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).
SWIFT is a dinosaur, oblivious to the mother of all meteors about to hit it. To this apocalyptic prediction, he adds one more: the world's top four currencies will go to a shared ledger within 20 years.
Rohit Talwar, a global futurist and founder of Fast Future Publishing, goes even further. He argues that every sector will transform by 2020. Digital currencies will be a feature of tomorrow, he states (along with hyperloop transportation and 3D printed cars).
He identifies 10 key disruptions that are shaping the global business environment, driving change and creating opportunity:
1. Shift from physical to digital mindsets
2. Exponential science and technology developments – Internet of Things, big data,
artificial intelligence and robotics
3. Linear versus exponential business thinking
4. Human versus machine
5. Potential for major shifts in employment patterns
6. ‘Financial stress’ driving new economic thinking
7. Migration from central control to distributed – digital currencies, blockchain and cryptocontracts
8. New industries are emerging
9. Desire for trust and transparency
10. Social structures and political governance models at the crossroads – Brexit, Trump
10 tips for would-be crypto-investors
David Siegel offers 10 simple things would-be crypto-investors can do to get started:
- Put a small amount of money, such as $100, into an exchange account. Use a reputable exchange – Lykke, Coinbase, Kraken, for example
- Buy some cryptocurrencies to learn about them
- Go to YouTube and watch videos on crypto-investing, cold storage, security, talks at recent events etc
- Read about new developments in Bitcoin Magazine, CoinDesk, Brave New Coin etc
- Dedicate no more than 10% of your entire investment portfolio to crypto-investments
- Diversify! Plan to buy at least ten coins/tokens. Learn about index investing at www.tokenfactory.io
- Carve out about one third of your money. Put this third into bitcoin, one third into ether, and one third into three to five other coins/tokens you like
- Wait and watch. The volatility will almost certainly present buying opportunities
- Work your way into your portfolio over time. If prices go down, buy more. Plan to be fully invested within 12-24 months
- After you buy, put your coins into cold storage. Don’t trade. Buy and hold for the long run
Calibrated Markets and cryptocurrency
Jacob Eliosoff is manager of Calibrated Markets LLC, the general partner of a small New York-based investment fund specialising in Bitcoin and related digital currencies. It uses proprietary trading algorithms to invest in these technologies.
Eliosoff is described on the Calibrated Markets website as a computer programmer with 20-plus years of experience at startups, on Wall Street, and as a teacher. He has been working on the fund full-time since the autumn of 2013 and helped compile this FAQ.
Q: Can you explain in simple terms how cryptocurrencies or tokens qualify as money?
Jacob Eliosoff: They satisfy some of the traditional properties of money. They can be sent from a payer to a payee (efficiently!), used to store value (though volatile), and as a unit of account - a handy measure (eg, for prices on a menu), though volatility limits use for that last role.
Q: What gives them a value?
Jacob Eliosoff: A common question is whether they have "intrinsic" value, and clearly they don't in the sense of food, shelter, etc. But I'd say they have value because they can be used (see money above). This is why, say, paper has value: the stuff itself doesn't do much, but you can write on it, and then other people can read it, and that's useful.
Q: Do they even have a value in the real world?
Jacob Eliosoff: The simple answer is you can sell them; there are liquid markets for them; so yes, as a practical matter, they have value.
Q: Do they have any clear advantages over traditional forms of money?
Jacob Eliosoff: Several. Some are like email's advantages over letters: faster, easier to send, cheap/free, accessible to anyone around the world (with Internet access). Others are new, particularly that (most of) these cryptocurrencies are decentralised. So unlike PayPal or Visa, no company owns them, no government can shut them down: they're collaborative projects, built and run by an amorphous group of volunteers around the world.
Q: What are their clear disadvantages?
Jacob Eliosoff: They're new and still immature - bugs crop up. Their prices swing wildly and could go to $0: gold's not going to go to $0. Most of them don't "scale" very well: as use starts to approach even a fraction of, eg, Visa's, transactions start to get slow and expensive - though there's reason to hope this will improve with time. Their decentralised model means a lack of accountable leadership, which means projects are somewhat prone to getting stuck or falling apart. And so far, they require users to be comfortable with a new technology, and how to use it securely. Because if someone finds out your Bitcoin password and swipes your bitcoins, they're gone, and there is no Bitcoin support number to call to get them back.
Q: Has the warning caveat emptor ever been more appropriate?
Jacob Eliosoff: Yes! Approximately one month ago, before prices plunged by 30-70%. And of course it's been more appropriate for many scams and frauds: most cryptocurrencies, even the ones with poor business models that will fail, aren't outright scams. But even those of us who are keen on this technology in the long term will grant that it's a market with tremendous potential for losses.
Q: What advice would you give to ordinary people contemplating buying?
Jacob Eliosoff: I'm bullish, and I'd advise those who can spare a bit of their savings portfolio to invest in one to five of the most established (well, least sketchy) cryptocurrencies, like Bitcoin and ether. Say 1-5% of your long-term savings. And then try to completely forget about it for years. But never forget that this is a very high-risk investment, which may grow by 10x or more, but also may go to $0! Don't invest next month's (or next year's) rent money - you could lose it all! Only invest money in this market that you can afford to lose, and never, ever borrow to invest.