Have I Been Wrong About Cryptocurrency?
Updated: Jul 27, 2020
I've firmly been of the belief that Crypto-Currency is the "Emperor's New Clothes" of investing in that it doesn't represent anything tangible. I understand the Block-chain (sort of) in that it's essentially a piece of book-keeping software that records every single transaction that goes through it and keeps an audit trail that's nobody owns therefore it's much less susceptible to fraud and corruption. I get that, but most people trade cryptocurrency on that Block-chain for actual value. Let's be honest, some geek somewhere came up with Bitcoin in his bedroom, imagineeered (not a word) a load of "Coins" and people then started doing things to "earn them" (Crypto mining) and then people started accepting them as payment for stuff. The value of the coins increased and then decreased and then increased again, so what did people start doing, they started trading them to make profit. As a result, those "Imagined" coins are now worth about $10,000 each. WTAF?
It sounds like something out of a sci-fi movie that would rival Avatar or The Martian but it's actually happening and it's moving from hyped-up, entrepreneur, purist-geek, gold-rush, get-rich quick propaganda, to mainstream, serious, long-term, passive investment consideration.
Over the last few years, I quietly scoffed at anyone who evangelised to me on how much money they were making on Bitcoin or Ethereum or one of the other 100's of coins with sexy-weird planetary names (DogEcoin is a personal favourite), thinking they would be crying in to their e-wallet when the music stopped and the whole thing becomes vaporware just like the Dotcom bubble in the nineties.
But I have to admit, I'm starting to change my view.
Not enough to start re-mortgaging the house for a few Tether coins or Litecoins but enough to spend some time learning how they work, what they represent and if and how they can produce real value. At this point, if you share the same view I had, you're probably wondering if I need my bumps felt or have lost the last few of my marbles but hear me out.
The COVID-19 crisis and more specifically the global stock market crash and subsequent stimulus packages being implemented has me wondering if good old fashioned Cash, Readies, Moola, Dough, Skriller, Bread, Almighty Dollar may be just as risky and possibly even more risky than a decentralized currency owned and regulated by almost no one but certainly by people slightly less questionable than the current global government leaders (I wanted to put dictators).
So how have life's recent events brought me to the conclusion that it's time to look again at Cryptocurrency? Stick around and I'll explain.
If you go back to how Fiat Money (the official term for global currency) all began, it's all essentially a bartering system; you have something I want, I have something you want, and we swap the two things. Bingo, bango, we have a transaction. Add into that that one of the things could be work or a service e.g. You dig me a hole, and I'll make a you a sandwich. This then allows people who have nothing to swap get something to swap for something else they want or need. Pretty simple so far.
The problem comes when you can't match the value of two things e.g. I want your hammer, but I only have my cow to swap. Everyone knows that a cow is worth at least 10 hammers but I only need 1 hammer, and I can't really give you a tenth of Daisy and expect her to keep giving me milk. This is how currency came about. You swap Daisy for 10 coins, and then swap one coin for the hammer. You then have a hammer and 9 coins to swap for the other things you need now, most probably milk! That is really all currency does, it creates a concept of value of the thing you have and the thing you want to allow you to swap everything for a fair price.
The big question comes from where the coins come from in the first place, and more importantly from whom?
Nobody really knows it was so long ago. So long ago in fact I have a wild theory that precious metals like gold and silver or diamonds are actually worthless. I like to think it was some clever chap or lady who wanted something that somebody had (lets say a cow as we're on the topic), they managed to convince someone that this piece of shiny metal they'd found on the ground was worth more than the cow and a swap took place. Oh how they must have laughed into their glass of milk, not realising they had started the concept of currency and that in thousands of years, people would be spending fortunes in time and effort digging up the ground to find those little yellow bits of metal which just sit around in the ground serving basically no purpose other than looking shiny on a finger or conducting electricity.
I recognize at this point I'm now waffling so I'll get back to the point.
