EKIP– Expert Club for Economics and Politics A Different Opinion
Mark Spitznagl, Mises.org
With each new peak in the price of Bitcoin, claims that it will become the best store of value asset of our time – the new gold – become more and more frequent.
However, we cannot ignore the fact that it is essentially a speculative investment in a new technology – blockchain. In general terms, these are layers of independent electronic security that encapsulate the cryptocurrency and seal it like a frozen fly in amber. This is the meaning of the “crypto” in the name cryptocurrency.
This doesn't mean that the price of Bitcoin can't hit many more new highs. After all, that's what a speculative bubble does until it bursts.
Bitcoin is an investment in technology, not in currency
Bitcoin, and any initial coin offering (ICO), should be viewed as innovative software tools, not competing currencies. Amber determines their value, not flies. Cryptocurrencies are a very significant technological innovation with added value that directly challenges the government monopoly on money. This uprising against government-manipulated money will only grow stronger until cryptocurrencies become the preferred method of payment between individuals – then who will need government funds? They, although in an early stage of their development, have great potential.
And while governments lack the tools to directly control cryptocurrencies, why shouldn't we expect them to suffer the same fate that befell certain Swiss bank accounts (whose bank secrecy remains legally enforced by Swiss law)? All the local government would have to do was declare confidentiality an illegal act, thus forcing citizens to become criminals if they don't reveal their accounts. The more weight anonymity has in shaping the value of a cryptocurrency, the more vulnerable its price is to such a possible decree.
Bitcoins should be viewed as assets/stores of value, not currencies. They are business plans—each creating future value. They are not a store of value, but rather the volatile expectations of the future success of those business plans. Most initial coin offerings (ICOs) likely lack a working business plan, relying solely on the momentum of a growing number of crypto investors. (The U.S. Securities and Exchange Commission correctly views them as stocks.) Therefore, we should expect their value to be calculated based on the same risk premiums and growth expectations that we see in the markets today. And let’s be aware that they will suffer the same fate that befalls any speculative bubble.
If you want to create your own private country with its own currency, no matter how safe it is from outside invaders, it would be wise to start with a pre-existing store of value like foreign currency, gold, or land. Otherwise, why would anyone exchange anything for your newly created currency?
Cryptocurrencies are not a "store of value"
Furthermore, in the process of creating different cryptocurrencies, whether for specific purposes or not, these ICOs drive the price of all of them up. It is obvious that the newly created cryptocurrencies can support their exchange value – perhaps even their fungibility with each other. But the moment they start competing with each other, they will not bring additional value. Technology, like an innovation, can actually create value out of nothing. But it is not the same when we talk about the “store of value” function. When a cryptocurrency acquires the store of value function, this function, of necessity, must be seized from another asset, be it gold, silver or another cryptocurrency. On a global scale, this is a zero-sum game - money flows into the new and more popular “store of value”.
Or, if we may put it this way - we can improve the layers of amber, but we cannot create a new fly.
This competition between cryptocurrencies, both on a technological level and in terms of their "store of value" function, will by definition limit the increase in the price of each of them. Simply put, cryptocurrencies have a very serious scarcity problem. The limits on the supply of each cryptocurrency are a huge improvement over the lack of any restrictions on governments when it comes to printing money. However, unlike physical assets like gold and silver, which have unique physical properties that have given them monetary value for millennia, the problem with cryptocurrencies is that there is no barrier to entry; the more cryptocurrencies succeed, the more the supply of the others is diluted, or inflated, i.e. there is cryptocurrency inflation.
The store of value function of cryptocurrencies– a basic requirement for a safe haven asset – is a minor part of their value. After all, assets with this inherent function are exactly that – stable and reliable. They do not create new value and are of limited supply, intended only to hold value that has been previously created through saving and production. This is clearly the same mistake that central banks make: money and capital cannot be created out of thin air, they are the result of resources that are saved for future consumption. This is the reality and it cannot be changed.
The crypto bubble is part of the bubble caused by central bank policy
By viewing cryptocurrencies as safe havens, investors are being encouraged to increase the risk-taking in their investment portfolios. Holding Bitcoin and other cryptocurrencies is likely to further inflate the very same bubble that central banks have created through unprecedented money printing in recent years, and from which some (who invest in cryptocurrencies) hope to protect themselves. The great irony is that both the libertarian proponents of cryptocurrencies and the interventionist proponents of government fiat money are making the same mistake.
Cryptocurrencies are a very important development and a huge step forward in the direction of decentralization of monetary power. They have huge potential and I am a big fan of them. But buyer beware, thinking that we can magically create a store of value and thus a safe haven asset.
The original text in English can be found here. Mark Spitznagel is the founder and chief investment officer of “Universa Investments”. Former partner of Nasim Raleb at the investment fund "Empirica" and senior economic advisor to Ron Paul. Author of “The Dao of Capital: Austrian Investing in a Distorted World”.
