I remember the first important conversation I had about cryptocurrency. It was at least 8 years ago, and I was having dinner and sharing a bottle of wine with one of my favorite cousins, Patrick. He and I have always shared the world of finance as a common passion and profession. He’s a partner at one of the largest public accounting firms in the world, a fellow USC alumni, and I’ve always found that he brings a fresh financial and political perspective to ideas that I greatly value. However, on this night, over this bottle of wine, we saw the emerging world of cryptocurrency in exactly the
same light… as a ridiculous scam destined to fail.
In the year leading up to my conversation with Patrick, Bitcoin, one of the early and most popular of the cryptocurrencies, had exploded in value from below $1,000 to around $20,000 in just under one year. In the eight years since our conversation, Bitcoin has increased to over $100,000. That’s certainly not what Patrick or I thought would happen. In fact, what I predicted with Patrick was not necessarily the future disappearance of cryptocurrencies, but an evolution of the concept that has not yet come to pass.
The idea of a US dollar alternative, like crypto, could eventually be widely accepted by the US public. For that to happen, you and me, along with our local stores and service providers, would have to welcome payment in something other than the “old greenback.” I do imagine a possible future when we might all warm to the idea. At that tipping point of acceptance, seizing the opportunity, several major US companies would step in and issue their own cryptocurrencies, which would be backed by their own balance sheets and continued profit-making ability. Now that’s hypothetically an idea I might be able to get behind.
Imagine a future where “Amazonians,” a fictitious cryptocurrency issued by Amazon, were widely available and easily exchangeable. Wouldn’t you be indifferent to covering the dinner bill if your friend agreed to reimburse you with some Amazonians? I know I would feel comfortable and confident in my ability spend Amazonians, if nothing else, on
Amazon.com with ease. Back in 2019 I thought my prediction had come to pass. Facebook (now called Meta) had a failed launch of a cryptocurrency called Libre. The idea was quickly scrapped though after political and regulatory backlash. That failure, and an understanding of why there would be political and regulatory concern, leads me to what I believe is the second possibility.
First, we all must understand and appreciate that we live a subsidized lifestyle. Everyone in the US enjoys a higher standard of living because of the preferential position our US dollar holds in global economics. The US dollar is the reserve currency of the world. The global oil trade is conducted in US dollars and other countries choose to buy and hold US dollars to stabilize their own currency’s value. The rules of supply and demand that make the prices of milk and eggs go up and down also apply to currencies. Since most of the world regularly buys US dollars, there is extra demand for US dollars, making its price relatively higher than it would be otherwise. With a more valuable dollar, all of us can buy goods produced in other countries much cheaper. We can buy more of the TVs, cell phones, furniture, coffee, bananas, and cars we want because the US dollar is the world’s reserve currency.
So… why in the world would we allow, much less encourage, any alternative to the status quo? Why would our elected representatives allow, much less encourage the adoption, dissemination, and popularization of anything that could be an alternative to the US dollar? We all stand to suffer as the demand for US dollars continues to fall. For this reason, I assumed the death of Facebook’s Libre would be the precursor to the death of all digital currencies. I assumed that if cryptocurrency ever achieved levels that allowed it to compete with the US dollar in even the most minor of ways, our elected officials and regulators, acting in the interest of all our citizens, would kill the fad overnight, as it did with Libre in 2019.
Investing in cryptocurrency falls into a category called speculative investments. These are investments whose sole determinant of value are the forces of supply and demand, with no other source of value beyond a speculative belief in its future scarcity. In contrast, the portfolio we’ve constructed for you at Village Wealth Advisors is grounded in the profit-making mechanisms of capitalism. As entrepreneurs bring together capital, raw materials, and labor, their efforts are rewarded through profits. My clients, through their portfolios, are providers of that capital, and are rewarded with return through participation in our economic system, which has proven over the past quarter century to be the greatest source of wealth creation ever created.
