Crypto inches forward

The history of fraud makes for salutary reading. Fraud always needs two parties - a liar who hopes to get money for free, and the other gullible enough to be duped. At the heart of any fraud scheme is a fiction, one sufficiently persuasive to convince the duped. Gregor MacGregor was a 19th century con artist who invented a central American territory called 'Poyais' (off the coast of Honduras), which he claimed to rule. He convinced hundreds of people to part with money to colonise this fictitious territory. Around 250 of them emigrated to 'Poyais', only to find undeveloped jungle; more than half died. Tulipmania gripped Holland in the 1600s, with rare tulip bulbs changing hands for six times an average salary; the South Sea bubble of 1720 saw shares in the eponymous company rise eightfold in 1720; Japan's property bubble burst in 1991 (after the value of the Imperial Palace grounds in Tokyo was valued more highly than California's entire real estate); the dotcom bubble popped in March 2000; and the ripples of the US housing bubble are still with us today. What do all these share? A willingness to suspend disbelief because the temptation of easy profit is too much to resist. The non-fungible token (NFT) bubble collapsed in 2022, as people questioned paying enormous sums for pictures that only ever existed in the digital sphere. We've all heard of Charles Ponzi, Bernie Madoff, and Elizabeth Holmes. Clever crooks all.

Are cryptocurrencies a bubble?

Given that there are more than 25,000 cryptocurrencies in existence it would be astonishing if some of them were not fraudulent. The FBI said in September that last year cryptocurrency-related fraud in US territories rose 45% year-on-year to almost $6 billion. The very name - cryptocurrencies - smacks of deceit, as none of them can be used in a fast and simple transaction such as buying a coffee, which can be easily done with fiat currency or gold through Glint's services. They should be called cryptoassets.

But some, Bitcoin above all, claim attention because they seem not to be fraudulent. Bitcoin has been around since 2009. It was designed in the wake of the Great Financial Crash as a means of eliminating banks and the risks inherent in a banking system. The original idea was one shared by Glint, returning to a form of exchange beyond manipulation by corrupt and/or incompetent powers. Using encrypted blockchain technology meant that user anonymity could be preserved while removing the weakness - the trust in humans element - from financial transactions. As a by-product it was also seen as a way of removing government control over what we use as a means of exchange. The financial crash had undermined trust in banks; fiat money lost purchasing power over time thanks to inflation; Bitcoin would be a stable currency beyond the control of any bank or government. It sounded like not just a libertarian's dream, but a dream for everyone who wants a reliable and stable means of exchange.

The Trump 'bump'

The trouble is, this clever creation has been picked up and been distorted. Donald Trump, soon to be the 47th President of the US, has turbo-charged not just Bitcoin but also so-called 'memecoins', digital tokens that now number in the millions and frequently reference animals or cartoon figures. One such is PEPE, which refers to a comic frog; after Trump's election victory PEPE hit a market cap of $8.2 billion ($6.44 billion), more than the British supermarket chain Sainsbury's. Of course there is no underlying value to PEPE or any other memecoin; they are valued only because people are sucked into their orbit. Memecoins are certainly a bubble.

The case of Bitcoin however is more complex. Bitcoin surged more than 50% after the election of Trump to above $100,000. Trump - a former cryptocurrency skeptic - has vowed to make America the "crypto capital of the world". Eric Trump, one of Donald's sons, has said Donald will be the most pro-crypto President in history. It's a strange paradox that an invention designed to remove power from government should become endorsed by one of the most powerful governments around. Trump has nominated several cryptocurrency advocates to top roles in his government-in-waiting; Paul Atkins, a crypto fan, has been picked to run the Securities and Exchange Commission (SEC) which regulates cryptocurrency in the US. The US senator Cynthia Lummis introduced a Bill in July to establish a 'strategic Bitcoin reserve'. Now a deputy in Russia's state Duma (its parliament) has called for Russia to create a similar strategic Bitcoin reserve.

Donald Trump has private interests in cryptocurrency; the Trump family - which is behind the crypto project World Liberty Financial - stands to make millions from their cryptocurrency interests. The possibility of conflicts of interest are legion.

With Trump's powerful support Bitcoin looks like it might shed its 'tulipmania' tag. But anyone heavily invested in US Dollar-denominated assets should be alarmed. If the US and Russia were to create Bitcoin strategic reserves, other countries would inevitably follow - El Salvador is already building a Bitcoin reserve. New technology has enabled the development - the massive spread - of crypto assets. But their value is only based on the confidence that another person will want to buy them. That accusation may also be levied against precious metals - except that gold and silver have been valued across centuries and don't depend on passing fads for comic frogs, monkeys or squirrels. Now that banks have started to sell exchange traded funds (ETFs) based on cryptoassets, if (maybe when) the crypto bubbles burst it will create the mother of all financial (and perhaps political) chaos.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.