Not a day goes by, it seems, that an item does not pop up in my inbox imploring me –– for my own sake! –– to buy gold. So far Bitcoin and other cyber currencies have yet to find this route into my thinking. It’s somewhat curious that stodgy old gold has made better marketing use of cyberspace than the cyber currencies, but then, they don’t need the help. Countless media outlets frequently hyperventilate about Bitcoin and other cyber currencies, and my younger associates gush about the prospects of such dollar alternatives. So the time seems right to take a look at what this is all about.
Much of the excitement about cyber currencies simply reflects the continual enchantment of the new and the different. But look further, and one sees that the pleas for Bitcoin, its cyber kin, and, indeed, stodgy old gold, have the same roots: concern about the dollar’s future. People doubt that the greenback can keep its value after the flood of liquidity the Federal Reserve (Fed) has poured into financial markets over the years. Huge federal budget deficits redouble such doubts, as does the legacy of past budget profligacy that has created an overhang of outstanding government debt in excess of the U.S. economy’s entire annual output of goods and services — the gross domestic product (GDP). The marketers of gold and cyber currencies suggest that, rather than putting one’s savings at risk with what this dire debt situation might mean for the dollar, it would seem better to entrust one’s assets to something “untethered” from the government that might weather the economic and financial problems better than the greenback. Gold has been the traditional haven for those who share such fears. Bitcoin and other cyber currencies present themselves as modern (and no doubt “cooler”) alternatives.
Though I don’t dismiss concerns about the dollar, one thing is clear: Bitcoin has failed utterly as an alternative. An effective currency, whether government-issued or not, must possess three qualities: (1) widespread acceptance in transactions; (2) ease of convertibility to goods, services, and other assets, including other currencies; and (3) a stable store of value. On all of these, the dollar has outshone Bitcoin and other cyber currencies. So, too, by the way, has gold, the original global currency independent of national issuers. Both the dollar and gold are more widely used than any cyber currency. Of course, advocates of the cybers might with some justice say it is just a matter of time. But for now, these alternatives have to play catch-up. On convertibility, the dollar also wins, as does gold. Indeed, options for convertibility on both exist worldwide 24/7. Here, too, the cyber currency advocates may well say, also with some justice, that it is just a matter of time. But convertibility for cybers is far out on the horizon, if it ever develops.
It is especially on the last of these qualities –– as a stable store of value –– that Bitcoin has failed most dramatically. Over the past three years, Bitcoin has offered anything but stability. Between January 2016 and January 2018, its value multiplied by some 20 times, encouraging holders of Bitcoin to hang in there. Then, between January 2018 and January 2019, it gave back the bulk of those gains. Recently, it has risen off its lows. For traders, this kind of volatility has been a Godsend, especially for those who went long in the first phase and short in the second. But for people who viewed Bitcoin as a currency substitute, it was a disaster. Gold has been more stable than Bitcoin, but it has hardly shown itself to be of urgent need in a portfolio. Continuing low rates of inflation in the U.S. make plain that the dollar has hardly lost value in terms of what it can buy in goods and services.
If, on closer examination, the cyber currencies possesses little luster as a dollar alternative, it is then fair to ask why so many financial entities have decided to introduce cyber currencies of their own. Most prominently, J. P. Morgan has announced its own cyber currency, called the JP Morgan, for trading between customers. More flamboyantly, Facebook has announced the issuing of its cyber coin, the Libra. Both stand to gain wider acceptance more quickly than Bitcoin. J. P. Morgan, after all, has a powerful presence in financial markets and on Main Street, while Facebook has a remarkable reach (at least for the time being) that is enhanced by others involved in its announced but for the moment seemingly postponed launch –– among them Visa, MasterCard, PayPal, and Uber Technologies. Both the Morgan and the Libra, however, fail to offer the untethered promise of gold or Bitcoin and other cyber currencies. The J. P. Morgan coin will tie itself to the dollar. The Libra is to tie itself to a basket of government-issued currencies in which the U.S. dollar is prominent. Thus, rather than disconnect their value from the dollar, these “currencies” will act as extensions of it; in fact, they will be less a separate currency than a technologically advanced version of the kinds of payments systems that have been around for decades.
What, then, are the issuers looking for when they offer a cyber currency to the public? The answer is age-old and straightforward: They aim not to bring a revolution to finance but to secure or enhance their own prospects for profits. No doubt the credit card issuers in the consortium issuing the Libra see it as a way to enlarge the scope for the fees they receive from retailers each time someone uses their card for a purchase. However, primary among the advantages is seigniorage. This old-fashioned term refers to the real advantages available to any issuer of currency, whether it is a government or a private venture. The more widely used a currency, the greater the number of people who will hold it. The issuers of the currency meet the demands of those who hold the currency by buying from them goods and services with their issued currency. As long as the public is willing to hold the currency, the issuers get the use of these goods and services, while those who provide them get to hold the currency. The more the currency expands, the more seigniorage the issuers secure. When some politicians suggest that the United States should cover its deficit by printing more money, they refer to this process.
This picture should clarify where gold and cyber currencies belong in an investment strategy: less as a new way to conduct the business of life or a means to protect oneself from economic vicissitudes and more as simply another investment option. Gold is a commodity. Cyber currencies that are not tied to the dollar are a form of synthetic gold. Some may offer a haven should the marketplace lose faith in the dollar. Gold, as well as other commodities and also real estate certainly protected asset values during the period of great inflation in the late 1970s and early 1980s. But for the most part, it is simply a question of how much enthusiasm –– genuine or manufactured –– will push up the currency’s price in the immediate future. The question is purely a matter of anticipated price appreciation. Neither gold nor the cyber currencies pay interest or a dividend, at least not yet, and some, like gold, can cost the holder for insurance, should he or she opt to hold the bullion itself. If cyber currencies, and gold, are not the most secure investment bet, neither are they illegitimate. A note of common sense: given the history of Bitcoin, an investor should put no more into such assets than he or she can afford to lose.