Invest in crypto?
Q – What’s so bad about investing in crypto? The currencies are promoted by some celebrities, available now as an ETF from big Wall Street firms, and even some finance commentators promote them.
A – First of all the use of the word “currency” with crypto is a misnomer. You can’t easily buy a pack of gum, pay your stylist, or make your car payment with a crypto currency. The fact that it doesn’t meet the needs of modern commerce – wide acceptance, immediate transactions, and equivalent forms means it shouldn’t be thought of as a currency. [By equivalent form, I mean it can't exist as cash, on a debit card, check, or digital transfer. Crypto is only crypto until it's not.] I’m particularly troubled that Bitcoin is portrayed in the image of a golden coin with a $ sign on it. There is no such thing. A Bitcoin is just a very long, unique series of digits in a computer, with its owner's name and transactions attached to some of those digits. While the technology behind crypto supports high security and global access and acceptance, that technology comes with negatives; large computing server “farms” to process every transaction, a lack of oversight of the technology and control of supply (crucial for stable currency value), and the proliferation of different crypto currencies that are similar but not equivalent. No doubt the best minds in computer science have evaluated the architecture of the technology and have not thrown up huge red security flags, so everyone assumes they're safe, but it's based on implementation, for which there is little oversight.
Thus, it’s no different than if we discovered a new mineral, mining it slowly, creating the appearance of limited supply, and the price will be set based on how much of this rare metal exists.
Today, precious metals may hold their value over decades because we have a good sense of how much of the metal there is under and above the ground and what it costs to mine it. With crypto, there are also limits, but no one knows where they are (except for the number of "coins" of a particular cryptocurrency that can be minted). It’s surprising to me that prominent financial experts would support crypto at this time, given the history of the tulip bulb mania of the early 1600s. For now, crypto is pure speculation and no regulation. If investors wish to hold it, they should be prepared to accept a complete loss, difficult liquidity at times, tax implications of capital gains or losses…and an unforeseen failure of technology. I won't go so far as to say it follows the 'Greater Fool Theory,' where investors purposely buy at high prices because they know there are greater fools waiting to get in on the trend, but the real winners of Bitcoin are those who bought at $19,000, not at $119,000.