If you've read any of my articles you'll know I'm an advocate of alternative assets, and crypto-currency would seem to be a natural fit for that.
The underlying technology is sound
Now while I have seen scams, hacks, rug-pulls, criminals using crypto and all sorts of unethical behaviour, there is nothing fundamentally wrong about the underlying block-chain technology.
Sure, it can get misused (and boy has it!), but it is not inherently a fraudulent technology.
It does provide a reliable way of storing data publicly in a way that is verifiable. If you imagine something like Wikipedia, literally anyone can login and update any pages, so you need armies of people to moderate it and ensure that the data does not get corrupted. Crypto provides a mathematical way to validate the transactions being written to the public ledger, so I have no issues there.
It is an elegant solution to that problem and quite an admirable technological advancement.
So why am I not optimistic about it yet?
The case for
So the main idea is that it is a superior currency to fiat (i.e. government backed currencies like dollars and pounds) for several reasons:
Inflation
Since nobody can print the currency, we should avoid inflation. This is actually a property of crypto that I like, because inflation is used by governments as a stealth tax and wealth transfer mechanism.
Inflation tends to increase the value of an asset, whereas it tends to decrease the value of any debt. If I buy a house for 100,000, with a 75,000 loan, then if the currency inflates by 100% over a 10 year period (so my salary doubles, everything else doubles), the house would likely be worth 200,000. However the loan is still only 75,000. Not only that, I can now pay that loan off twice as fast since my salary is twice as large.
So governments basically borrow money from the public, then print more currency to decrease the real value of the loans, thereby avoiding having to raise taxes (which is unpopular). The net result is the main way of getting wealthy now is to borrow money to purchase assets (i.e. levering).
This is great for people that have good credit rating and access to capital, and terrible for everyone else (i.e. the majority of the population).
Crypto making this harder is a good thing.
Decentralised / Democratised
So this kind of goes back to the inflation point, but basically nobody is in control of a currency like bitcoin. Once the code is written and the maths set in stone, it just rolls on with no way of being altered.
Sure people can fork the currency, but it is a democratic process. If enough people are not persuaded the fork will fail.
Smart Contracts
These are actually quite cool, but the idea is that code can be triggered based on the payments (or lack thereof). For example you have a car with a loan. The loan is based on a smart-contract. If the loan payments aren't made, then the car won't start. This is automated and enforced by machinery, there is no way around it.
You could also use these for things like, project governance. If enough votes go one way, then the outcome WILL happen. No danger of the voting process being corrupted, or the results being ignored.
Hedge against fiat currency failure
The printing of money to stealth-tax people is a financial drug as old as time. One most often employed by the government in the possession of the "reserve currency" of the world.
Every period in history has proven time and again, that the allure of printing your way out of financial irresponsibility is too tempting to resist. The Chinese did it in the middle-ages, the Dutch did it in the renaissance. The Germans tried it before the war. Everyone tries it, everyone suffers the same fate. It works very well and almost feels like a cheat-code the first few decades, and will work well-past the point at which you can undo the damage done by it. Like selling your soul to the devil, you think you're so smart until the day of reckoning comes and you are left with only remorse.
There is a strong case to be made that the USA has already gone a very long way down that road, too far to come back even. Take note of all the US budget wars that shut down the federal government from time to time, and arguments over the debt-ceiling.
It remains possible that fiat has been pushed too far and that the system will one day collapse. However, we must accept it is possible it will also continue to stumble along for another century or two before that happens. Nobody has a crystal ball.
The case against
Ok so crypto sounds great right? It's based on rock-solid maths, solves a bunch of issues with existing currencies, and is here to stay. You'd think I would be buying it up left right and centre. However:
It's Risky
There are simple risks around the mechanics of owning and securing crypto-currency. If it is stored on an exchange, then your currency is only as secure as the exchange it is on (and many of these have been hacked).
If you store it yourself, you run the risk of being that guy who had his wallet on a hard-drive that is now buried in a land-fill site. Try as he might to get it back, it looks like it is lost forever.
There are also financial risks of selling crypto, as I sold some last year and got a warning from my bank that the person I sold it to was laundering money. I was told I had been a "mule", by unwittingly assisting in money laundering. I got a slap on the wrist and a firm warning that if I did this again my account would be closed.
It's slow and unstable
It's very hard to price things using crypto given how volatile it is, and using it to purchase things with the slow transaction speed and low transaction volume it is very unpractical for use as an every day currency.
Sure there are projects trying to address these issues, but none of them are currently doing it better than Visa and Mastercard.
Utility
The other issue I have is crypto is primarily a solution looking for a problem.
Sure, you can store verified data on a public database. Great. Question is, who actually needs to do that?
So far, nobody. We have yet to find one single economic problem that is better solved using crypto than it is using centralised data storage. By this I mean banks. The bank has a private database it controls access to, and in there is stored the balance and all your transactions.
