Cryptocurrencies are on an inevitable downhill slide toward irrelevance because the crypto price bubble has popped, and irreparably so. Worse, cryptocurrencies have failed decisively to function as a currency, their initial rationale.
Crypto prices occasionally spike up — some believe that may occur during the upcoming holiday season — but the occasional price spike cannot mask the fact that cryptos have no inherent value. There simply is no “there” there!
The initial appeal of cryptocurrencies, such as bitcoin, ether, and XRP, was based on the assertion that they would eventually replace fiat currencies, such as the dollar, euro, or pound, when conducting financial transactions.
What has become quite evident, though, is that cryptocurrencies flunk three key tests of any viable currency — a financial medium for executing transactions, i.e., buying and selling; as a unit of account in setting prices; and as a store of value, as reflected in the purchasing power of a particular unit of currency.
First, while there has been substantial hype about using cryptos for transactional purposes, very few transactions are executed using a cryptocurrency; that is, a buyer transferring cryptocurrency to a seller to complete a purchase.
There are many reasons why this is the case — the seller is unwilling to accept cryptocurrencies as payment, it takes too long to transfer the cryptocurrency from buyer to seller, and the cost of executing the transfer is too high.
Second, greatly inhibiting the use of cryptos in buying and selling is the impracticality of pricing goods and services in a cryptocurrency when its value fluctuates significantly relative to the fiat currency in which the business operates — the currency in which it buys what it sells or manufactures and pays its employees.
In order to function efficiently, businesses operate in the fiat currency of the country where their operations are based, and keep their books in that currency. Keeping two sets of books — one in the local fiat currency and the other in a cryptocurrency — would be redundant, and therefore costly.
Third, the volatility of crypto prices, relative to fiat currencies, makes cryptos a lousy store of value because a crypto’s value — its purchasing power — fluctuates so much, and so unpredictably, while losing value over time.
For example, a bitcoin today can buy less than one-third the amount of goods and services that it could when it hit its peak price last Dec. 17. Someone who owned a bitcoin a year ago, and still owns it, is a lot poorer today.
The other major cryptos have experienced similar losses in purchasing power. It is highly unlikely those losses will ever be recovered.
Early investors in cryptos are still ahead of the game, if they still own them, but those who have purchased cryptos over the last year, and held them, have suffered paper losses that will become real losses when they sell their deflated cryptos.
The creation of so-called stablecoins, such as tether or truecoin, attempt to minimize price volatility by investing the proceeds of the sale of the crypto in a fiat currency, such as the dollar, and making the crypto readily exchangeable with the fiat currency.
Essentially, stablecoins are a variant of a money market mutual fund. Questions have arisen, though, if in fact the fiat currency is available to pay off the holders of a stablecoin should there be a run on that coin.
A supposed appeal of cryptos is their anonymity — that the owner of a particular unit of a cryptocurrency is unknown, just as no one knows who owns a particular dollar bill. But that argument fails on two counts.
First, anonymous transactions, where neither the buyer nor seller is known, are ideal for executing illicit transactions, such as money-laundering, paying bribes or ransoms, or for drug purchases. These reasons are not an appealing public-policy rationale for cryptocurrencies.
Ironically, that anonymity has made it extremely difficult to recover cryptocurrencies stolen from a cryptocurrency exchange that has been hacked. These exchanges, where owners store their cryptos electronically, have been amazingly vulnerable to crypto thefts. Protecting them from hacking, and theft, has proven to be a very difficult undertaking.
Second, the supposed anonymity of crypto transactions is somewhat illusory as techniques have been developed to pierce that anonymity. One notable example — U.S. intelligence agencies were able to identify the Russian agents who used bitcoins to pay for Russia’s meddling in the 2016 presidential election.
Further complicating the appeal of cryptocurrencies, and especially bitcoin, is the increasing amount of electricity needed to “mine,” or create, new cryptos; much of that electricity is generated by fossil fuels. The heat generated by the computer chips mining cryptos has even raised fears about the negative climate impacts of that process.
For all the reasons cited above, cryptocurrencies have no meaningful future. The only question is how fast they will fade away.
Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system, and the growing federalization of credit risk.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.