, or nodes. The idea is that the record on the blockchain is very difficult to change, hack, or steal. There are lots of other uses for a blockchain besides keeping track of cryptocurrency transactions, and people are coming up with more all the time. Wrapping your head around what a blockchain actually is can be difficult.
Example of How Blockchain Works
Imagine that two people wish to do a transaction, such as purchasing a car. Instead of one of them going to a central authority (the bank) to get a cashier's check and then the other one going to a central authority (the bank) to cash the cashier's check, they instead go to an auditorium filled with accountants. Standing on the stage together, they announce “I, Joe, am giving Rudra this Bitcoin in exchange for his car.” The accountants all turn to the page for that particular Bitcoin in their ledgers, and they scribble down that Joe gave it to Rudra. The accountants in this example are the nodes. Each node keeps a separate record of the blockchain.
What Are Crypto Coins and Crypto Tokens?
A cryptocurrency has its own blockchain. The individual units of that currency are called coins. A token is recorded on some other blockchain. It can have value, like a coin, or may simply represent a contract, deed, or another asset. Think of the cryptocurrency as the native asset on a blockchain and tokens as guest assets.
Proof of Work vs. Proof of Stake vs. Proof of History
First- and second-generation blockchains and cryptocurrencies use proof of work to help secure the blockchain. A more recent technology is proof of stake. Whereas proof of work requires each node (computer) in the blockchain network to solve a computational problem, proof of stake only requires the node to hold a certain amount of currency. The issue with proof of work is that nodes are awarded computational power based on energy consumption and computing power. This is massively energy-intensive and, honestly, unsustainable. With proof of stake, mining power comes from the “stake” of the node, meaning how much of the currency it holds. This is much less energy-intensive. Proof of stake is also considered more secure, as it solves the “tragedy of the commons” issue that proof of work networks will run into once all of the currency has been mined.
Want something even faster than proof of stake? Check out proof of history, which is a verifiable delay function. Think of it as a cryptographic time stamp.
How to Mine (Create) Cryptocurrency
Where does cryptocurrency come from? Well, in the case of many cryptocurrencies, it is “mined” by sophisticated computers solving difficult mathematical problems that require a great deal of computer resources, time, and energy. Computers are competing with each other to arrive at the solution first. When a computer gets the solution, it is awarded the next chunk of cryptocurrency, and the process begins anew. Remember “proof of work?” That's what mining is.
What is the problem to be solved? It is actually coming up with the next hash, that 64 digit hexadecimal number used to identify each block on the blockchain. It's not exactly advanced math. It's more just a process of trial and error with A LOT of possible answers to guess from. If you want to win, you need a high hash rate. What is a high hash rate? Well, it is continually improving, but expect it to be 1,000-10,000 “terahashes per second.” Tera means trillion.
Some cryptocurrencies are not mined. The code determines how they are created. In addition to or instead of mining, cryptocurrency may be created at launch as a developer reward or as interest to holders of a token. Most people who own cryptocurrency did not mine it. They simply bought it or received it as a gift.
What Is Halving?
Halving is a Bitcoin-specific term for events, where the reward for mining is cut in half. This has occurred approximately every four years on the following dates:
- November 28, 2012
- July 9, 2016
- May 11, 2020
The next halving is projected to be in 2024. The idea behind halving is to decrease the reward given to a miner for a new block in the chain. Originally 25 Bitcoin, it is currently 6.25 Bitcoin. This produces an artificial rate of inflation until the last Bitcoin is mined, projected not to occur for more than 100 years despite the fact that about 90% of Bitcoin has already been mined.
What Is Gas Price?
Gas price, not to be mistaken with an actual token named “Gas,” is the concept of the cost of doing a cryptocurrency transaction. The more you pay, the quicker your transaction happens. Miners always record transactions in order of which ones will pay them the most. If you don’t add enough gas, your transaction may not go at all. To make matters worse, you have to wait until your transaction finally drops off the network before you can submit it again. It’s a terrible game.
At least when you send money to Russia via Western Union, you know what the fee will be ahead of time. Bitcoin transactions are more like hailing an Uber. When the prices are rising and more people want to buy or sell, the amount of gas required to get your transaction written to the blockchain goes up with surge pricing. Remember when brokerages charged transaction fees for buying and selling stocks? Imagine that world, except there was no way to know what the fee would be until you were moments from submitting your trade. One day, it may cost you $2 to make a trade, but the same trade during a busy week may cost $50. Occasionally, network participants are willing to pay more than the going rate for gas, resulting in a “gas war” where the price of gas rapidly rises. If gas prices get too high, it makes cryptocurrency less useful to the end user, but without enough incentive for the nodes to continue to do their thing, the blockchain would become less secure. Improvements to this process have been made, and hopefully, it will get cheaper and faster as time goes on. But there will always be a fee of some kind.
What Is Use Case?
Many blockchains and the tokens on them are not primarily designed for cryptocurrency, despite the fact that some people use them for speculation. The use case is the use or uses that a particular blockchain, token, or cryptocurrency is best for. For example, the use case for Bitcoin in the original white paper and for many years after included use in daily transactions. Most fans at this point have acknowledged that the use case for Bitcoin has significantly narrowed from there as it has proven to be impractical for that particular use.
How Does Cryptocurrency Gain Value?
This is the biggest beef that most traditional investors (including me) have with Bitcoin and other cryptocurrencies. As an investment, it is purely an instrument of speculation. It goes up in value because someone else is willing to pay you more for it because they believe that, down the line, someone else will pay them more for it. The entire premise of the “investment” relies on the “Greater Fool Theory,” i.e. there is someone who is an even greater fool than me who will pay more for this than I did. Cryptocurrency produces no earnings, no interest, and no rents. Like empty land, gold, silver, or Beanie Babies, it is worth only what it can be sold for, and there is no objective way to value it. It is a bit of a popularity contest, so a solid understanding of crowds, psychology, and popular sentiment—or at least a little luck—is essential to long-term success. Just learning more about the technology is not enough to ensure a profit.
Is Cryptocurrency Useful as a Medium of Exchange?
At the top of this article, we talked about how money is useful because it is a medium of exchange and a store of value. Cryptocurrency attempts to be money. However, there is currently no cryptocurrency on the planet that is even 1% as useful as the US dollar as a medium of exchange. Just because you can find a handful of websites or even brick-and-mortar businesses that will accept a cryptocurrency or two as payment does not mean that cryptocurrency is ready for prime time. When you can use a cryptocurrency for your daily transactions (gas, groceries, lunch, etc.) then you can consider it “real money.” Until then, it remains an instrument of speculation that might eventually become useful as money.