Similarly games or other projects people have tried to force crypto into (web 3.0 anyone?), we find time and again that the existing solutions of having a central server that is the authority, with a private database work just as well and if not better than a public ledger system does.
Nobody backing it
If you think about what a currency actually is, in a way having it backed by an organisation (like the government or a commercial enterprise) is what gives the currency its value.
Like if you get a steam voucher, then your confidence that voucher is still going to be worth something is directly tied to your confidence in the underlying organisation to still be solvent in the time period you want to use that currency, and for them to still accept it as payment.
Fiat currencies are used by the government as tax payment, and so they are backed effectively by the force of the judicial system of the nation. As long as people believe the nation will continue to stay solvent and accept that currency as payment of taxes, people believe in the currency.
So there is something underneath that backs the currency.
Crypto sits on thin-air. Sure, there is a collective belief, but that is like a self-fulfilling prophecy. It's like celebrities who are famous for being famous, and not for having any exceptional talents like singing or dancing. Or get-rich gurus who sell courses on how to get rich by selling courses.
So the idea of it being decentralised as its main strength, is also potentially a weakness.
No yield
The same reason I don't invest in gold, is it doesn't actually do anything. As Buffet astutely observed, we spend millions digging gold out of the ground, only to bury it again in vaults and pay people to guard it.
Businesses do things, they solve problems. Wine and whiskey you can drink, horses you can ride and jump. Property people can live in.
I prefer to invest in things and own things that provide genuine value to other people, that generate a revenue stream and therefore have some kind of annual yield based on economic value.
No integration with fiat
The main issue I see at the moment, is no realistic pathway to integration with existing currency systems.
Crypto works really, really well as a closed system. In other words, if we could click our fingers today and immediately switch over to crypto, where people are paid in crypto, your rent is a smart-contract that comes out of your pay-packet, you can buy beer and fidget spinners with crypto at Walmart. Basically once the entire world has transitioned, I feel confident saying that world is far superior to the one we all live in today with fiat currency.
But it's much like having the UK join the rest of the world in driving on the right-hand side of the road - it would be great after that happens. Car manufacturers only have to build one type of car, hiring a car is easier when traveling and so on. So many benefits. But the only way to do it, is to force the switch over in one day. There is no gradual transition option available.
And crypto seems the same to me. There is no pathway currently to smoothly integrating that currency into our economy. There would need to be a period of time where you can pay rent in both fiat and crypto, to allow a transition.
Even if you gave me 400 bitcoin today (with a market value of millions), how do I spend it? Where do I spend it? I cannot. I must, at some point, sell that crypto for fiat, and only then does it become useful to me.
I've yet to see a convincing answer to this question. Everyone seems focused on the promised land and the benefits of crypto, and assume that will (in the long run) be enough to dislodge the incumbent. But we've seen time and again that network effects can keep inferior products from being dislodged by better ones. Once something becomes entrenched (like VHS), Beta-Max has no hope, even if it is better.
It's not until DVD comes along that VHS has to make way. The benefits have to be so overwhelmingly large, that people are willing to take the pain of making the transition.
So while crypto you can argue has better properties than fiat, they are not so good as to have everyone clamouring for a change. And there is no viable pathway to run these things alongside each other.
Everything you can do with crypto you can do with fiat. Like tokenising assets. Why not just setup a limited company as an investment vehicle, and open a bank account for that company, and then sell shares in it? Then use that to purchase the asset (house or whatever).
With crypto, you have to exchange your fiat for crypto first before you can purchase the token. Then the token is tied to some legal contract, that ties the token to a legal entity, which owns the asset. Then once all the tokens are sold guess what the investment project has to do? That's right, sell it. It must sell all those tokens for fiat, so it can actually go ahead and buy the damn thing it is trying to invest in.
So all that has happened is a bunch of complexity has been introduced for zero financial benefit.
Summary
So in summary, while I'm not going to pretend I know what's going to happen, and that crypto is worthless. We have to admit that we are in the stage of an early start-up venture.
We are basically on Dragon's Den and we've heard some guy from Brixton pitch us a new way of vacuuming the house, but we have no idea if anyone wants to do it that way or if he has any way to pull it off.
I know people trade crypto, and if you want to gamble your money in that casino, go ahead. If you are buying and holding and believe it's going to be the next great thing, you can do the same with any random start-up, or angel investing in any company. There are plenty of things that have the potential to 1000X if you get in early. That's not my investment style but I can respect it if you think you are going to get lucky with it.
I can see for some people it's a moral stand, and that they believe in the principles of it and want it to succeed. That's great, and I respect that also, but I personally don't believe wishful thinking is a good investment strategy. I'm a little more pragmatic.
I'm much happier investing larger amounts of capital at lower risk profiles and having a more reliable route to building wealth, then speculating on unproven companies or unproven technologies.
To each their own.