A few weeks ago, I had a cracking question asked of me by one of my readers. After reading it back recently, I felt it should be reproduced here, because it’s an important conversation.
Lots of people ask me this question. In fact, I think I hear it at least daily. So here it is along with my reply, and slightly edited for length.
‘How could any crypto be worth anything? They all have absolutely nothing backing them up. There is no tangible value in their string of bits and bytes or a bit of code?
‘At least the paper/plastic notes or bank accounts we call fiat currency is backed up by the federal reserve and tax payer as legally enforceable tender. Cryptocurrencies have no such call or backup.
‘The whole thing could be worth zero by tonight or tomorrow? They are not even a barter system as such.
‘The illusion of value at the moment is because somehow free thinking people seemed to be “conned” or are willing to pay their real “fiat money” in exchange for those fictitious coins at a certain market rate as advertised in so called exchanges which can be instantly banned or made illegal by any government at a moment’s notice.
‘You see real money needs a legally enforceable system that backs it up. If you think these coins are a real currency then you are most likely being deceived.
‘Even gold (which is a real physical, usable commodity) is not a currency since it was legally removed as legal tender by congress. I’m afraid cryptocurrencies could never really be worth anything at all unless they are legalised by governments, the law and congress which I doubt will happen unless they can control it.
‘But that’s the prompted reason why people seem to want [crypto] because governments cannot control it or so they seem to think?
‘But if you really think this out, governments can indeed control them, they can shut them down, ban them or ban you from converting them to real fiat currencies. They can force exchanges or businesses that convert them to real fiat currencies or goods and services to only do so if you provide a valid tax identity. Meaning the government can tax you and your currency movements. So much for the privacy and secrecy aspects of blockchain currencies?
‘All the developers and originators of these crypto-currencies never want you to recognise these basic facts?
‘You talk about supply and demand pushing up the coin prices, but what exactly are these coins? They are not a commodity like gold. They are not real fiat money. They will only be accepted by ICO startups (or anyone for that matter).
‘If they can convert them to real fiat money, which they do once they receive your coins. Would you really invest in these coins if you could not convert them back to real fiat currency? I think not, because then they would become valueless — right?’
Lots of points to cover there. I’ll see if I can tackle them one by one.
There’s actually intrinsic value to many cryptocurrencies. Bitcoin for instance requires inputs of computational power and energy. So there’s actual value in each coin created.
But perhaps another way to look at it is similar to software, which is also ‘just’ lines of code. But you quite happily buy Microsoft Office at ever increasing prices, even though it’s not ‘backed by anything’.
Just because something is digital doesn’t mean it’s instantly worthless.
And if you understand the fractional banking system you’ll also know that all the ‘cash’ in the world isn’t actually backed by real cash either. So the system you currently exist in also has plenty of money with nothing to call on. In fact, it’s is as much an illusion as you purport cryptocurrency to be.
Many governments trade technically insolvent. And without their ability to continue to print their own money from thin air, they would default on their debts. These debts to other countries would result in the utter collapse of the existing financial system.
The inherent flaw in this ‘crypto is worth nothing’ thinking is always relating crypto into fiat money. The idea is that value of tokens or ‘coins’ exists as a medium of exchange external to the existing fiat system.
The aim is to no longer use fiat money in exchange for goods and services. Instead using decentralised cryptocurrencies.
This is a transition period to a new definition of what the masses deem as money. Remember that many people thought it would be impossible for the Eurozone to switch from many currencies into one universal currency, the Euro.
But they did it without too much fuss.
Time to face the reality of cryptocurrencies
As such, I anticipate the transition to digital currencies as a real medium of exchange will happen faster than most think.
In fact it’s already happening. It’s classified as legal tender in some jurisdictions.
Centralised authority isn’t the only way to give something legitimacy. Being accepted and legitimised by citizens and the wider network gives something legitimacy. This is why something like bitcoin is accepted as such. Even governments who do recognise bitcoin as an asset or a form of currency never would never have done so if their citizens hadn’t lead the way.
And no, governments can’t control a blockchain like bitcoin or ethereum.
They would need to take control of millions of computers worldwide. And not just in their own country. This is a virtually impossible feat.
The ‘kill switch’ argument for the internet is rubbish as well. All systems now, including government systems, rely on internet capability.
Amazon Web Services host a number of government department sites. The global economy is inextricably entangled in the internet. Killing it would be like turning a shotgun on themselves.
And when you try to apply historic ideas and concepts to what is effectively a new financial system, you will only get confused.
Bitcoin is actually a combination of a store of value, a medium of exchange and a secure audit system. Nothing else in traditional markets exists with similar properties. To try and pigeon-hole it as only a commodity or a currency or an asset is naïve. It’s actually a balance of all three.
Finally yes, I would invest in these crypto assets and never convert them back to fiat money. In fact, that’s exactly what I recommend and what I intend to do.
I can and will be able to use them in the coming years for payment systems, asset class investment and income generating activity. It’s a whole parallel financial system and digital infrastructure.
It’s decentralised democracy and governance.
There’s so much more to it than just bitcoin and prices in fiat money. If you only take a superficial view, it’s easy to get misled into thinking it’s some kind of fake, ‘valueless’ mirage.
In fact, it’s a complete overhaul of centralised digital systems. This is resulting in a redistribution of power and (for now) a wealth generation event.
But most people don’t research to that level of detail. They just pick up the vagaries of mainstream media coverage and clickbait. They’re obsessed with the fiat price of crypto, and have no real care for the technological or social developments it’s creating.
It depends on whether you want to see the forest through the trees.
Editor, Secret Crypto Network