Is Cryptocurrency Useful as a Store of Value?
The second main use of money is as a store of value. That is, you trade your time or valuable assets for the money now, and then in a few months or years, you expect to be able to trade that money for a product or service of similar value. The problem with using cryptocurrency as a store of value is that it is entirely too volatile for that purpose. A 2021 paper by Baur, et al, concludes that Bitcoin, currently the most popular cryptocurrency, is 10 times more volatile than typical currency exchange rates. While that volatility decreased for a few years, it really has not for the last seven. For a cryptocurrency to be used as a store of value, the volatility must be much lower than what is seen with the most popular cryptocurrencies out there (with the exception of the “stable coins”).
What Is a Cryptocurrency Wallet?
A cryptocurrency wallet, like a regular wallet, stores money. However, it only exists electronically. It is a software application. You can move cryptocurrency (really the keys or codes to access the cryptocurrency) from the exchange where you buy, sell, and trade it into your wallet. This prevents you from losing the cryptocurrency should the exchange be hacked. When you are ready to trade it, you can move the cryptocurrency from your wallet back to the exchange. There are dozens of companies that provide (sell you) wallets including Exodus, Electrum, Mycelium, Ledger, and Trezor. They generally charge you either an upfront price ($0-$200), a flat fee per transaction, or a percentage of each transaction. Hot wallets are connected to the internet, and they can provide faster and easier transactions. Cold wallets are not connected to the internet and, thus, are less vulnerable to hacks.
Why Is Cryptocurrency So Volatile?
Volatility is a major problem with cryptocurrency. Traders and gamblers love that aspect, but serious users—even serious speculators—are not so fond. The reason it is so volatile is simply that no one is really sure what it is worth. Consider other marketable assets, such as the stock of a blue-chip company. Its value goes up and down each day a percentage point or two as investors consider the impact of macroeconomic changes and the individual fortunes of that company. A particularly bad day when an unexpectedly bad earnings report occurs may involve a 5% or even a 10% drop in value. But there is some reasonable way to value the company and its stock. You simply take its earnings and multiply it by a reasonable multiple for its industry and the current market, and that gives you a value.
That is not the case with cryptocurrency. There is no way to value it. It is guesswork. Talking heads on CNBC might put a “target” on the value, but they're just completely making that up. An investor might conclude, “I think it will go up still,” but there is precious little way to quantify that. By necessity, when there is no consensus as to the value of the asset, its price is going to be volatile, like when Bitcoin dropped 40.4% in 44 days in the spring of 2022. Likewise, it will not take much to move that price substantially. Consider the 14-character tweet made by billionaire Elon Musk in December 2020: “One word: Doge,” Its effect? A temporary 20% rise in cryptocurrency Dogecoin. Now that's volatility!
What Is a Stablecoin?
Stablecoins are designed to solve the volatility problem of cryptocurrency by tethering the price of the currency to something that is more stable, such as a more traditional fiat currency. The most common one is the US dollar. They may also be tied to the price of gold or another precious metal or commodity. Fiat currencies are more stable due to reserves (often of gold) that back them and due to the actions of those that control them, like the US Federal Reserve.
The reduced volatility of a dollar-backed stablecoin is nice, but to get it, you have to give up one of the primary benefits of cryptocurrency (decentralization) to start with! Think of it as a bridge asset between traditional fiat currencies and “traditional” (if such a thing can be said) cryptocurrencies. This bridge position does cause somewhat higher scrutiny among regulatory authorities, given the increased potential to affect the fiat currency markets and the overall economy. Plus, sometimes the stablecoin becomes unpegged to that fiat currency, like when the TerraUSD coin (UST) fell from $1 to as low as 60 cents in May 2022 (and then soon after, it fell to 11 cents). Then, the stablecoin doesn't seem so stable after all.
What Is a Memecoin?
A memecoin, like a memestock, is simply a particularly popular cryptocurrency. It is usually associated with a theme and more of a joke than a serious project. However, sometimes memecoins, like memestocks, can grow out of their meme status into more legitimate investments.
What Are the Most Popular Cryptocurrencies?
What is the top cryptocurrency? The popularity of a cryptocurrency can be measured in many ways, such as how frequently it trades, how many people own it, or how many transactions it is used for. However, the most commonly used measurement is simply market capitalization. You can calculate the capitalization of a cryptocurrency by multiplying the price of a coin by the number of coins in circulation.
As of November 2021, the market capitalization of the biggest cryptocurrencies by market cap are as follows (hat tip to the Statistics and data YouTube channel):
Compare that to the top-15 from mid-September 2021, and you'll see a fair amount of change.
If you want to watch the changes in video form from the past several years, check this out. Notice that only three of the top-10 in 2017 were still in the top-10 in 2021.
What Can Cryptocurrency Be Used For?
Just because cryptocurrency is not useful for the primary functions of money does not mean it has no uses at all. Here are some of the most common uses of cryptocurrency:
- Speculation
- Gambling
- Concealing illegal business activity
- Squirreling money out of a country during a crisis
- Impressing others and having fun
- Getting a head start on a possible future currency
- Hedging against bizarre global financial catastrophes
- Assisting with some underdeveloped world banking activities
The vast majority of those who own cryptocurrencies are simply speculating. They believe the value will go up in the future and that they can sell it for far more than they paid for it. So far, that has mostly been true with the most popular cryptocurrencies, but only time will tell if that will continue.
Is Cryptocurrency Legal and Safe?
Yes, buying, selling, trading, and spending cryptocurrency is perfectly legal. There are government rules that you are supposed to comply with, and there are penalties for those who are caught breaking those rules. The very nature of cryptocurrency makes it a little easier to skirt government rules, but governments are rapidly finding ways to catch and punish the lawbreakers.
There are risks with cryptocurrency that do not exist in the fiat money system. The first is that, as a new technology unfamiliar to many people and with massive cash flows and asset volatility, the cryptocurrency space is a magnet for scammers, bad business people, and outright criminals.
