2 With the advent of cyber currency, first, with bitcoin then followed by a host of others, it was only a matter of time until Uncle Sam threw its hat into the ring.
Cryptocurrency as it is called comes in many forms. Bitcoin is the most notable, there are many others that go by names like Ethereum, Ripple, Stellar Loomis, EOS, and Lightcoin to name a few. With currently over 5000 cyber currencies, it certainly seems like everyone is issuing their version of internet cash.
The idea behind crypto is it’s anywhere and everywhere there is internet access. Not controlled by any one government, crypto is “mined” by using mathematical formulas called blockchain technology. Wikipedia describes it as: “A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets”.
As a currency, its qualification meets some of the characteristics a medium of exchange must possess. A currency must be hard to replicate, divisible, recognizable, have uniformity, portable, have acceptability and maintain a store of value. On the first six characteristics, crypto could be argued to fit the bill nicely. My objection is having an issue with the last characteristic, maintaining a store of value.
It goes without saying that at times, the price of cryptos can vary tremendously. Stories of skyrocketing prices and subsequent roller coaster-like plunges are common. Although a rising price may convince some investors (and I use that word loosely) to believe crypto makes a great currency to own, the very fact it rock and rolls violate the store of value characteristic in spades.
A store of value means both the buyer and seller of the currency must have faith in its stability. Stability means it doesn’t go up or down much. Certainly, the buyer of crypto relishes the meteoric rise when it occurs, but like all things money, there is always someone else on the other side of the trade. If an owner (buyer) of crypto makes an overnight fortune on a crypto blast-off, the seller of that crypto lost an equal amount. For to buy crypto one must have exchanged something else for it. Usually, it’s another currency that is exchanged and the person who sold the crypto now holds a currency that has fallen in value by an equal amount.
Stability, the very definition of maintaining a store of value, is almost nonexistent at this time in the cyber coin market.
Another attraction of crypto is the fact no one or no government can shut it down. Again from Wikipedia: “It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries”.
By the nature of how its created and it ownership maintained, each coin’s “DNA” (the mathematical formula that created it) is stored on each and every computer that possesses it. Since the internet is worldwide and basically unstoppable, the thought is it can’t be confiscated by meddling governments and therefore safe to own.
Although the concept of non-interference is maintained in its purest sense, central governments can and have shut down its exchanges. This means if your country of residence decides it doesn’t want you trading crypto, it can shut down all the ways you can trade it by shutting the exchange websites. Internet workarounds are certainly possible but for the average Joe, those backdoors may be difficult to access.
Governments maintain strict controls over their respective currencies. They are the lifeblood of an economy and also the bank accounts for governments. History has proven time and time again a government will insure its currency is valid and not usurped by another other if it deems it necessary.
Currency controls are common as are restrictions against exchanging a country’s currency for another as citizens as governments try to protect themselves from a currency crisis. A currency crisis is the absence of confidence in that currency. Think Mexican peso.
That said, to say central governments aren’t fully aware of the threat crypto presents to their currencies and their economies would be more than naïve.
Governments worldwide are looking closely into the rise of cryptocurrencies.
Case in point, the U.S. government is looking into issuing its own version of the cyber coin said Federal Reserve Governor Lail Brainard last year at a conference at Stanford University. The U.S. is not alone. Brainard confirmed the issue is being discussed with central banks worldwide by adding: “we are collaborating with other central banks as we advance our understanding of central bank digital currencies”.
It’s only a matter of time before governments bring down a harder hammer on cyber coins.
This article expresses the opinions of Marc Cuniberti and should not be construed or acted upon as individual investment advice. Investing involves risk. You can lose money. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is www.moneymanagementradio.com. California Insurance License # OL34249.