The cryptocurrency mania continues to heat up. Bitcoin, the best-known one, is trading at US$15,000 giving it a market cap of more than $250 billion. A newer cryptocurrency, called Ripple, is threatening to surpass Bitcoin.
With everyone talking about cryptocurrencies is it time for investors to take a look?
My associate Fraser Betkowski wrote a post in September 2017 that describes the basics of the cryptocurrency world. In revisiting the same topic so soon I note that in the cryptocurrency world three months might be the equivalent of several years of normal evolution.
During the Christmas break I was asked at every social gathering about either Bitcoin or marijuana stocks. Today we only have space for Bitcoin but another time we’ll look at the marijuana industry.
Bitcoin (BTC) in 2009 was the first cryptocurrency but there are more new “coins” available every day. There are now more than 1,300 cryptocurrencies (cryptos), a 30% increase from September. The ease with which new currencies are created is troubling.
The total value of Bitcoin was about $87 billion four months ago and is now $250 billion, according to cryptocurrency exchanges. But transferability is limited and no one knows if large amounts can be transacted. To compare how big BTC has become consider the value of the two largest market cap companies trading on stock markets today — Apple at $878B and Alphabet (Google) at $730B.
Most of the trading in Bitcoin is for the purpose of exchanging Bitcoin into other cryptocurrencies, not into “fiat money”. Fiat money is the term used for paper currencies created by governments “at the stroke of a pen”. For libertarians fiat money is unacceptable because, according to them, it is open to manipulation and unlimited printing by governments and central banks.
A newer offering, called Ripple or Ripple Transaction Protocol, (XRP), was worth $9 billion in early December but now has a market cap of $300 billion, edging out Bitcoin. There were 100 billion XRP created at the outset. Ripple aspires to be a global payments system and claims a number of large financial companies as users. Ripple compares itself to Visa, the world’s largest payments company that handles 50,000 transactions per second. A founder of Ripple is Jed McCaleb, founder of the Mt. Gox exchange which went bankrupt in 2014 and “lost” 850,000 Bitcoins. In US dollars XRP recently went through $3, overtaking BTC in value.
Here are four hurdles that cryptocurrencies face:
- No government accepts them as payments. Over the centuries one feature of all successful currencies is acceptance for tax payments.
- Early entrants into a new disruptive technology often are wiped out by those who enter later but have deeper pockets. Who remembers early internet companies like Myspace and Mosaic?
- The Federal Reserve, the Bank of England, the European Central Bank and others stand behind currencies, promising to manage the inflation-adjusted value, or at least to try.
- Central banks could create their own cryptocurrency, perhaps backed by gold which would counter the most powerful objection against fiat currency. Since central banks of the U.S., Germany, Italy, France and China own large amounts of gold they could use that “barbarous relic” as a backstop. At today’s value all the gold ever mined would exceed US$7.5 trillion. The world’s total money supply is estimated at US$37 trillion.
So if investors are looking for a hedge against the end of the world, or the collapse of western civilization, gold might be a better bet than cryptocurrencies. Governments and central banks will not stand by and watch cryptocurrencies take over the role of official currency. They will act.
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