Another risk is the flip side of one of the benefits—additional privacy that comes from decentralization. Yes, you can do a transaction without anyone else knowing about it, but that also means there is no authority to appeal to when something goes wrong. You can't get Paypal, a credit card company, the government, or a bank to reimburse you if you get scammed. If you forget the “password to your account” (commonly referred to as a key), you can't just call up the bank, tell them your mother's maiden name, and get it back. Your money isn't gone, but neither you nor anyone else will ever get to it. Reasonable estimates of “lost” Bitcoin run as high as 20%-25%. A big chunk of all the Bitcoin that will ever exist has already become inaccessible to its owners!
Cryptocurrency exchanges also seem to get hacked more frequently than more traditional financial institutions. The consequences of these hacks vary, but the potential for massive consequences exists.
In addition to these risks of permanent loss of capital, cryptocurrencies are massively volatile. Nobody knows exact numbers, but there are surely thousands or even millions of investors who have bought high and sold low, losing substantial amounts of money they used to have.
So no, while cryptocurrencies are legal, they are not perfectly safe. They have a different, unique, and possibly higher risk profile than most other financial assets. Caveat emptor!
Is Cryptocurrency Primarily Used by Criminals?
No, as mentioned above, the primary use for cryptocurrencies at this time is speculation. According to a 2019 paper, 46% of Bitcoin transactions were a result of criminal activity. However, other studies have suggested that number is as low as 0.34%. True crypto fans like to point out that far more fiat money (like 2%-5% of annual global GDP) is used for illegal activities than cryptocurrency. Critics point out that there is a lot of illegal activity that remains undetected, particularly the laundering of money through cryptocurrencies. Criminals certainly embraced cryptocurrency early on, as it had obvious useful applications for them, but their use has since probably been outweighed by non-criminals who are simply speculating with it.
While the blockchain has anonymous elements (your name is not technically assigned to your address on the blockchain), there is still the fact that EVERY transaction is monitored and recorded. This provides a record that can be tracked, and criminals don't like being trackable. Private firms and law enforcement can and have tracked criminals by tracing transactions through the blockchain to places that know the identity of their users, like cryptocurrency exchanges. So while cryptocurrency can help a small-time criminal stay hidden, it isn't going to work on a large scale or in any sort of crime that gets wide publicity. In August 2021, the largest known hack of Bitcoin ($600 million worth) occurred. The hacker returned all the money—and probably not just out of the goodness of their heart, given the traceable aspect of the blockchain.
Investing in Cryptocurrency
Let's decide for a moment, that you actually want to invest (speculate might be a better word) in cryptocurrency. How would you go about doing it? There are actually a surprising number of ways to invest in cryptocurrency, but some are far easier than others.
Should I Invest in Cryptocurrency?
Many doctors, including some white coat investors, buy cryptocurrency. Most of them readily admit they are simply speculating with a tiny percentage of their portfolio. However, if you are considering investing real, serious money into cryptocurrency, you need to spend some serious time thinking about if you actually should. Ask yourself why you want to invest in it. If you cannot make a clear, logical case for it improving your portfolio performance, then I would suggest you stick with play-money type amounts.
Am I Stupid for Not Investing in Cryptocurrency?
No. Chances are good you don't understand cryptocurrency and you should never invest in anything you don't understand. Once you do understand cryptocurrency, you probably won't want to invest in it anyway. It is super interesting to learn about, but that doesn't mean you need to put a quarter of your life's savings into it.
I do not invest in cryptocurrency and have no plans to do so going forward. I have been accused over the years of not understanding it. The argument goes, “If you only understood it, you would not only invest in it but beg your entire audience to do so as well.” Honestly, it's the same thing the whole life insurance salespeople say. I assure you that I understand it enough to make a decision of whether to invest in it. I have my reasons.
How Can I Avoid FOMO with Cryptocurrency?
Fear of Missing Out (FOMO) is the investor's enemy. The sooner you get over it, the more likely you are to be a successful investor. I wouldn't even want to hang out for long with someone who spends a lot of time bragging about their crypto speculation success. However, if the FOMO is really bothering you, buy a little. Just enough to cure your FOMO. Heck, you can do it with your Venmo app.
Is Cryptocurrency Good for Hedging Against Market Declines or Inflation?
Cryptocurrency does not seem to correlate with the value of any other asset class. In that respect, it can make for an excellent asset class in a portfolio. However, correlation is not everything. First, there is not much of a track record for any cryptocurrency. Nobody you know had any money in cryptocurrency during the last big bear market in 2008-2009. Second, correlations vary over time. More important than the correlation is the return of the asset. If the price of the cryptocurrency you buy goes up like a rocket, who really cares what the correlation is? Likewise, if it loses 96% of its value in the next year, do you really care that it had a correlation with your stocks of 0.02? Not really. You can get zero correlation with a pile of manure, but that doesn't mean it is a good asset class to include in your portfolio.
Some people think that cryptocurrency will protect you from inflation of the US dollar. Maybe it will, maybe it won't. Many cryptocurrencies can inflate just as much as the dollar. So if this is your goal, be sure you buy one with a limited number of coins. There are lots of ways to protect yourself from inflation (stocks, real estate, TIPS, I Bonds, debt, short-term bonds, commodities, precious metals) that don't require anywhere near as much speculation as cryptocurrency.
What Should I Know About a Particular Cryptocurrency Before Buying It?
“You didn't talk me out of it. I still want to invest serious money into cryptocurrency,” you say. Well, here's what I think you should know about a cryptocurrency before you speculate in it.
- If available, read the entire white paper, a document that contains information from the company about the product.
- Read the entire website, if available.
- Is it deflationary or inflationary?
- Where do new coins come from?
- What blockchain(s) does it use?
- What is its volatility?
- What are its uses?
- How fast is it?
- How much energy does it use?
- Is it popular?
- Was it the first of its kind in some way?
- Does it have a dedicated community behind it?
- What is its current momentum?
- Are coins ever destroyed? Why and how?
- Is it open-source, run by a nonprofit, or run by a for-profit company?
- What scandals, scams, scammers, and crises have there been associated with this cryptocurrency?
- Is it a stablecoin?
- Is it a memecoin?
Which Cryptocurrency Is Going to Win?
Cryptocurrencies come and go in popularity, and it leaves the investor wondering which cryptocurrency is going to win in the long term. Which one will achieve mainstream use and actually function as a reasonable medium of exchange and store of value? In the video above, there are two clear themes:
- As new technology is developed, cryptocurrencies rapidly drop out of the top-10.
- Bitcoin is still ahead for now, but it's only a matter of time.
