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Wednesday November 14th 2018

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Cryptocurrency, Is it real or virtual fiat money?

From the looks of my inbox, Cryptocurrency is the only investment in town.  But is it.  Is it even an investment?  The simple problem I have is that crypto currency isn’t backed by anything.  It sounds like a great idea but so does living in a true commune with no government.  Even though the US Dollar is no longer backed by gold, it is backed by the US Government.  That might not count for much but its at least a little better than nothing.

Cryptocurrency Graphic

Is it real or is it…..

In a previous article about Bitcoin, I posed the question “Who gets the bitcoin riches?”  The first cryptocurrency with some acceptance posed an interesting proposition. The math will be difficult and it will take time to mine a bitcoin.  Thus the nerds with the most powerful computers could “mine” them faster.  Once the code was written though, I am still having a hard time wondering why one person just didn’t super mine all one million bitcoins?  What if your hours of work led to a result that someone had mined and registered?

What I left out of that article was the next phase of cryptocurrency, speculation. I don’t know when all of the bitcoins will have been mined or if there truly is a “limit” to how many may be produced.  As we are already seeing it apparently doesn’t matter since new cryptocurrency’s are already being developed.

Fiat money is basically money that is printed by a government with no backing.  When coins were made out of gold, silver, nickel and copper, the metal added some value.  Today the metal used is worth much less than the coin.  Old US coins have more value just in the metal used to produce them.  While it is illegal to melt the coins down, I do keep all pennies older than 1984 and Nickels.  Even now the value of the nickel and copper in a nickel is more than $.05 meaning the government loses money when it makes nickels.

The rest of the money the US government prints or stamps out costs way less than the material you get.  If it didn’t counterfeiting wouldn’t be an issue.

With Fiat money the currency markets are huge and everything is compared to two or three major currencies.  You can compare the dollar to anything, but head overseas and try to trade dinar’s for pulas or Kwanzas (yes it is a currency in Africa) and you’ll have to trade for Dollars or Yuan first and then for the other currency.  Unless borders touch, direct currency exchange is rare unless it is Dollars or Yuan.

When Einstein and the original big thinkers tried to find a way to move money away from the control of the government, they were trying to base the new “money” on actual ownership of commodities goods that people need every day.  The problem they encountered was two fold.  One the government didn’t like it and two the availability and lifespan of commodities were not 100% predictable.  With their new money there was no one to blame if it failed.

When a government fails or has a financial crisis, democracy gives us a feeling of hope because we can blame the incumbent, vote them out and try a new leader.  We don’t have to behead them like the French did to King Louis XVI and is wife Marie Antoinette.  Democrats spending too much, we vote republican and it feels like “we” won.  Republicans letting corporations destroy the environment, we vote democrat and it feels like “we” won.  Our system isn’t perfect but it gives the people a feeling of power even though our trust of politicians is near zero.

So were does all that leave us when there are three or more cryptocurrencies?  No one knows, at least not at my level.  Maybe there is someone at the top of the Cryptocurrency trading world that will decide when enough is enough.  For now it is pure speculation, like tulips, swampland and even more so than fiat money.  Who will be the first big investor to wake up and say “This is crazy, I can’t pay my bills with this…” and sell it all.  Every speculative market has a peak moment.

Warren Buffet is one of my favorite investors because he invests in the kind of growth companies I like.  They grow profits, so your investment is worth more each year.  Companies that grow income without a profit are what I call “hope investing”, you hope they make a profit before your investment goes to zero.  Venture Capital firms want to make 10X before they bail on an investment.  Seven or eight out to ten times they are wrong and the company goes bust before it makes money.  That is only slightly better than hope investing, its educated hope investing.

Can Cryptocurrencies make a Profit?

Can you “invest” in a cryptocurrency and make money?  Yes.  Can you lose it all? Yes.  If there is a “profit” with cryptocurrency what is it and who gets it?  The answer is simple, the “miner”.  That person that spends their time creating a bitcoin or whatever the cryptocurrency of the day is.  If they can create the cybercurrency and sell it for more money than other work they could do with the same tools, it is a profit of sorts.  Everything after that is speculation profit only.

I say this because there isn’t anyone or anything that backs the cryptocurrency.  Human nature demands one thing and it has been seen throughout history, and that is leadership.  When the unexplained happens we the people want to turn to a person who can come up with an explanation or a fix.  That is how all religion and government have been formed since the beginning of time.  This human need is the basis for power and the abuse of power, and why most of the constitution was written. Yes there were a few lines that were a bit racist and sexist, and those were corrected.  Unfortunately a few others were lined out too.

Never in the course of human history has true “communism” existed where there is no government, just people taking care of people.  Even the bedouins and Native American’s had “Chiefs” and “Medicine Men” to turn to.  Cults always have a leader.

While science may at times disprove some of the teachings of religion or give us an apparent alternative to paper money, it can’t change human nature.

The question isn’t if the cryptocurrency crash will happen, it’s when.

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