The way we conduct business is always evolving. Years ago, wearing a suit to the office was the norm. Today, workers may wear business casual one day a week and work from home the others. Where salt and spices once dominated global trade, technology has emerged as the driving force of business. However, over time there has been one commonality: the use of currency.
Yet man has set about to change even this cornerstone of business, revolutionizing it with the invention of cryptocurrencies. While it may appear to be the next big thing, staying away from crypto investing would be wise.
Cryptocurrencies have been in and out of the news in recent years, with the value seeming to rise in one week and fall in the next. However, at the end of 2024, Bitcoin, the most popular cryptocurrency, reached a value of over $100,000. This number gained the attention of investors and reignited calls to invest.
One factor enthusing investors is how quickly Bitcoin can gain value, in financial terms, its high volatility. While this may sound like a beneficial quality for an investment, volatility also works in the opposite direction, meaning the asset can quickly drop in value. Individual investors should seek predictability in their investments; designing a low-risk portfolio of stocks and bonds can ensure the retention of principal and its slow and steady growth. High-volatility investments are not ideal for individuals saving for a home or retirement, and, unfortunately, many have learned this lesson only after losing everything.
Currency is the creation of governments. Cryptocurrencies may have value for small-scale use; however, to be of value as an investment or a true currency, crypto would need to be adopted by governments. But how realistic is its implementation on such a scale?
If you have studied a dollar bill, you may have seen the words “Federal Reserve Note” printed across the top. In 1913, the Federal Reserve (Fed), was created, and so was a new common and elastic currency. With the new notes, the Fed could manipulate the economy and design conditions such as the interest rate environment.
When adjusting rates, the Fed utilizes monetary policy, moving the rates up or down through the purchase or sale of securities. To make purchases, the Fed will authorize and create U.S. currency; this is only made possible because the U.S. has an elastic currency. Cryptocurrencies are inelastic, governments could never utilize them on a mass scale because they do not allow for the engineering of economic conditions.
While many cryptocurrencies have a ledger of transactions, some users can remain anonymous. This may be a unique quality of the advanced technology, but it is a significant reason why governments will never widely adopt crypto.
No government would ever grant citizens the ability to hide financial transactions. In the U.S., some politicians have gone so far as to suggest eliminating physical U.S. currency, opting for an entirely virtual dollar so every transaction can be tracked – or, more accurately, taxed.
Additionally, cryptocurrency has no real or intrinsic value. Instead, it relies on scarcity through a limited supply to produce the idea of value. But is this any different from the U.S. dollar or any form of fiat currency?
While the U.S. dollar also has no intrinsic value, it is backed by the full faith and credit of the U.S. government. Section 4 of the 14th Amendment, known as the public debt clause, also helps us understand the value of the dollar, stating that the validity of U.S. debt shall not be questioned.
When it comes time to pay taxes, those payments are made using the U.S. dollar. Chartalism explains that since the government requires payment in the dollar, it therefore has value. And what happens when those payments are not made? The government has the authority to prosecute tax evasion, essentially backing the U.S. dollar with force.
Combining these concepts, we can surmise that, unlike crypto, the U.S. dollar has real value. Not only does the government accept it as payment for taxes, but by holding U.S. debt, other nations offer validity to the currency. The Constitution provides safeguards for debtholders, legally ensuring eventual payment, and, by doing so, backs the U.S. dollar.
The nation’s source of income is taxes, or, restated, a portion of the fruits of a productive society, which are collected in the dollar, meaning debt payments will always be made in the dollar. The world runs on U.S. debt, with the risk-free rate in finance deriving from treasury bills. Not only does the U.S. government back the dollar, but millions of people worldwide invest based on their faith in U.S. debt and its payment in the dollar, offering the highest form of validity and value to the currency. It is improbable that Bitcoin or any cryptocurrency could work alongside, or let alone replace, a currency so ingrained in the global economy, leaving it as a fascination rather than an investment.
So, if crypto has no value as a currency, then why do people invest? This may be explained by a theory in behavioral finance known as the “greater fool theory.” This theory states that investors may have no faith in the merit of an investment but will continue to trade based on the belief that there will always be a greater fool to sell to at a higher price. Cryptocurrencies appeal to man’s desire to gamble. Few investors could explain the reasoning behind their investment other than they expect the price to keep increasing because it has done so in the past. Man tends to see patterns where none exist, and the euphoria from chasing an easy dollar mutes the voice of reason.
Cryptocurrency has become more of a buzzword in popular culture than an investment to be studied. Reviewing its place in the global economy and judging it based on its presumed purpose as a currency, it is rational to conclude that crypto investing is merely a game, whereas true investing is based on the virtue of a security. Do not expect the dollar or other fiat money to be a relic of the past. Instead, invest your funds wisely in that which holds potential, rather than getting swept away in the mania of trading what is popular.
