Brian BollenCryptocurrencies may be new but the warnings about them are as old as the Lydian electrum trite from 600BC – thought to be the first minted coin in the world.
Caveat emptor (buyer beware). The love of money is the root of all evil. All that glitters is not gold. A fool and his money are soon parted. If it sounds too good to be true, then it is too good to be true.
There are many proverbs, axioms, maxims, old saws and other sayings relating to the perils associated with the acquisition and retention of wealth. Human beings really should now be hardwired to being deeply suspicious of the latest big financial thing.
But no. Here we go again. The wheel of fortune goes round and round, picking up deluded souls at the bottom of one turn, lifting them to the top of the cycle and then re-depositing them at the bottom of the next turn, at least some of them minus their wealth.
South Sea Bubbles, the sceptics intone. Tulip mania. Railway mania. Pyramid schemes. Ponzi schemes. Snake Oil sales. Dotcom 1.0. This time it's cryptocurrency. And, of course, this time it's different, say the believers in holy bitcoin, ethereum, ripple et al.
This time it's different
The four most frightening words in the international institutional financial services world are: this time it’s different. Industry veterans know that as soon as some teenage scribbler utters those words, it’s time to take to the hills. Stock up on food. Buy gold. Go back to absolute basics.
So, is it fair to suggest that cryptocurrencies might inevitably be the next in a series of unfortunate events stretching back to when the first con trick took place in the Garden of Eden?
With the S&P 500 technology sector surging past its dotcom bubble peak of March 2000, the timing is arguably perfect to at least pose the question. The temptation for this writer is to say an emphatic yes.
Bumbling baby boomer
But this writer is a late baby boomer who can multi-task effortlessly on an iMac but cannot master the iPod, iPhone or iPad. This writer is relentlessly analogue in a digital world. This writer cannot read a book on a screen. This writer uses paper and red pen to edit his work.
Nevertheless, the tools are there to enable gentle mockery to begin, rapidly graduating into ranting, leading to an out-and-out denunciation of what some other younger sentient beings feel is, if not a scam, a solution in search of a problem.
For what it’s worth, for this late baby boomer it is a no-brainer. Cryptocurrencies are the work of the devil. They are inherently worthless, enjoying no more monetary status than the money used in the classic board game Monopoly.
Smoke and mirrors
To this trained banker there is nothing, absolutely nothing, behind them to grant them substance. Think the Wizard of Oz at the denouement of his story. Smoke and mirrors. Much sound and fury signifying, all day long, absolutely nothing.
To this late baby boomer cryptocurrencies have no more substance than the blocks of council flats that once featured in an episode of Monty Python's Flying Circus, held up purely by hypnosis. Once belief failed, the tower blocks crashed, rising again when belief returned.
Volatility on steroids
This tongue-in-cheek analogy prompts a serious question. How on earth can anyone take seriously a 'currency' demonstrating such volatility as, for example, bitcoin? On 22 July 2016 it was 'worth' US$650.80, according to CoinDesk. On 10 June 2017 it hit $2,942.34.
It then slumped to $1,993.20 on 15 July before rallying to $2,877.39 on 20 July. It resembles a giant rollercoaster more than it does a currency. A story on www.capital.com (LINK) argued that the first quarter of this year was a big one for the blockchain space.
CoinDesk said the first quarter saw the spark of a massive cryptocurrency rally and the emergence of the Enterprise Etherum Alliance. And Japanese regulators moved to treat bitcoin as a legal payment method, sparking a revival of interest in that country.
A separate story on www.capital.com attested that every boom brings the seeds of its own bust embedded within it.
But this is meant to be a balanced examination of a serious topic, rather than foaming-at-the-mouth utterances of Disgusted of the International Monetary Fund.
Hence the contributions sought from market practitioners and market observers who know exactly what they think they are doing, and believe in it implicitly. Allow us to introduce David Siegel, Jacob Eliosoff and Rohit Talwar.
Business agility expert
Zurich-based American David Siegel styles himself as a blockchain, decentralisation and business agility expert. He also lays claim to being the world's first web designer and is chief executive officer of Twenty Thirty AG, a Swiss-based blockchain innovation company.
He is evangelical about bitcoin, ether, ripple and the other 830-odd cryptocurrencies or tokens. But he places them firmly in the context of relentless technological advancement, citing Moore's Law that computer power doubles every two years.
He says we are living in what he calls an accelerated world and that the pace is about to increase. “Anything that doubles constantly tends to wreck everything every 10 years,” he says.
“The next 10 to 20 years will look nothing like the last 10 to 20. No linear extrapolation of the last 10 years gets to the next 10 years.” In the face of exponential growth, it is more and more difficult to cling onto the things that we know work, like money, markets and regulators.
“We are about to blow right through that,” he continues. “I'm not a fan of ALL cryptocurrencies. I am a fan of diversification.”
Harder to defend cash
Siegel continues: “It is becoming harder to defend cash. It's dangerous to carry large amounts of physical money and it is extremely inefficient.” In his view of the future, the inefficiencies and expense involved in handling cash and reconciling separate ledgers must disappear.
Blockchain makes it possible to go from what he describes as a push model for business to a pull model. To achieve this one-time transition from a quasi-Soviet model to a truly on-demand economy will require a change of mindset. Globally.
“The music business has gone from push to pull, enhancing the power of the artist and reducing the power of traditional labels,” he observes. Apart from any other consideration, this gives the little guys a chance, he says approvingly.
Welcome to e-mugging
Even the major cheerleaders for this 'asset class' have had to admit recently that cryptocurrency or cybertokens can be just as vulnerable as traditional money in the face of determined wrongdoing.
CoinDesk, which prides itself on being the leading source of news, comment and data on the subject, recently reported that 150,000 ethers (worth $30m) had been stolen after a Parity Wallet breach.
CoinDesk notes that this followed a hack in CoinDash in which $10m was stolen in an ICO (initial coin offering). Siegel warns of the dangers of carrying cash. But cyber-investors can find themselves being e-mugged and there are currently no police they can turn to.
Caveat emptor...
SWIFT is a dinosaur
Siegel defines blockchain very simply: blockchain is a shared ledger that everyone trusts to be accurate forever. In his vision, ripple will replace SWIFT (the Society for Worldwide Interbank Financial Telecommunication).