The lesson there is that, in the long run, Bitcoin is not going to win. In fact, it seems highly likely to me that the winner is not even yet in that video. It has not yet been invented. However, my crystal ball is admittedly very cloudy, and I truly have no idea what cryptocurrency, if any, will be widely used in 2030 or 2050. I do know it won't be Bitcoin, though. Bitcoin and other cryptocurrencies of its generation simply cannot become widely used. They're not fast enough, and they use too much energy.
How to Create a New Cryptocurrency
There is almost zero barrier to entry when it comes to making a new cryptocurrency. That's why there are so many. The general pathway looks like this:
- Choose a consensus mechanism
- Pick a blockchain platform (unless you want to create your own blockchain, too)
- Design the nodes
- Establish the internal architecture
- Integrate the Application Programming Interface (API)
- Design the interface
- Follow any applicable regulations
- Create a white paper
- Make a fancy-looking website
- Advertise and list your Initial Coin Offering (ICO)
That's it. You want your own cryptocurrency? Go for it.
How Is Cryptocurrency Taxed?
This is an important thing to understand BEFORE you start dabbling in cryptocurrency. The IRS has decided to treat cryptocurrencies like any other investment. That means when you sell it, you will either have a capital gain or a capital loss. And you will have to report it. And pay taxes on it. It is not a currency; it's an investment as far as the IRS is concerned. It's now a very specific question at the top of your IRS Form 1040.
So, if you go out and start buying pizzas and gasoline with Ethereum, every transaction you make is going to end up on Schedule D at the end of the year. That's gonna suck. So treat it like an investment with infrequent trades, not daily uses. If you own it for less than a year, you're going to be paying short-term capital gains rates on those gains. It's better than a loss, but if it makes sense to hold for at least a year, your tax bill will be lower.
Although Congress is set to change this law, cryptocurrency had one huge tax advantage over stocks up until this point. When you tax-loss harvest cryptocurrency, there is no 30-day waiting period to prevent a wash sale from disallowing your use of that loss on your taxes. Take advantage. If you're a believer in the long-term merits of that cryptocurrency, sell it, get your loss, and buy it right back!
Cryptocurrency is becoming a larger part of our financial system. It is best to understand it, even if you choose not to invest in it. But don't feel like you must invest in it. Beware of scams and remember that the investor matters more than the investment. Fight FOMO and beware the animal spirits of the crypto marketplace.
What do you think? Do you “invest” in cryptocurrency? Which ones? How much of your portfolio do you put into it? Which cryptocurrencies do you think we'll all be using in a decade or two? Which is your favorite? Comment below!
That is not a correct description on what the technology is supposed to solve. It’s solves the problem of double spending without needing a financial intermediate. Plain and simple.
If you don’t understand this age old problem and why solving it is revolutionary then really you don’t understand the technology at all.
What part of decentralized you didn’t understand?
“Decentralized” is a buzz word, along a spectrum and just a single product of the technology that maintains immutable accounting without a financial intermediate. In does nothing in explaining the underlying problem that’s faced humanity for millennia.
Your question is a great example for the readers of the point I’m making. Thank you.
Not a buzz word, it has actual meaning to it with its pros and cons that obviously you don’t understand
It is a word…
It is a word with a real definition….
So you are correct and we at least agree on that.
But you are 100% using it as a buzzword as many others accidentally do. A buzzword that most don’t understand in context which is why WCI and VC’s use the term to compare it to networks like Solana and Avalanche as “competitors” to bitcoin’s monetary network. This is a fundamentally incorrect way of assessing the technology. In one case, because of a lack of understanding of the problem being solved and the other case, it’s being used as a marketing scheme.
“Decentralized” is to the network as “healthy” is to the body. It relative, subjective etc…
The true technological breakthrough of Nakamoto Consensus is not decentralization. It’s all the other features of the network WHILE SIMULTANEOUSLY being as decentralized(“healthy”) as possible that make it so unique. And like I said, people’s lack of understanding of the problem, the tech and what it’s solving is what leads to one buying Dogecoin based on the fake pretense that because it’s “decentralized” it is thus a competitor. Like WCI, confusing article “ Bitcoin Is Just like AOL; It Won’t Win the Race for Best Cryptocurrency”.
Cryptocurrency is only one part of the larger field of exponential technology . Maybe Jim should could do a podcast interview w/ an expert in this as to how this sector may be suitable to the WCI. I’m a little too old to use this in my portfolio, but am sure the young among us would find it of interest.
Thanks for your article and interest in this subject.
My prediction, which is likely to be wrong, is that crypto investing goes the way of British Railway Mania of the 1840’s: a novel technology that makes the investors go bust but leaves behind something legitimately useful for future generations.
This is a really interesting thought. I do think blockchain technology is so valuable that it will drastically change a lot of technologies we interact with regularly (eg financial tools, web browsing, gaming, social media, purchasing anything, ID verification, voting etc), but like most tech these days, the intricacies of the change will happen under the hood quietly and the beauty will go largely unnoticed. That being said, even the few useful cryptos that have compelling use cases and ways to monetize their product outside of speculation (though rare, they are out there) mostly tend to require that you buy their native token to use their tech.
Hi Jim,
This is an excellent and thorough article. I thought I’d add some thoughts for consideration regarding fiat currency because I have studied (and struggled with) this concept for a good portion of my adult life. You mentioned early in your article that fiat currency is useful because people believe it has value. It goes beyond simple belief. The value is real. Anyone who is in debt knows the value of fiat currency. Most loans are collateralized by property, and if a person does not have the fiat available to meet the scheduled loan payments then then creditor has the right to take his/her stuff! In addition, some payments can only be made in specific fiat currencies. Taxes are a prime example. A person is free to run his/her business or lifestyle using any medium of exchange he/she wants; however, in the end the taxes on profits must be paid in the coin of the realm. Failure to deliver the required fiat can produce some rather unpleasant results! So the value of fiat currency is real. It originates as a result of obligation.
You are right about the fear of mismanagement. This fear is perhaps highest between national sovereigns who store each others’ currencies as reserves, the dollar being the most prevalent among the reserve assets. This is the main reason the US Treasury stores as much gold as they do (261 million ounces valued at about $470 billion at today’s market prices). The Treasury itself has admitted that this gold is collateral. You can verify this here: https://www.treasury.gov/resource-center/faqs/currency/pages/legal-tender.aspx. The key phrase in these few paragraphs is “Federal Reserve Notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them”. Most central banks store some gold as a means of settlement in the event of a loss of faith in their currency.
