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Sunday, September 24, 2023

Crypto Dreamin’? The Good, the Bad, and the Ugly

Way, way back in 2014, I debated the cryptocurrency evangelist Andreas Antonopoulos on the merits of bitcoin. It was a wonderful, civil, and not too disobedient dialogue. I was skeptical, not cynical. Today, six years later, I remain skeptical but now have a cynical bias.

Let me explain what I see as the good, the bad, and the ugly across the cryptocurrency landscape. I won’t cover the blockchain. For that, I have only optimism.

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The Good

  1. A democratized currency can only be described as good.  
  2. A decentralized currency that cannot be controlled by any — misanthropic, missing, or maddening — government leader must be described as good.
  3. A digital currency that does not recognize sovereign borders and so requires no conversion taxation or limitations is good.
  4. A currency for places that do not have a stable or developed one is so very beneficial.
  5. And hooray for a currency that is ready, maybe too willing, and able for our global, digital world without all range of account establishment hurdles, capital movement restrictions, and other challenges.

If you believe the rule of three, then those five ought to be more than enough to wipe out the skepticism and initiate our livin’ the crypto dream.

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The Bad

Whenever making an argument, it is best to focus on the logic. Yes, I know that preying on emotionality, as most media outlets do, is often the most effective strategy. But my “Bad” logic may be massively packed with emotion and could — should? — still win my logic argument.

What if the world fully embraced a cryptocurrency? I mean, no more paper money. The social contract that we fear is fraying today would be torn to shreds.

Without delving into what led to our social contract challenges, how would “universal sovereign individuals,” based upon their money, be taxed to enable and support a social contract with their schools, fire protection, police, and safety nets?

Answer: They could not, I cannot imagine, without creating a violation — breaking the sovereignty — that would tear down the crypto kingdom as it stands. Moreover, governments with social contracts know this and will do whatever it takes to stop any real breakaway from their currencies.

Now, re-visiting the five “Goods,” because hope and hype is NOT a strategy, we can lose the first one because a democratized cryptocurrency is kind of fictional. Why? Because today, BIG controlling hands exert an influence on the various cryptocurrencies that exist through mining or any other process. Cryptocurrencies have not been distributed like some type of universal basic income (UBI). (To be sure, introducing a form of cryptocurrency could make for a brilliant UBI, but it would be guaranteed to be controlled by a central, sovereign state actor. So much for that idea.)

And, for all those who think crypto is fabulously anonymous, it is NOT. Hello blockchain — the real dream tech! There is a reason that governments have threatened or begun to remove larger denominated paper currencies. Hint, cash is much more anonymous.

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The Ugly

All paper currencies can be lost or stolen. Ugh! But crypto is not demonstrably more secure. There are big thefts and hacks and people lose their crypto keys all the time (UGH!).

And, don’t forget the famed bank robber Willie Sutton. When asked why he chose banks, Willie allegedly responded, “Because that’s where the money is.” Well, crypto exchanges are arguably bigger and easier targets than any individual bank today. And exchanges don’t offer complimentary insurance.

As if that isn’t ugly enough, try to stomach these:

  • Cryptocurrencies can be manipulated or schismed. It has already happened.
  • How would you feel about paying the equivalent of several thousand dollars for a pizza? Yep, that has happened, DOH! If a cryptocurrency cannot remain stable, why would buyers/sellers be motivated to use it? Aside from potential illicit applications and maybe for collectibles, there is no use, no purpose. Unless . . .
  • You view your cryptocurrency as an investment. Maybe just don’t. Investments offer dividends or a yield. Cryptocurrencies have neither. They are . . . speculations, collectibles? Does the world really need any more private ornaments? And digital gold? Really? That’s nice marketing. But why not just buy gold?

In the End (Not That Anything Is Over)

The skeptical me remains skeptical and not crypto dreamin’. You may wish to be careful too.

Furthermore, the idea of sovereign digital currencies — the stuff of efficiency / effectiveness dreams — could be dangerous too. Take a moment and think of the temptation to tax, repress, fine, or devalue with the proverbial press of a button if there’s any form of centralized control.

Fiat currencies are no panacea, but for me still, today, I’ll take paper or plastic/credit, please, at least until decentralized digital is a reality.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Travis Wolfe / EyeEm

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Michael S. Falk, CFA

Michael Falk, CFA, CRC, is a partner at the Focus Consulting Group and specializes in helping investment/wealth management teams improve their investment decision making, and their firms with strategic planning and succession. Previously, he was a chief strategist at a global macro L.P., and a chief investment officer in charge of manager due diligence and asset allocation for a multi-billion-dollar advisory practice. He is a frequent speaker and presenter at industry events and often quoted in the press. Falk is part of the Approved Speaker List at CFA Institute. He has taught on behalf of the CFA Society of Chicago in its Investment Foundations Certificate program, been a contributing member in the Financial Management Association’s (FMA) practitioner demand driven academic research initiative (PDDARI) group, and adjunct faculty at DePaul University in its Certified Financial Planner (CFP) Certificate Program. Falk has authored or co-authored 2.33 books: the 2016 CFA Institute Research Foundation monograph Let’s All Learn How to Fish . . . to Sustain Long-Term Economic Growth, the 2019 follow-up Get to Work . . . on OUR Future, and, with Jim Ware, CFA, and Keith Robinson, Money, Meaning, and Mindsets.

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