Quantitative Easing - A word most of us have heard yet not many of us know (or care) what it is. Put simply, it's printing out cash and being pushed into the system by governments (mostly through buying debt). If you happen to be in charge of one of the biggest and most powerful countries in the world and you hit on hard times due to a global pandemic which stops people working (the hole for the sandwich analogy above) and that means they stop paying the taxes you need to pay for the stuff to keep your country the most powerful? Well you flick on the photocopier and start banging out the moola. It costs you nothing to do, you buy up a load of debt so that when things get better and everyone is back to work, they all owe you the money you printed out, this in turn keeps you rich and powerful. All good, no?
Well no, not really.
Maybe it will help on the surface by propping up the economy for a bit until the dust settles, and that should keep the voters happy and keep the dictator in charge for a bit longer, but what about the long term affects? Well that's simple, the value of money overall goes down which means all the money you'and me have currently got and all the stuff that we currently own, is worth less. Put simply, we can now only afford half the hole to be dug because we need two sandwiches now to pay for the hole we really want.
It's like having a perfectly made glass of orange cordial. You know just the right amount of water to mix with the cordial to make it a great tasting glass of orange juice. Then someone comes along and puts some extra water in your glass. Now it doesn't taste so great and the only option is to add more cordial. The cordial is your money and the water is quantitative easing.
In the US, the Federal Bank has now been quantitative easing since the 2008 financial crisis, they never stopped. How eased do you need to be?
If you were reading any financial news before the COVID-19 crisis, you would have seen news about how the S&P500 has reached record levels, the DOW Jones was powering ahead in the longest bull market in history,everything is simply awesome! Guess when that "Longest ever bull market" started? Yep, 2008, right after the last global meltdown. If the US was smashing records and everything was the best it's ever been (well that's what Donald Trump keeps saying on twitter so it must be true), why keep the photocopier running?
Yep, they've been watering down your drink for 12 years and if it continues, one day you're going to run out of cordial. Don't live in the US? Doesn't matter. If your country is printing cash, it probably borrows money from the countries that do (or sells it some debt). How much have they printed? Unsurprisingly, it's hard to get an accurate figure but a rough guide would be $10,000,000,000,000. Yup, 10 trillion dollars. That's more than the most meglamaniacal James Bond villain would ask for!
So getting to the point (again), if this "Easing" has been happening since the last global finance crisis 12 years ago and COVID-19 is going to result in another one, there's probably going to be water getting poured into your juice for at least another 10 years.
The problem is, how long can this continue before something catastrophic happens and the only thing left to drink is a glass of water?
And this is exactly why I'm re-evaluating Cryptocurrency. If it really is decentralised and if it really can exist and maintain a concept of value and if it really can't be abused by our so-called "Leaders of the free world" then maybe, just maybe, it might be worth converting a bit of my savings to hedge off the Fiat Money Photocopier.
So this week, I bought my first bit of Bitcoin. R30,000 / $1,650 / £1,350 worth in fact. Which bought me a grand total of 0.1586 BTC. How exciting.
Unfortunately it's dropped in value by 7.5% in the last 24 hours alone so not the greatest start but luckily for me I've bought it to pay somebody in another country for a purchase of making and we pre-agreed the price in bitcoin so unfortunately for him, he's the one making the loss.
What have I learned so far from buying my first Bitcoin?
Its expensive to buy and sell. I've used a recommended and reputable broker but they still charge 2% of your buy or sell transaction, which reminds me of my early days of trading stocks when you would lose most of your profit through the ridiculously expensive dealing costs.
You have to be super careful. Where I live in South Africa, Cryptocurrency is unregulated (which I think is pretty much the same in most countries) so if you send money incorrectly, someone defrauds you, the company you trade with goes busty or basically anything goes wrong, the police wont want to hear it, you're on your own.
It's volatile. Even though I've gone with the most well known and established coin (Bitcoin) a 7.5% swing in 24 hours is pretty terrifying. If that happened to the stock market or a global Fiat currency, you wold definitely hear about it. It seems to happen as standard in the world of Cryptocurrency, I guess that's why so many people trade it.
I have much to learn but I intend to put in the hard miles to see if it could be viable to have at least some of my wealth held in Cryptocurrency because I know one thing, if quantitative easing continues, dark times are on the horizon somewhere.
I'll let you know what I find out. Subscribe now so you don't miss it.