Crypto Currency Risks

The momentum of investing in crypto currencies, including the 13 year old Bitcoin, has been surging and more and more individual investors, financial advisors and institutions are either investing in or are stating they plan to invest in this new alternative to fiat currency and other forms of payment.

A massive ecosystem has been built on cryptos, yet very little has been explained or written about in detail on the benefit a person or firm would get for using a crypto currency versus credit card/debit cards, Venmo, or even cash. For example, in the April 12, 2021 five page printed edition of the Barrons special report “Diving into Bitcoin“, there was no mention of why crypto currencies are useful currently or in the future from a use-case perspective (outside of use in horrible economies like Venezuela, Lebanon, Nigeria, or a firm that wires lots of money internationally).

Yet, over five pages of writing were dedicated to people making 1% allocations to crypto, price appreciation of Bitcoin and others, advisors allocating to it, companies adding it to their treasury, and institutions heavily investing in infrastructure to support crypto investors. And to be fair, quite a bit of negative warnings about its risk were in this Barrons article, even from those investing in it.

For something to be worthy of an investment, usage of that item is mandatory for that item to have any staying power as an investment. What seems to be missing is actual use of crypto currencies to perform some function that is superior in some way to the current way to purchase items. When one envisions themselves at the literal or digital checkout counter in a future world the choices will be: cash, credit card, debit card, the “paypals”, and crypto currencies.

So far, there is no compelling benefit described by proponents of crypto that would convince large numbers of consumers to choose paying with a crypto currency.

Fans of crypto have written that the following benefits will propel crypto currencies: anonymity, lack of transaction costs, lack of central bank dependency, portability via personal devices. Some of these benefits are false, for example there are no transaction costs when paying by credit card/debit card, assuming one is not borrowing from their bank via a balance. The other benefits stated are largely philosophical. The exception is those consumers or businesses that transact business internationally as currency conversion costs exist. However, the number of entities transacting internationally is quite small and cannot support wide-spread adoption.

Over the past six months I have been reaching out to crypto enthusiasts, both investors and advisors alike to ask the question about consumer adoption and posed the question about being at the “checkout counter” and why would a consumer pick crypto? There are two types of replies I get, in roughly equal numbers. First, the enthusiasts state the use-case of crypto has changed from being a currency to being a store of value, like gold. The store of value utility argument has its own challenges, which will be addressed in a future article. The second type of response I get is no response to the pointed question.

After just 16 years of its creation, a personal computer was owned by 25% of American households. Bitcoin is now in its 13th year, and the number of Americans households that have used any crypto currency to transact is immeasurably small.

It appears so far that the underlying reason people buy crypto as an investment is exclusively because the price is going up, not any underlying use. Before making any investment in a crypto, it may make sense to thoroughly investigate its underlying utility and to speak to a financial advisor who has researched how widespread a future usage would be, and quite importantly, why.

Related: Bitcoin: Spend or Invest? Just Ask Tinkerbell