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Soapbox: Irresponsibly long

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With cryptocurrencies now being used to pay for the transfer of a professional Spanish football player – David Barral is going to DUX International de Madrid, the transfer performed via (an unrevealed amount of) Bitcoin – it might seem like a further sign that cryptocurrency has become a truly alternative currency, and is consolidating its legitimacy. But dig a little deeper. Inter-Madrid’s sponsor is Criptan, a Spanish platform for the buying and selling of cryptocurrencies, so the club has a vested interest in doing this kind of deal. It’s a common practice for soccer clubs to be sponsored – selling their ‘soul’ is perhaps a better description – by enterprises who wish to advertise themselves.

A more interesting case perhaps is the professional US football player Russell Okung – the offensive lineman for the Carolina Panthers – who is now reportedly getting half his $13 million a year salary in Bitcoin. It’s not clear if his salary moves up and down when Bitcoin does so. US veteran investor Warren Buffett called Bitcoin “probably rat poison squared” but that isn’t bothering Okung. Last November Okung tweeted that he was “irresponsibly long [i.e is heavily invested in] bitcoin”. After the news broke about Okung’s pay he said: “Money is more than currency; it’s power. The way money is handled from creation to dissemination is part of that power. Getting paid in bitcoin is the first step of opting out of the corrupt, manipulated economy we all inhabit”. To which Glint says a cautious ‘Amen’; but does Bitcoin (or any other of the more than 5,000 cryptocurrencies that existed last April – more than 1,000 cryptocurrencies have been created and died) have all the qualities needed to truly oppose fiat currencies?

 

Financial vertigo

Source: Nasdaq

Traders love volatility – they make money only when markets move up or down: a static market is no good to them – but people who need to use money in their daily life cannot afford to see the value of that money going up and down like a yo-yo.

While we support the thinking behind cryptocurrencies – that national currencies (aka fiat money) have lost their value and are likely to see their purchasing power further deteriorate, cryptocurrencies replace dollar (or pound or euro) disappointment with financial vertigo.

The volatility in the price of Bitcoin over the last 24 months has ranged between 75% and 125%, while gold’s has been between 8% and 24%. Such are the dramatic swings in Bitcoin that you could find yourself (if you use Bitcoin) paying for a lunch or a basket of groceries and discovering that said lunch/groceries have become much more expensive than when you first set out. Alternatively then when you leave the restaurant/store you might discover that Bitcoin has soared in ‘value’ and that you have paid more than you might have done.

The concentrated ownership of cryptocurrencies is another problem. The top 2.8% of Bitcoin addresses now control 95% of the supply. This is a market without liquidity. More than 2,000 wallets contain more than 1,000 Bitcoin each. At the start of January, a sale of around 150 Bitcoins resulted in a 10% drop in the price. Very few Bitcoins ever come to market – around 63% of the supply has not moved in the past year. The price is underpinned by “sheer faith”, the “hope that other people will keep having the faith”, according to a Financial Times writer.

Then there is the slowness of transactions. In 2017, Bitcoin transactions took up to 12 hours to be confirmed and at the height of the Bitcoin frenzy of 2018 they took more than a week. Bitcoin can process just five transactions per second, while transactions using Glint complete within 200 milli-seconds. Transaction speeds are critical for wider adoption of a ‘challenger’ currency. Cash is instant – Glint is instant – while with cryptocurrencies you have to hang around while the transaction is recorded and accepted on the blockchain technology that underpins cryptocurrencies. The more who use them the greater the bottlenecks will become – and the higher the fees. Cryptocurrency ‘miners’ require large fees to process and confirm transactions – for Bitcoin the fee charge per transaction was around $7 at the end of last year. Against that, Glint’s Mastercard and P2P transactions are free to its users in their country of residence.

Security is an important factor to consider. The internet is littered with stories of how people have either forgotten or lost the keys to unlock cryptocurrency fortunes. That’s not an issue for the gold you hold with Glint, which is physically allocated (meaning no-one else but you controls what happens to it) and is stored in secure vaults in Switzerland. You never have to worry about forgetting how to access your gold with Glint – our client services team is around to help sort out any problems.

And one other overlooked drawback of cryptocurrencies, concerns energy use. Mining cryptocurrency via dedicated computers is very energy-heavy. One estimate suggests that in 2020 the Bitcoin network alone consumed around 120 gigawatts per second, or about 63 terawatt-hours per year; that’s enough to switch on around 630 billion 100-watt light-bulbs at the same time and is the amount of electricity generated by almost 50,000 wind turbines working flat out. With the world’s policymakers driving hard to curtail our energy use, or at least to make it derive from more sustainable sources, it’s difficult to see the mining of cryptocurrencies escaping greater environmentalist scrutiny.

Governments are stepping in

The Covid-19 pandemic has helped accelerate change in many directions, including how governments think about money. Okung is right – money is power. Politicians have ‘locked down’ societies and quite rightly have been handing out money to people who have suffered from being unable to work. Simultaneously the use of cash is dying out.

Those ‘free’ checks (or cheques if you’re British), aren’t really free, but are mortgages against the future. The uncertainty about that debt – how it will be paid for or indeed if it will be paid for – has created additional anxiety.

The pandemic, plus the death throes of cash, plus the injection of vast sums into people’s pockets is distorting lots of things and has helped drive sky-high valuations of companies that have never made profits, pushed as much by fear of missing out (FOMO) as anything else.

This conjunction of interacting events is stimulating a lot of government interest and private thinking about the nature of money. We could be poised on the edge of a momentous turning point, when a new monetary paradigm will be set, one in which governments will seek to retain control over money/power by adopting the latest technological innovation – blockchain – and creating their own digital currencies and requiring us all to use them for our money. This is already happening in China. Governments who promote their own digital currencies are unlikely to tolerate rival privately-created cryptocurrencies.

It’s far too premature to know how all this will pan out – if uncertainty was a stock then its valuation would be sky-high right now. But if an alternative form of money is what you want, and you consider that the drawbacks of cryptocurrencies that have been identified are correct, then Glint’s gold may well be for you.

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