Practical analysis for investment professionals
16 June 2020

Crypto Dreamin’? The Good, the Bad, and the Ugly

Way, way back in 2014, I debated the cryptocurrency evangelist Andreas Antonopoulos on the merits of bitcoin. It was a wonderful, civil, and not too disobedient dialogue. I was skeptical, not cynical. Today, six years later, I remain skeptical but now have a cynical bias.

Let me explain what I see as the good, the bad, and the ugly across the cryptocurrency landscape. I won’t cover the blockchain. For that, I have only optimism.

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The Good

  1. A democratized currency can only be described as good.  
  2. A decentralized currency that cannot be controlled by any — misanthropic, missing, or maddening — government leader must be described as good.
  3. A digital currency that does not recognize sovereign borders and so requires no conversion taxation or limitations is good.
  4. A currency for places that do not have a stable or developed one is so very beneficial.
  5. And hooray for a currency that is ready, maybe too willing, and able for our global, digital world without all range of account establishment hurdles, capital movement restrictions, and other challenges.

If you believe the rule of three, then those five ought to be more than enough to wipe out the skepticism and initiate our livin’ the crypto dream.

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The Bad

Whenever making an argument, it is best to focus on the logic. Yes, I know that preying on emotionality, as most media outlets do, is often the most effective strategy. But my “Bad” logic may be massively packed with emotion and could — should? — still win my logic argument.

What if the world fully embraced a cryptocurrency? I mean, no more paper money. The social contract that we fear is fraying today would be torn to shreds.

Without delving into what led to our social contract challenges, how would “universal sovereign individuals,” based upon their money, be taxed to enable and support a social contract with their schools, fire protection, police, and safety nets?

Answer: They could not, I cannot imagine, without creating a violation — breaking the sovereignty — that would tear down the crypto kingdom as it stands. Moreover, governments with social contracts know this and will do whatever it takes to stop any real breakaway from their currencies.

Now, re-visiting the five “Goods,” because hope and hype is NOT a strategy, we can lose the first one because a democratized cryptocurrency is kind of fictional. Why? Because today, BIG controlling hands exert an influence on the various cryptocurrencies that exist through mining or any other process. Cryptocurrencies have not been distributed like some type of universal basic income (UBI). (To be sure, introducing a form of cryptocurrency could make for a brilliant UBI, but it would be guaranteed to be controlled by a central, sovereign state actor. So much for that idea.)

And, for all those who think crypto is fabulously anonymous, it is NOT. Hello blockchain — the real dream tech! There is a reason that governments have threatened or begun to remove larger denominated paper currencies. Hint, cash is much more anonymous.

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The Ugly

All paper currencies can be lost or stolen. Ugh! But crypto is not demonstrably more secure. There are big thefts and hacks and people lose their crypto keys all the time (UGH!).

And, don’t forget the famed bank robber Willie Sutton. When asked why he chose banks, Willie allegedly responded, “Because that’s where the money is.” Well, crypto exchanges are arguably bigger and easier targets than any individual bank today. And exchanges don’t offer complimentary insurance.

As if that isn’t ugly enough, try to stomach these:

  • Cryptocurrencies can be manipulated or schismed. It has already happened.
  • How would you feel about paying the equivalent of several thousand dollars for a pizza? Yep, that has happened, DOH! If a cryptocurrency cannot remain stable, why would buyers/sellers be motivated to use it? Aside from potential illicit applications and maybe for collectibles, there is no use, no purpose. Unless . . .
  • You view your cryptocurrency as an investment. Maybe just don’t. Investments offer dividends or a yield. Cryptocurrencies have neither. They are . . . speculations, collectibles? Does the world really need any more private ornaments? And digital gold? Really? That’s nice marketing. But why not just buy gold?

In the End (Not That Anything Is Over)

The skeptical me remains skeptical and not crypto dreamin’. You may wish to be careful too.

Furthermore, the idea of sovereign digital currencies — the stuff of efficiency / effectiveness dreams — could be dangerous too. Take a moment and think of the temptation to tax, repress, fine, or devalue with the proverbial press of a button if there’s any form of centralized control.

Fiat currencies are no panacea, but for me still, today, I’ll take paper or plastic/credit, please, at least until decentralized digital is a reality.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Michael S. Falk, CFA

The late Michael Falk, CFA, CRC, was a partner at the Focus Consulting Group and specialized in helping investment/wealth management teams improve their investment decision making, and their firms with strategic planning and succession. Previously, he was a chief strategist at a global macro L.P., and a chief investment officer in charge of manager due diligence and asset allocation for a multi-billion-dollar advisory practice. He was a frequent speaker and presenter at industry events and often quoted in the press. He taught on behalf of the CFA Society of Chicago in its Investment Foundations Certificate program, was a contributing member in the Financial Management Association’s (FMA) practitioner demand driven academic research initiative (PDDARI) group, and adjunct faculty at DePaul University in its Certified Financial Planner (CFP) Certificate Program. Falk authored or co-authored 2.33 books: the 2016 CFA Institute Research Foundation monograph Let’s All Learn How to Fish . . . to Sustain Long-Term Economic Growth, the 2019 follow-up Get to Work . . . on OUR Future, and, with Jim Ware, CFA, and Keith Robinson, Money, Meaning, and Mindsets.

