When the Savior was asked about taxes, he observed that a coin had Caesar’s image on it. When you look at US coinage, you will likely see a President’s profile, but you’ll also see “In God We Trust.” US currency is backed by the faith and credit of the US Federal Government. May it prove faithful in perpetuity and do nothing to make itself unworthy of our trust.
Nevertheless, there are times when that trust wavers. A viable Plan B can help keep those in charge of Plan A honest. Specifically, if all of your eggs are dollar-denominated, they can get scrambled if someone in Washington turns on the printing presses.
Governments use inflation as a hidden tax on everyone and no politician can get reelected promising to raise voters taxes. (Any government that says, “Vote for this school millage. Some other guy will pay it,” would turn on the printing presses if it could.)
My parents saw everything financial through the lens of the Great Depression that they’d grown up in. My dad’s friend Howard would preface every visit with, “Do you think we’ll have hard times, Don?” He said this all through the go-go sixties. Lots of people lived through hard times and they took steps to proof themselves against its return.
I was a young man during the stagflation of the 1970s. The ‘70s were a perfect storm of lousy markets, a slow economy, high energy prices, and inflation. It wasn’t until well into 1982 that the economy turned around.
This has left guys like me wondering ever since when inflation is coming back. If you want a depressing read, pick up the novel The Black Obelisk by Erich Maria Remarque. It describes the hyperinflation of 1920s Germany. Ask any German what they think of monetary policy.
You can try to protect yourself against dollar inflation with international funds or owning things which are relatively inflation-proof. Like gold. Gold is money and paper is a politician’s promise. But gold is not a productive asset.
So, if I dislike fiat currency (aka paper money), I must really hate cryptocurrencies like Bitcoin and Ethereum. After all cryptocurrencies are backed by zero tangible assets.
For a long while I thought so. Now I do not.
The richest guy around here started a company called Amway. For years Amway defended itself against accusations that its multi-level marketing business model was a pyramid scheme. Its ultimate legal defense was the fact that Amway sells soap. Then there’s the great American Ponzi scheme known as Social Security. Any company operating an annuity on the same basis as the Social Security Administration would be tossed into prison at the first opportunity. Its ultimate legal defense was the fact that Social Security is neither a security nor an asset, but a tax.
Beyond legal defenses there are practical considerations. Abraham Lincoln said on the Internet, “…you cannot fool all of the people all of the time.” If Amway is just a rip-off, how come it is in business? If Social Security is just a government boondoggle, how come it has outlived cash-for-clunkers, shovel-ready-jobs, and the Soviet Union?
If cryptocurrencies were nothing but vaporware, they wouldn’t have survived the Mt. Gox collapse. (This was an event where an exchange lost millions of dollars worth of investors’ bitcoin and it showed me the risk of storing Bitcoin in an exchange.) But Bitcoin did recover and is doing quite well of late. So, how are cryptocurrencies more than vaporware when they aren’t backed by silver, gold, or some other tangible asset? (When I was a child, some greenback dollars were “silver certificates” and before that other greenbacks were “gold certificate.” Nowadays dollars just Federal Reserve “notes.”
What makes cryptocurrencies more than vaporware is “network effects.” A telephone that by itself is useless. It has limited utility when it can call only a few numbers, but when it is connected to everyone the telephone’s value is huge. Same goes for cryptocurrencies. Enough people use Bitcoin that it is not going away any time soon. Same for Ethereum.
Though I’m convinced Bitcoin isn’t a cheat, it’s nevertheless a non-productive asset. Like gold. If I have Bitcoins, the only way they can make me rich is buying or selling them. It’s just another instance of foreign exchange trading. And I don’t do that.
Ethereum is interesting for a different reason. It’s not just a cryptocurrency, it’s a programming platform. It enables the creation of distributed applications. Do you think Google is biasing its results to benefit Google? Of course. Do you think Facebook is showing you the stories that benefits Facebook most? Maybe there should not be one corporation that is in charge of your social media platform. Or your search engine. Or chat server. Ethereum enables creation of distributed apps wherein nobody has total power like that.
More fundamentally, Ethereum enables creation of “smart contracts” which are bits of code that dole out money to entities designated in the contract as certain events occur. Did the customer commit to the deal? Pay 10% down. Were materials delivered to job site? Pay another 10%. Did Phase-1 milestones get done? Pay another percentage. And so on. The contract just needs to know that the parties’ conditions are satisfied to pay out accordingly.
What makes Ethereum exciting are Initial Coin Offerings (ICOs). These are smart-contracts that promise future goods and services in exchange for start-up capital now. Since ICO shares two letters with IPO and since they are used to capitalize the creation of new companies, a lot of people regard ICOs as “securities” and not “assets.” Lawyers and regulators perk up their ears at this point. If ICOs are all securities then everyone offering them are in violation with Federal law until they kowtow to the Securities and Exchange Commission and jump through whatever hoops the SEC has in mind.
Conversely, if ICOs are only “assets,” then they have the same legal status as that coupon book you bought from the neighbor kid for his fund-raiser. I doubt the people selling this coupon book have registered with the SEC nor are they restricted to only selling to accredited investors.
It should be interesting to see whether the SEC can regulate ICOs in such a way that does entangle newspaper coupons (and neighbor kids) in regulations.
As I’ve stated elsewhere ICOs act like a debt instrument or a bond. I think that they will be subject to regulatory risk until the SEC gets its act together. ICOs are raising a lot of capital and disintermediating powerful banks and vulture capitalists. They are reshaping existing capital markets. No doubt the empire will strike back. We’ve seen this in a lot of fear-uncertainty-and-doubt (aka FUD) journalism of late. Are ICOs Ponzi schemes? Some are. Some aren’t. I don’t know which are which. Are the people offering ICOs felons? Probably. It’s awfully easy to commit three felonies a day. We’ll see more guilt-by-association with drug-runners, money launderers, and other criminals use cryptocurrencies.
ICOs bear close scrutiny. The future of securities analysis entails being able to ascertain the valuation of an ERC20 standard token. I’m not a securities analyst, but I see a lot of up-side potential in these technologies. And risk.
Risk is a two-edged sword. The great risk to governments is they’ll be bypassed. Why do an ICO in the US where the SEC will make your life miserable when you can instead set up shop in Singapore where the government is embracing the technology? The Internet lets me send Bitcoin or Ether anywhere in the world with a connection. And the cost of sending cryptocurrency to family members living overseas is a fraction of what a conventional funds transfer will cost. Did I say that the empire will strike back?
Would I buy shares in a cryptocurrency/token/ICO index fund?
In a heartbeat.
If anyone wants to hear more about my dalliances with Bitcoin & Ethereum, please let me know. I don’t want to natter on about crypto if I’m the only one interested therein.