I have not yet seen any reports of sovereign central banks storing cryptocurrency. Unless and until there is a deep debt market denominated in a specific cryptocurrency I don’t think the central banks will. And, as you have stated cryptocurrencies are volatile, so volatile that one would have to have a death wish to borrow them (though some speculators do!).
Best Regards,
Paul
Paul, nice post.
The volatility criticism is a nascency criticism, one of the worst of all the (usually foolish) criticisms of BTC. Who cares about volatility if you are a long term holder? Or would you not have enjoyed owning BTC since 2013? It’s funny to think about how people conveniently ignore this.
At least David Spilker above states something that is reasonable – he’s too old for what this asset might do for people (save them from more abuse over time). To him, he just doesn’t need to worry about it. Us younger people, on the other hand, do.
I would argue that young people don’t “need” to worry about it either. It is something that will become more common in the future, but that doesn’t mean young people have to know the ins and outs as it pertains to “investing” in crypto.
On a side note, why does it seem that crypto enthusiasts often take any criticism of crypto so personally? Why do you care if everyone else is as interested as you are in crypto?
But isn’t the volatility criticism a valid one? Per Bitcoin’s white paper it was intended to be a means of peer to peer electronic cash transactions, and volatility matters greatly for that. If you pay me $10 and 10 minutes later it’s worth $9, I won’t be ok with that. Now magnify the number of transactions by what a business would process. It screws up accounting/the books. No bueno. Alternatively, if you want to buy something from me worth $10 but think it might be worth $11 the next day or $20 the following month, you’ll be less likely to spend it and decrease its liquidity. These are a couple reasons why Bitcoin failed as a practical currency. So the narrative got changed to, “ok it’s actually a store of value like digital gold.” How volatile do you want your store of value to be? And another common argument is that it’s an uncorrelated asset with stocks, but even that’s not true. It’s the biggest crypto for now because its consensus mechanism was innovative and brilliant for its time, and it has name brand recognition, but it’s use case becomes weaker and weaker everyday. I agree Bitcoin will not be the winner.
No, it’s not a valid one, for reasons I’ve said. And its use case continues to go up because of fiat clown world. Again, the store of value is that it keeps increasing – does the fake FUD of just using the word “volatility” matter if your investment goes up 250% average YoY? Haha, of course not. The idea that you and others put forth is that it will always be volatile. Think about how silly that is, then think some more, do some research, and come back with a real criticism. That’s not one, not even a good one.
I don’t know if I agree that the price of Bitcoin will always be volatile. I think there is a non-trivial likelihood that it reaches a relatively insignificant non-zero steady state that will translate value to the owner in a fashion similar to that of a collectible coin.
Some thoughts to consider:
Why is Vitalik spending so much time and energy to transition Ethereum from PoW to PoS?
In simple terms, wasn’t Bitcoin just the original memecoin, but with a better origin story (though perhaps not as good of a marketing strategy)? Seriously, compare its tech to Shiba or Dogecoin.
Bitcoin is the gateway crypto for institutional investors. It is the brand that will get them to invest in the market, but once they and their advisors become savvy with the technology, they will realize that there are better options that already exist on the market, and their money will go elsewhere. Yes Bitcoin currently has the largest market cap by far, but its die-hard fans are essentially fixated on the old amazing engine of the Ford Model T not realizing that there is already a Tesla (not referring to Ethereum) motor on the market.
But Bitcoin fanatics are going to believe what they want to believe.
Good luck.
Time will tell.
Ad hominem is one of the weakest arguments in debate.
I believe there is some BTC denominated debt out there, but you’re right there isn’t much.
Can you do a podcast with Dr Jeff Ross on bitcoin only? No one should be investing in [anything but Bitcoin].
Profane remark removed.
I agree, Dr Jeff Ross would be a great interview. Would give a well informed perspective on Bitcoin.
Why not just post a link here to what he says about it?
Agree…have either a podcast or blog or both with Jeff. He is well spoken…a recently retired radiologist and runs his own hedge fund now. I will reach out to him and tell him to contact you. He is a good guy and has some great knowledge on BTC.
Have him apply and we’ll consider him with all the other applicants who apply to come on as a guest.
A cautionary tale about bitcoin– my dad unexpectedly passed from Covid recently. He did not leave financial information in a good spot for my mother. We were eventually able to determine he had ~$200k in bitcoin that no one else knew about. But unless we magically discover the secret codes hidden in their house somewhere? It’s all gone. And it was the bulk of their nest egg.
Obviously, many missteps here (share financial info with your spouse!!) but at the end of the day, as far as I understand, we can’t do anything. There’s no one to call to fix this.
[Rude comment deleted and poster’s IP address moved to “requires approval prior to posting” list.]
It’s a serious risk. Something like 20% of BTC has already been lost.
So it can’t ever go to $0, right?
Can’t tell if you’re being sarcastic or not, but that is certainly a possibility. Seems less likely to me though. The bigger risk IMHO is that it goes to $1K or $10K or something and stays there and 20 or 30 years from now people realize they didn’t make any return on their money or perhaps even a negative return. Not the end of the world if you only put 5% in there, but a huge problem if you put 50%.
Jim, overall I appreciate your attempt to explain the world of “crypto” to your readers, which is very complicated and takes a relearning of “what is money” in the first place. Money is a technology that solves the problem of store of value (SoV), medium of exchange (MoE) and unit of account (UoA). Kudos to you for starting with Money as a general concept. Fiat is a MoE but a terrible SoV, due to inflation, seizure, counterfeiting, etc. You want money be salable across space and time. Meaning value can be sent to a person in another space/country. And value can be kept intact (not degraded) over time. Fiat is great for salability across space but not time. Meaning the money you have today will have much LESS purchasing power in the future, thanks to the Fed inflating away your value.
In general, I would agree that much of your criticisms apply to crypto, but not to Bitcoin. Many of the Meme coins (Shitcoins) are pure speculation and gambling. I don’t mess with them. But there are many factual mistakes in this article:
1. Gas is not used by Bitcoin, but rather by Eth.
2. Nodes and Miners are not the same: Nodes verify the blockchain ledger and enforce the rules of the protocol, Miners solve cryptographic puzzles with hash power and get rewarded with newly mined coins.
3. POW and POS comparison is really shoddy. POS leads to centralization which is the whole problem we have today with the Fed.