6 thoughts on “Crypto Dreamin’? The Good, the Bad, and the Ugly”

  1. Kirk Cornwell says:

    No criticism of the thinking here – but as Washington prints another trillion in “Federal Reserve Notes” at the press of a button, a “currency” that stays within its promised limits (i.e. Bitcoin – 21,000,000; Litecoin – 84,000,000) makes more and more sense.

  2. Bitcoin is coming says:

    This article does nothing to dissuade me that Bitcoin is not coming to take over. It’s just that everything we know today will have to change. Yes, EVERYTHING.

    This is because everything we know today is purely built on fiat currency ponzi-schemes that are heading to zero. They aren’t working anymore. Our money and states must now be separated for the progress of the species.

    Drop the ‘crypto’ and ‘blockchain’ nonsense and just concentrate on Bitcoin for a start.

    – Governments can /will have to accept tax in Bitcoin.
    – The state will also have to reduce in size and waste if it wants to receive said tax.
    – The transfer of wealth has already begun.
    – Those who have financial power now need to wake up fast or be left behind by digitally native money.

    The rest of the statements made are largely pointless as they’ve been debunked before many times.

  3. In addition to The Good items you listed, many believe the benefit of idiosyncratic (i.e., low or negative statistical correlation) return of crypto, and the providers are using it as a critical benefit.

    Although crypto assets are under significant pressure from the regulators than before and many moved to jurisdictions outside of developed countries, it has thrown a question to investors.

    That said, the root of this issue is the bias toward the overuse of market price volatility as a measure of risk. Controlling risk through diversification makes sense, but each risk should be analyzed individually. If the past market price deviates entirely from the real underlying value, which is the accurate measure of risk, statistical modeling is just dealing with illusion on a paper.
    If you are familiar with coding and aware of how to set up a blockchain currency using open source, it is quite easy to find that just a variable in a program you set up gets a price immediately everyone starts to trade. Where is the value?

    What needs to be done first is to ask the value of blockchain assets with solid logic. I do not think there is, and the value assumption seems dependent mainly on the past market price dynamics. However, the essential nature of the market price is not to value the asset, and instead, it serves the medium of transactions as a pair of scales between purchase and sales.

    In other words, the records of the dynamics of a pair of scales is past price history. It has nothing to do with the variability of actual underlying value itself.

    It looks as if the paradigm of market price-oriented risk management is over-extended, and anything that moves differently is thought to be incrementally valuable to the portfolio construction. The industry has leveraged computing capability in the last 40 years and leaned too much, and the price-based paradigm was established. Blockchain assets are its milestone.

  4. Leo says:

    I’m pretty disappointed by this article. I don’t mind a negative take on bitcoin or any other cryptocurrency, but I would expect more from this publication when laying out an argument against any particular asset.

    Why does a cryptocurrency have to be the single, unifying currency to have value? The US dollar is not the world’s only currency, and before anyone says that it is the “reserve currency” for global trade, how do you explain the continued existence of the Euro, Canadian dollar, Japanese Yen, etc?

    Why does a cryptocurrency have to be “more secure” than its fiat alternative? I think an argument can be made that it is secure in ways you have not noted (no government can print more at their whim, devaluing what you own–which is a form of insecurity inherent to all fiat).

    Why is an appreciating price (during a period long before mass adoption) an indication of unsuitability as a currency?

    Why do you consider an investment to only be an investment if the asset produces a “yield” or dividend? Many investments (maybe even most) do not produce dividends or yields.

    As an alternative to gold, you ask why not just hold gold? Do you really have to ask that question? Because gold is not nearly as divisible, storable, or transportable, and it cannot be used as a means of exchange except in the most cumbersome of transactions.

    Bitcoin has been the best performing asset for several years, and if you want to write that off as nothing more than a modern day tulip mania, that’s certainly your prerogative. However, you do your readers a disservice to comment about something you are apparently this unfamiliar with–or writing about a subject you know in such a disingenuous way as to raise such false concerns.

  5. Jonathan G Harris says:

    A good discussion. The “good” aspects of Bitcoin, assume that governments will continue to demand more controls on banks than on users of cryptocurrency. I think the proponents overstate the degree to which governments cannot disrupt Bitcoin. They get confused by the war-on-drugs analogy.

    The problem with that, is that a drug’s potency is unaffected by government regulations; on the other hand, a currency’s liquidity and usability can be greatly hampered by government restrictions. Think of the impact on usability in a country where transactions with cryptocurrency are banned. True, it is physically possible for people to store their own keys; but they would be vulnerable to hacking and have no recourse in the event of theft. Stores could not post prices in cryptocurrency units, and investments could be solicited only on the dark web. Victims of fraud would have no recourse.

  6. Jim Hamilton says:

    A very good article.
    Blockchain does have useful applications and some forms have been around for a long time. The Torrens land tile system has similar characteristics.
    As for Crypto, rather than sceptical, I am in the Charlie Munger camp that compares it to rat poison.

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