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Category: Soap Box

Soapbox: A Finite Supply of Fools

Sometimes it's hard to stand aside and just watch. What would you have done during the tulip mania or South Sea bubble episodes? Would you ha...

11 March 2021

Gary Mead

Sometimes it’s hard to stand aside and just watch. What would you have done during the tulip mania or South Sea bubble episodes? Would you have had the fortitude to stand back and let others make fortunes (or lose everything) from things that had little or no intrinsic value? Or might you have succumbed at some point and put your life savings into something that you could not exchange and whose use-value was zero?

Yes, we are back in the land of Bitcoin and other cryptocurrencies.

The price of Bitcoin has surged by almost 10% in 24 hours (as of Tuesday afternoon this week) to above $54,000 and within spitting distance of its record price (so far) of $58,000 on 21 February. Bitcoin’s market capitalisation is above $1 trillion (£720 billion) with some exuberant fans saying it could rise to around $100 trillion.

 

 

In the US, Coinbase Global, which claims to have 43 million verified users who can trade Bitcoin and other cryptocurrencies, plans soon to do a public listing on Nasdaq, with a valuation of around $100 billion. On its website, Coinbase, which has been in existence for just nine years, says its genesis was the “radical idea that anyone, anywhere, should be able to easily and securely send and receive Bitcoin”.

As the above chart shows, if Bitcoin is a bubble it’s gone much higher and faster than either tulip-mania or the South Sea version. There’s no conclusive evidence that it either is or is not a bubble. Only time will tell.

The cryptocurrency revolution

One thing is for sure – the 2008 financial crash spawned many profound socio-economic changes and the development and growth of cryptocurrencies is one of them. It’s a revolution and, like many revolutions, the appeal is mostly for younger generations. According to a survey of February this year, 40% of British 18-34 year olds said they had bought at least one type of cryptocurrency, dropping to just 4% for those aged 55+. It’s also more of a male thing – 24% of men have bought some compared to 13% of women. 71% of Brits say they have no intention of ever buying any cryptocurrency.

The most popular reason why people have already bought, or intend to buy, cryptocurrency is that they believe it is going to be very influential in the future (23%). This is closely followed by 21% of people who are frustrated with the interest rates for savings accounts. Other reasons why people include not wanting to miss out (20%). 19% of potential, or existing, crypto buyers said it seems like an easy way to make money. 16% said that influential people, such as Elon Musk, talking about cryptocurrency had convinced them to invest.

Risky investment or money?

We understand why cryptocurrencies were created. It’s about declining faith in fiat currencies, and the desire of people to avoid from becoming hostages to government control over their personal wealth. Fiat money, the money most of us live by, is a currency that a government has simply declared to be legal tender, despite the fact that it has no intrinsic value and is backed by nothing. Cryptocurrencies share those two latter characteristics with fiat money.

 

 

But we think that cryptocurrencies are nevertheless going to become a permanent feature of the financial landscape, if only because the temptation for governments to use blockchain technology (which underpins cryptocurrencies) is just too strong. Governments everywhere, from China to the US, are already rolling out their own state-controlled digital currencies (CBDCs and/or stablecoins) or planning to do so.

What do we want from a currency? A number of things:

1. We want it to be stable – or as stable as possible – over time. If it loses purchasing power then public confidence in it will die.

2. We want it to be free, as much as possible from manipulation, so that we can rely on its value.

3. We want to be able to use it whenever we like or need, to buy a coffee or a home.

4. We want to be able to save it for the future.

5. We want to be able to transport it easily and be able to use it when we go travelling.

6. We need our currency to be easily transportable and liquid (i.e. how quickly it can be used).

These minimal considerations are overlapping, crossing both immediate ease-of-use and investing. In our view holding gold with Glint fulfils all these needs while cryptocurrencies meet only 2 and 4 – and perhaps not even those.

Gold is now transportable

A paper published in January this year argues that Bitcoin’s volatility is almost 10 times higher than those of major exchange rates and that therefore “Bitcoin cannot function as a medium of exchange and has only limited use as a risk-diversifier”, although Bitcoin “shows store of value properties”.While cryptocurrencies are invulnerable to bank robberies and counterfeiting, their computer-based development make them a potential target of “denial of service” attacks.

Bitcoin is massively illiquid; 78% of Bitcoin is illiquid. It is a Godzilla of energy consumption; Bitcoin uses more electricity than Argentina. And there is an increasing likelihood of a tightening regulatory noose around the privacy of cryptocurrencies.

One of the old drawbacks against gold being used as a currency was the (previously justified) claim that it was heavy and not easily transported. With Glint this has been eliminated. Glint enables its users to carry with them any amount of gold, from millions to just a few dollars or pounds, which can be spent and used in daily life – or saved if you prefer. For us, the advantages of securely-held Glint-gold easily trump the slow, energy-heavy, vulnerable and hardly usable Bitcoin – or any other cryptocurrency would-be currency.

Bitcoin and many other of the 3,999 cryptocurrencies now in existence are no doubt here to stay. Governments will use the underpinning technology for their own purposes – but gold is not open to government manipulation. With Glint, gold has already become the alternative currency; immediate, transportable and easily accessible as an instant means of payment.

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