4. Energy use is way over-rated. Read this and then read your statements. https://www.coindesk.com/business/2020/05/19/the-last-word-on-bitcoins-energy-consumption/
5. CPI is 7%, not 5%, and will likely get worse. PPI even higher.
Lastly….Bitcoin will not be the winner? (“I do know it won’t be Bitcoin, though.” –Jim) This is a ridiculous statement. How can you “know” this with your “cloudy crystal ball”? Bitcoin has already won. Consider the following: largest market cap, largest network, most secure, most decentralized, never been hacked, predetermined issuance, massive 2nd and 3rd layer tech being built on top of it, only crypto being considered for nation state adoption (El Salvador, Turkey, Tonga)… the list goes on. And remember the protocol can adopt new technology to improve the network (i.e. SegWit, Taproot).
Bitcoin is the best money technology ever invented and will remain so because its adaptable. But we are still early and there is growth potential. A new money must be a store of value before it can be a medium of exchange, otherwise there is no incentive to exchange it. Sand is not valuable and why nobody uses it as a medium of exchange. Gold was valuable before people used it as money.
[Ad hominem attack deleted.]
Inflation was 5% when I wrote the article. The editor missed updating it prior to publication.
Here’s why I don’t think BTC will be the winner: https://www.whitecoatinvestor.com/what-is-the-best-cryptocurrency/
Lots of truly excellent points in this comment. Mark has done the work.
PoW tends to centralization more than PoS does. This happens because PoW requires much more equipment, space, and energy, all things that purchasing with economies of scale will benefit. This is why mining pools form. Bitcoin is a case in point with 5 companies producing roughly 50% of the hashrate. They are secure (due to slow block production times and immortalization of appendages after an hour), but they are not a good example of a decentralized blockchain.
Wrong! Consider the following.
So in PoS, the more coins (Eth) you have, the more voting power to win blocks and change rules of the protocol. So you mean to tell me that those with the most coins will not act in their own best interest? Follow the incentives. Would that not cause more accumulation of coins to those who already have the most? This is our current Fiat system! And this is the problem that PoW aims to solve. Eth is not decentralized and will become more centralized under PoS system. PoS is the equivalent of a person thinking they are exercising because they own a gym. Don’t kid yourself.
Contrast this to PoW in Bitcoin, where you have to expend real value (electrical energy) to win the block rewards and fees. It follows the 1st law of thermodynamics: energy cannot be created or destroyed, only converted. PoW converts electrical energy into digital energy. This leads to a competitive market to find the lowest cost of energy and most efficient mining practice. Sure, I agree, large mining companies will benefit from economies of scale. This is an efficient market. But, I don’t think you understand that miners in PoW don’t change the rules of the protocol… the *nodes* control the rules. And anyone can spin up a Bitcoin node for $150. Now that’s decentralization. Try running a full node in Eth… what a joke! That will cost thousands of dollars and many days to download the nearly 1TB full block chain. How decentralized will that system become?
By the way… 70% of Ethereum Nodes Are Hosted on Centralized Services.
https://decrypt.co/44321/70-of-ethereum-nodes-are-hosted-on-centralized-services
Bitcoin nodes are much more decentralized because the nodes are smaller, cheaper and easier for an average person to run.
I think you’re further highlighting my point that PoW tends to centralization more than PoS due to economies of scale. I agree that Ethereum is also not a good example of a decentralized blockchain, and that they also run on a PoW consensus. In addition to the underlying consensus, you also have to consider the tokenomics. If the majority of coins went to initial investors and the owners, then that’s going to play a role in the degree of decentralization as well.
Regarding Bitcoin’s concentration of miners, it matters because of the concept of a 51% attack (IE a concentration of hash rate over 51% enables that group to control the network and alter the state of the network or double spend). These attacks were carried out on Bitcoin Gold, Ethereum classic and ZenCash/Horizen in the past. Recall what proof of work is, it’s not just simply putting electrical energy into a system. It’s solving the next, more difficult computational puzzle. And by doing so, you push out the next chain, which is now longer by 1 block. In the case of a 51% attack, the nodes will recognize this as the valid block despite its deviation from correct.
Jim – This is a relatively good break down. I appreciate your attempt at staying as factual as possible this time. I would push back on the same area’s that Mark did above.
There are a couple errors in your post that you may want to correct. Gas is ETH not BTC. Here is the mempool for BTC: https://mempool.space/
Your statement that BTC is massively energy intensive and unsustainable is opinion of course, but not a correct one.
The difference between Proof of Work and Proof of Stake cannot be understated. This is what will likely decide what cryptocurrency “wins”. Of course you already know which side of the coin I stand on.
[Ad hominem attack deleted.]
I remember getting my very first email account somewhere around the turn of the century (yahoo if I recall). And I will always remember sending my first email to my cousin across the country. Clicking the send button, and knowing it hit her email box nearly instantly after that. No having to get an envelope and stamp, walk it down to the mail box, wait 3-5 days, and still not really know if it was received. Because who was gonna make make a long distance phone call back in the day to see if someone got a piece of mail, that was like a dollar a minute. Anyways, I knew when I sent that first email, that this was the future. Electronic communication over the internet. Nearly instant, reliable, easy, and soon, cheap.
Sending ethereum to my personal wallet for the first time evoked similar feelings. I clicked the button, and boom, as soon as I could check my wallet, it was there. No waiting for 3 days for the bank to settle the transaction. No having to get a cashiers check or pay western Union to send the money by “wire”. It was there quickly, and directly, without any intermediate steps. Blockchain tech is still young and working out the kinks, but if it doesn’t become the backbone for all financial transitions in the future, then humanity will have missed a great opportunity.
What’s interesting is that that can be entirely true, and yet BTC, ETH etc can be terrible investments.
True enough. But I do want to point out one mistake you made in your post. In a proof of stake blockchain, you can earn interest for the coins you stake. Currently, you can get somewhere between 4-5% APR by staking your ethereum, depending on how you do it. You get “paid”with ethereum, not USD.
I find it hilarious how diehard crypto folks are, this comment section is a case in point. Universal across forums and feels very cult like. I don’t intend on putting any money into it as someone in their 30s. Everything points to extreme speculation with high chance of complete loss.
Everyone buys bitcoin at the price they deserve. MM is exactly on point here. PoS is simply the tokenized, digital equivalence of the existing system.
