There’s no denying it. Cryptocurrency — or the crypto craze catapulting the values of cryptocurrencies, to be accurate — was stunning. The popular digital currency bitcoin rallied more than 500% between September and December last year. It’s pulled back quite a bit since then. But fans of the digital money have thus far chalked it up to normal volatility.
Several unlikely companies have jumped on the bandwagon too, adding the word “blockchain” to their monikers only to see their stock prices skyrocket as a result. Riot Blockchain Inc (NASDAQ:RIOT) had shares soaring nearly 400% after the company reported it was looking at ways to get into the cryptocurrency business — without even really explaining how it was going to do so. Blockchain Industries Inc (OTCMKTS:OMGT) and Long Blockchain Corp (NASDAQ:LTEA) saw similar surges, when they changed their names from Omni Global Technologies and Long Island Iced Tea, respectively. They were all just the simple capitalization on a major social movement.
What if, however, the crypto craze was fatally flawed in a way that leaves little hope for the kind of speculative growth in the values of these digital currencies we’ve seen of late.
That flaw is all too real.
The Fatal Crypto Flaw
If you’re still reading, then it’s a safe bet you’re familiar with blockchain, and how it’s the building block of cryptocurrencies like bitcoin, Ethereum, Litecoin and others.
You’re also apt to have heard that all of these digital currencies are not only a means of efficiently and anonymously exchanging goods for value the way a fiat currency (like the U.S. dollar) does, but also a means of storing value … as gold does. Indeed, cryptocurrencies’ proponents argue that unregulated currencies are better than government-issued fiat currencies specifically because they’re unregulated. They’re truly a reflection of the supply/demand dynamic.
And that’s where the philosophical argument for bitcoin and its crypto cousins starts to break down.
It’s not a reality supporters (and owners) of any digital currency want to hear, mostly because it destroys the crux of their bullish thesis. But, the reason government-issued currencies “work” is because there’s a finite amount of it at any given time. That amount changes at the discretion of a nation’s central bank in response to inflation, or lack thereof. It’s managed with the ultimate goal of maintaining stability in the value of that currency though. And by and large, most central banks are pretty good at holding the value of their currency steady.
The counterargument: There’s a limited amount of bitcoin too. All told, once they’re all “found,” only 21 million bitcoins will be in existence. No more, no less. The market’s supply and demand will take care of setting the value.
More and More Cryptocurrencies
The problem is, there’s literally no limit on the number of cryptocurrencies that can be created. They clearly won’t all be bitcoin or all be Ethereum or all be Litecoin. They’ll all be in circulation though, forcing buyers and sellers who choose to use them to do business.
And so far, bitcoin and all the other cryptyo money in use has been far too volatile to use as a currency; it has to offer stability from one day to the next. That’s why the number of organizations accepting bitcoin and other digital currencies as payment for goods and services is shrinking rather than growing, despite the fact that the buzz has never been louder. Worse, the more digital currencies there are competing with one another, the less valuable each becomes, making them all less stable than more stable.
The $64,000 question: Where does the creation of new cryptocurrencies end? Nobody really knows. Therein lies the rub.
Crypto Bottom Line
Sure, Bitcoin and its peers are flying high now, but few are denying the bullish buzz to date has been more rooted in the fear of missing out and speculation about the price of each cryptocurrency tomorrow. That tank will run out of gas sooner or later though. What will be left is a group of traders looking for a reason a crypto will be worth more in the future. And increasingly, those traders are looking for reasons to buy or sell one cryptocurrency or another.
That’s the last competition any of these digital currencies can afford to enter.
All of a sudden the regulation and control a central bank can provide for a currency looks pretty enticing.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.