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Marc Cuniberti: More about cyber currencies | News
With the advent of cyber currency, first with bitcoin and then followed by a host of others, it was only a matter of time before Uncle Sam threw his hat into the cyber currency ring. I’ve covered cybercurrencies before, but with Bitcoin’s recent new highs, it’s worth taking another look at the phenomenon.
Cryptocurrency comes in many forms. Bitcoin is the most notable, but there are many others that go by names such as Ethereum, Ripple, Stellar Loomis, EOS, and Lightcoin, to name just a few. With currently over 10,000 cybercurrencies, it certainly seems like everyone is issuing their version of money over the Internet.
The idea behind encryption is that it is anywhere and everywhere there is access to the Internet. Not controlled by any government, crypto is “mined” using mathematical formulas called blockchain technology. Wikipedia describes it as: “A cryptocurrency is a digital asset designed to function as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.”
As currency, its qualification brings together some of the characteristics that a medium of exchange must possess. A currency must be difficult to replicate, be divisible, recognizable, have uniformity, be portable, have acceptability and maintain a store of value. In the first six characteristics, it can be argued that encryption fits perfectly. My objection is that we have problems with the last characteristic, maintaining a store of value.
It goes without saying that sometimes the price of cryptocurrencies can vary enormously. Stories of exorbitant prices and subsequent roller coaster-like crashes are common. While a rising price may convince some investors (and I use that word loosely) to believe that crypto can be a great speculation game, the very fact that rock and roll so violently violates the store of value characteristic that a means of exchange must have to qualify as a currency.
Store of value means that both the buyer and the seller of the currency must have faith in its stability. Stability means it doesn’t go up or down too much. Certainly the crypto buyer appreciates the meteoric rise when it occurs, but like all things related to money, there is always someone on the other side of the negotiation.
If a buyer of crypto makes a fortune overnight from a price increase, the seller of that same crypto will lose an equal amount in value.
Because to buy crypto you need to have exchanged something else for it. Typically it is another currency that is exchanged and the person who sold the crypto now holds a currency whose value has fallen by the same amount.
Stability, the very definition of maintaining a store of value, is almost non-existent at this point in the cyber currency market.
Another attraction of encryption for some is the fact that no one or any government can shut it down. Again from Wikepedia: “It is a decentralized digital currency with no central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.”
Because the Internet is worldwide and basically unstoppable, it is thought that cryptocurrencies cannot be confiscated by nosy governments.
However, if they wish, central governments can and have closed cryptocurrency exchanges.
This means that if your country of residence decides it doesn’t want you to trade crypto, it can shut down all ways of trading it by shutting down exchange sites. Alternative solutions on the Internet are certainly possible, but for the average person, these backdoors can be difficult to access.
Governments maintain strict control over their respective currencies. They are the lifeblood of an economy and also the checkbook for governments.
History has proven time and time again that a government will ensure that its currency is valid and not usurped by another if it deems it necessary in order to have the ability to print that currency and spend it freely to finance its operations.
That said, to think that central governments are not fully aware of the threat that cryptocurrencies can pose to their specific currencies would be more than naive.
Case in point, the US government is considering issuing its own version of cyber currency called Central Bank Digital Currency (CBDC).
The US is not alone. The issue is being discussed among central banks around the world.
That said, in this analyst’s opinion, it is only a matter of time before governments bring a stronger hammer down on the entire phenomenon of cyber currencies.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not intended to be investment advice, or a recommendation to buy or sell any securities, nor does it represent the opinion of any bank, investment firm or RIA, nor this media outlet, its staff , members or subscribers . Mr. Cuniberti holds a BA in Economics with Honors, 1979, and California Insurance License #0L34249. Your insurance agency is BAP INC. Email: news@moneymanagementradio.com