Here’s a great article that seems appropriate here:
https://www.citadel21.com/why-the-yuppie-elite-dismiss-bitcoin
*please note, this reply may be disliked but it’s not an ad hominem attack. I’ll screen shot this just in case. Then again, maybe centralized control of a platform is really what’s preferred by this site.
Yes, we prefer “centralized control” of both our website and our living room. If you cannot act appropriately in either place, you will be removed. Fortunately, most people do not need to be told that so bluntly. They don’t have to have their anonymous posts deleted for them to realize that they should also act like an adult online.
This article does not “explain” anything. This article is just one gigantic meme. The entire thesis can be boiled down to:
1. “I’m smart so I believe in bitcoin, and because I believe in bitcoin (and read ARTICLES about it), I must be very smart.”
2. The only thing you can trust is a person or an organization without any established credibility – Because if they had any established credibility they would by definition be out of touch with reality.
I think you’re further highlighting my point that PoW tends to centralization more than PoS due to economies of scale. I agree that Ethereum is also not a good example of a decentralized blockchain and that they also run on a PoW consensus. To be fair, in addition to the underlying consensus, you also have to consider the requirements for becoming a validator and the tokenomics. If it’s too cost prohibitive to produce or validate the blocks, or if the majority of coins went to initial investors and the owners, then those are going to play a role in the degree of decentralization as well.
Regarding Bitcoin’s concentration of miners, it matters because of the concept of a 51% attack (IE a concentration of hash rate over 51% enables that group to control the network and alter the state of the network, including double spending). These attacks were carried out on Bitcoin Gold, Ethereum classic and ZenCash/Horizen in the past. Recall what proof of work is, it’s not just simply putting electrical energy into a system. It’s solving the next, more difficult computational puzzle. And by doing so, you push out the next chain, which is now longer by 1 block. In the case of a 51% attack, the nodes will recognize this as the valid block despite its deviation from correct.
I find it amusing how dedicated crypto enthusiasts are, as evidenced by this comment area. It’s universal across forums and has a cult-like vibe to it. As someone in their 30s, I have no intention of investing any money in it. Everything points to high-risk speculation with a high likelihood of total loss.
This article says NOTHING about the environmental impact of cryptocurrency. Doctors I thought you went into medicine with at least some sense of helping the world. So why are you investing in a speculative Ponzi scheme that has its greatest negative impacts on the poor?
CoinShares released a report in January 2022 called The Bitcoin Mining Network – Energy and Carbon Impact. This report was created in response to ESG concerns by institutional investors. The authors estimate that 1/3 of Bitcoin’s energy use comes from renewable energy and ultimately mirror Satoshi Nakamoto’s 2010 sentiment that the utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used. They calculated that the energy used by Bitcoin is roughly equal to 0.05% of that used globally, and they argue this is a very small cost for a global currency to be maintained, though it puts out roughly 4x the carbon emissions of fiat currency. Of course we know bitcoin makes for a poor currency, and it also begs the question if that energy would be better used for other causes.
The Crypto Carbon Ratings Institute also published a report in January 2022 titled the Energy Efficiency and Carbon Footprint of PoS Blockchain Protocols, which included comparisons to PoW chains such as Ethereum and Bitcoin. The report found Bitcoin to consume the same energy as 8.5 million U.S. households in a given year while Ethereum consumes the equivalent of 1.6 million U.S. households. On the other end of the spectrum, the top PoS networks were found to consume the equivalent of 7 to 200 (not a typo) U.S. households, depending on the network. In other words, PoS networks consume less than 0.001 % of the Bitcoin network. Additionally, Visa consumes about 1.5 Wh per transaction, while Bitcoin consumes about 1722.24 kWh per transaction.
I should note a weakness of these reports is that they do not take into account the environmental effects of creating the specialized hardware that miners use. So even if new equipment is more energy efficient, it is at the expense of replacing older machines and creating waste. Unfortunately, the deleterious environmental effects are likely worse than either of these reports suggest.
In terms of potential conflicts of interest of each group:
The CoinShares Group claims to have launched the world’s first regulated bitcoin investment fund in 2014 and to have offered the world’s first bitcoin based securities on a regulated exchange in 2015. Crypto Carbon Ratings Institute is a research company focused on the environmental impact of cryptocurrencies.
your description of money is wrong. you should include hard money vs soft money.. Gold beat Silver because it was harder money. Dollar beats pesos because it is harder money. Hard money always wins. 10 minutes to settle time for bilions instead of 3 weeks for a house or 48 hours for a stock. Money isdoes not have to be efficient consider gold for 3,000 years very hard to inflate but very difficult to use in large sums. it was the best money until bitcoin. the best store of value until bitcoin .The most important quality of money if can it be inflated. Glass beads for Africans was very hard to inflate . IT came from meteors in the sand . Then along came the dutch who could produce thatn in vast sums. They bought al of africa and destroys african economy for centuries. still going. Bitcoin is digitized money just like we have digitized him pictures, letters, art contracts. Fiat is the true fake creating ” money” out of not basis. Nto physics not economics. Nothing just declare it. Humans are the only cause of inflation and bitcoin is only inflated by 6.25 now and it 2024 3.125 and in 2028 by half of that. so you know the inflation rate forever and can make you plans on that.
I agree that the Bitcoin bros share a lot in common with the gold bugs.
Some might argue that guns, germs and steel allowed the Europeans to conquer Africa, not their glass beads.
They conquered because they can create things like the bitcoin network, that is, in this world they are more advanced civilizationally. Only a social scientist would try to explain why some other reason is why, when it’s obvious that empirically (as in science) it’s true. The best part is that he admits the greater advancement, which is a criticism destroying his and others feelings.
Bitcoin is not just another crypto. It is the only one that is decentralized. This can’t be replicated after it has already won a market cap of $1.4 trillion. That money is not just going to evaporate. It is on the balance sheet of many major companies to an alarming degree. It has already won and cannot be replaced, barring some major black swan event in the future.
It’ll only be a black swan for those who didn’t see it coming.
By definition.
I often wonder if the passive investing guys think that “bubble” can continue.
They will pay for their willful ignorance; quite literally. Can’t say we didn’t warn them to do their due diligence.
Via email:
Phenomenal article! Has to be one of your best.
One issue with: “Hedging against bizarre global financial catastrophes” as a use case.
Not bizarre, but unlikely in any given year. The financial catastrophe would be collapse of USD as global reserve currency. Countries and companies may buy Chinese Yen to replace it, but Western countries don’t trust China. So gold and bitcoin, both being hard money, stand to appreciate in that case. Maybe only Gold will, maybe bitcoin will too. I don’t know.
