“When the facts change, I change my mind. What do you do?”
There’s some question as to whether noted economist John Maynard Keynes actually uttered these words, but that hardly matters. I find it to be an increasingly useful credo, regardless of initial source.
Last year I observed that Bitcoin’s price volatility had settled into a range not much wider than that of several sovereign currencies.
I said this not because I’m a big proponent of Bitcoin as the currency of the future. I’m not, although I always take pains to emphasize the distinction between cryptocurrency and its underlying blockchain technology, the latter of which holds immense potential.
Thankfully, this distinction is becoming more widely appreciated. My point was that as it matured, one of Bitcoin’s Achilles’ heels as a sound store of value seemed to be receding.
It’s time to revisit that premise, along with a few others.
After spending nearly 18 months trading in the $600 to $700 range, Bitcoin crossed the $1,000 mark on the first day of 2017 trading and tripled to $3,000 just five months later.
If you rode that wave, congratulations. But anyone who bought in mid-June has already lost 20 cents on every dollar “invested,” or more accurately, gambled.
The pattern is even starker for Ethereum, Bitcoin’s younger, cooler brother. It didn’t cross the $20 line until mid-March, but by mid-June it hit $375.
Now it’s back to $220—still an 11-fold increase over four months but don’t tell that to the folks lured to the punchbowl at $300 or more.
The reversal was fueled in part by fabricated reports of the death of Ethereum’s founder. It should raise major warning flags when such “news” can have this extreme an effect on the market.
Much of 2016’s groundswell of Bitcoin commercial interest can be traced to its potential as a new form of tender for everyday transactions. Online merchants began accepting it, and “Bitcoin ATMs” sprang up in some hip coffeehouses.
It’s on this practical front, however, that Bitcoin has lost the most luster. Ask anyone who’s lived through a mass devaluation in a country like Mexico or Argentina—it’s no fun to watch helplessly as your buying power declines, whether lopped in half overnight or eroded over months.
With virtual currency rates on a similar rollercoaster, anyone holding meaningful Bitcoin balances to fund future purchases runs the same risk.
Perhaps worse, a key virtual currency selling point—lack of friction—reversed course in a hurry. As The Wall Street Journal recently reported, Bitcoin transaction fees have swelled to more than $6.
Because this cost is fixed in nature (unlike the familiar card interchange model) it becomes a non-starter for casual transactions of, say, $300 or less.
Also in contrast to the card model, the buyer bears the transaction cost. When would someone willingly foot this bill? When they place a premium on the privacy of a (usually) high-value purchase—precisely the type of illicit transactions Bitcoin aims to outgrow.
Another recent development with all the earmarks of excess is the Initial Coin Offering (ICO). These sales operate much like they sound: In an almost entirely unregulated environment, a startup issues a new variety of “coin,” which it sells to willing participants, usually in exchange for Bitcoin.
While some of these scripts may prove to be valuable, most will become worthless. Note that buyers are not acquiring a stake in the company itself, but are rather placing a bet on its new currency.
In many cases, that currency can also be applied to business services to be offered by the issuer. For instance, lost behind the hype, Ethereum is at its core a computing platform service.
In this sense, ICOs share at least as much DNA with Kickstarter as with the initial public offerings their name implies.
Breaking news: While researching this article I was served up a banner ad on a coin trading site—“Buy Ethereum with Your IRA”—that made my heart hurt.
For anyone with mad money lying around they can afford to lose, speculating on virtual currency may offer some entertainment value. But I’d be hard-pressed to suggest a worse use of retirement funds.
If you consider financial education to be part of your credit union’s mission, please add this point to your curriculum.
To keep things in perspective, consider the trading ranges of various established currencies. The Brazilian real and Russian ruble each lost more than half their value against the dollar within roughly two years starting in 2013.
Gold, the classic store of value, shot up 2.4 times from 2009 to 2011, only to fall 40% about three after.
Trading in any currency is risky business. But in an unregulated environment with no established backstop, those dangers are magnified.
GLEN SARVADY is managing partner at 154 Advisors and senior payments expert with Best Innovation Group, a CUNA consulting partner. Follow him on Twitter via @154Advisors. His views do not necessarily reflect those of Credit Union National Association.