Perhaps the hottest story in business these days is crypto-currencies, a new way to store value digitally using blockchain technology to verify transactions and ownership through distributed computing. No longer are currency-related transactions verified only by banking intermediaries, but using blockchains they can be recorded by many computers across the Internet. This has led to a great deal of optimism from those who would like to reduce financial transaction costs by cutting out bank “middlemen”, enabling secure direct peer-to-peer finance.
The most notable of the crypto-currencies has been Bitcoin, which was first created in 2009 and which has recently traded in the range of $10,000 – $20,000 apiece within just a single week! Unlike national currencies, there is no one standing behind bitcoins, so there’s no party with the resources and incentive to step into the market to help stabilize the price of bitcoins (or any other of the more than 1,000 other crypto-currencies), and so they have a tendency to experience far higher levels of volatility than national currencies.
With the US dollar, for example, the international community of nations agreed at Bretton Woods that all national currency transactions would be traded against the greenback so, unless and until that changes, there can be expected to be a constant need for US dollars not just within the US but internationally as well. For other national currencies, except in the case of bartering, all goods and services paid for within each nation’s borders will require some form of that nation’s national currency. So there is a constant demand in each country for its currency for everyday commerce.
However, with bitcoin and other crypto-currencies, apart from being a favorite of speculative investors, their main use seems to be as a way of avoiding the oversight of national and international regulators, so they’re attractive to those interested in illegal commerce such as sanction-busting, drug deals, money-laundering and other criminal activities. Because they are not issued or regulated by a central bank or government, six countries have banned crypto-currencies, while China has banned initial coin offerings.
The blockchain technology, however, seems to have merit as a distributed accounting method, and the Bank of England is known to be researching the merits of launching its own crypto-currency, which would provide the credibility the other crypto-currencies currently lack.
So, is now the time to invest in crypto-currencies and, if so, which ones?
Without the stabilizing influence of a major central bank, today’s markets are like the “wild west”, whereby there is nothing to stop anyone launching a new crypto-currency and no natural use for any of these currencies other than for trafficking in illegally traded goods and services. This makes their markets opaque and subject to manipulation and high volatility as rogue nations and criminal organizations move the markets with large sales and purchases of illicit goods.
From an energy perspective, it would be wise to consider whether your investments are aligned with what is loving for you or not. In doing so, you would consider the following 3 questions:
- Does the investment add to the value of yourself and others?
- Does it help create valuable additional wealth in the world or not?
- Can it be liquidated easily should you wish to exit the market when you choose?
With respect to the first question, it could add value to your wealth if your timing is good, however, because it is purely speculative, this is a gamble. Also, while you can buy interest-bearing instruments denominated in national currencies, when you buys bitcoins, it’s like buying gold, as there’s no associated income stream. So the answer to question 1 is “no”.
As there are no legal markets being supported by crypto-currencies, the answer to the second question would also be “no”.
And the answer to the third question would also be “no”, at least for bitcoin, as its rise in popularity has placed a burden on the processing of bitcoin transactions, which has been preventing the rapid clearing of bitcoin orders lately.
It seems that, for the markets for these currencies to stabilize, they will need to be supported by a major market-maker, similar to the role played in national currency markets by central banks. Until then, there is nothing to stop the ongoing proliferation of competing currencies, use of them by illegal market participants, and high volatility as a result. I would recommend proceeding with extreme caution, unless you are investing money you can afford to lose.
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