It’s unlikely in any given year this would happen, and I hope it doesn’t happen anytime soon, but if you are a student of history, many nations have lost this coveted status and many nations have succumbed to debt bubbles and currency debasement, from Rome to Chinese Empires to European countries during WW1 and WW2.
You know there is no such thing as Chinese Yen, right?
But ignoring that, let me push back a little.
The dollar loses global reserve currency status. So then I sell my stocks and real estate for Yen instead of dollars. How does the Bitcoin help?
What do I really lose? Maybe just my cash and treasuries, right?
Yes, I meant Yuan not Yen. Thanks for catching that.
As I stated, Western countries don’t trust China, so I don’t think they’ll flock to the Yuan as a replacement for the Dollar. Already in the last few years, the Dollar as a percentage of reserve assets around the world has decreased around 5%, but it’s been a mixed basket of global currencies as opposed to the Yuan taking its place.
The reason Gold has stood the test of time over Silver or other precious metals as a store of value is that even if its price appreciates, it’s very hard to rapidly produce drastically more of it. This hasn’t been the case for shells, glass beads, or other metals throughout time and their use as currency has come and gone.
If the US loses its global reserve currency status, it may be a slow bleed and hard to protect against in real time, just like how it’s easy to call a recession after the fact but hard at the beginning before there’s already been substantial damage to your portfolio. Preparing ahead of time with an insurance policy is in my better than trying to figure it out in real time.
What do you think about a stable coin with bitcoin and derivatives collateral?
Great mechanics and model, just need to figure out which counterparty can be trusted.
BTC-linked synthetic stack is probably our next step in the cryptocurrency community.
But I think the community also needs to fight scam projects like Luna and not let it happen again so as not to undermine retail investors’ trust in cryptocurrency.
I think the verdict is not yet out on whether LUNA was a scam project, but I think it’s fair to say it was a poorly-modelled under-collateralised algorithmic stable coin that could easily be exploited by a wealthy entity, and the leadership was too arrogant to acknowledge and remedy these concerns. Granted, before it was collateralised with mostly BTC and some AVAX, its mechanics were ponzi-like in the sense there was a guaranteed return and there had to be a new buyer providing exit liquidity for someone else.
Though having a decentralised collateralised stable-coin not pegged to an existing currency would be the ideal, having it backed by a volatile asset like BTC isn’t prudent and definitely contributed to LUNA’s death spiral. Until a better model is imagined, having a stable-coin pegged to the US dollar seems like the next best option. So, I imagine USDC will have highest market cap and adoption among the stable coins in the short term.
Hopefully a positive takeaway from the LUNA exploit is an acceleration in US regulation.
Note: I sloppily used LUNA when referring to its related stable coin TerraUSD (UST).
100% agree with your assessment, DA. Luna and it’s algorithmic stable coin UDT were not scams, just a fatal flaw in their design which was exploited and led to its death spiral. Prominent members of the cryptocurrency community had pointed out these concerns however the head of the project was too arrogant to address these concerns validly.
There is no point to a Bitcoin back stablecoin at this time because Bitcoin is too volatile right now. This will likely (my opinion) change in the future, at which point Bitcoin backed loans and use of Bitcoin as USD collateral will probably become more common ( again, my opinion).
Stablecoin savings accounts might be one of the least crazy ways to invest in crypto:
https://www.whitecoatinvestor.com/crypto-savings-account/
However, they’re not all the same. And there is still risk there:
https://www.theverge.com/2022/5/16/23075139/stablecoin-terra-crash-depeg-dei-fantom-usd-scream-defi-instability
Not a crypto evangelist at all, but my criteria were finally met for taking the plunge (with play money, after all recommended retirement accounts maxed out):
1. As of mid-June 2022, prices have cratered multiple times (buy low!). May drop again as people fret about tether, but I’m doing recurring investments with each paycheck).
2. Found a site that lets you buy a “mutual fund” of crypto – so I’m diversified across many different coins (and avoiding the speculative coins like Doge*). It’s called Makara and it was recently bought by Betterment – same basic concept, let’s you buy a diversified “basket” of crypto – and focuses on the “revolutionary” technologies like Web 3.0, decentralized finance and the metaverse.
Not a paid advertisement (and I’m not including my referral link), just curious your thoughts. From my admittedly cursory research, seemed like it solved a lot of of my concerns like ease of use, diversification and avoidance of the tulip-mania. The only downside I could find was no ability to tax loss harvest – but maybe the upcoming Betterment integration will add this…
*they do let you buy some speculative coins if you want, but they’re easy to avoid
Lot better deal now at $20K than at $69K a few months ago.
I’m a little bothered that you only did a little “cursory research” before investing in something so new. As a general rule, I’m a fan of diversification but I don’t know anything about this particular company. You should be VERY wary of just about any company in the crypto space. They’re all basically brand new.
You’re not wrong. There’s not a lot of information out there right now about them and I’ve been watching out for critical pieces popping up online. So far all I’ve found is some scattered unhappy App Store reviews.
I felt comfortable with the risk because Makara was purchased by Betterment which lends some degree of credibility. I think if you look into their investment strategy (diversify, rebalance, avoid day-trading, dollar cost averaging), they line up well with many of your own principles. I emailed the company and confirmed they are planning to add automated tax loss harvesting shortly.
Obvious downsides are the risks inherent with crypto*, and I am disappointed that they offer two meme coins (Shibu and Doge). Second downside is their management fees which are way higher than a traditional stock investment.
In the end do I think this is a good idea? Maybe. I’m not willing to drain my 401k or Roths to invest more, but I am willing to put a portion of my taxable investments here every week and see what happens.
*I once heard an adage in medicine that you don’t want to be the first 10% or the last 10% to adopt a new treatment modality/medication/etc. I don’t know where I am in the crypto world, but I’m pretty sure I’m somewhere in the middle 80% – and like you said in your other post, it’s a much more comfortable place since bitcoin is no longer at $69K.
(What happened to the feature on your website that emails when a new comment is posted?)
Yea, if you liked it at $70K, you’ll love it at $20K.
If you check the “email me” comment box, you should be getting emails for updates. Check your junk box for them.
I don’t see the “email me” box anymore. I’m on mobile right now but I don’t think it was on desktop before either.
Looking into it…stay tuned.