Cryptocurrencies' False Promise as a Store of Value
NOTE: Figures and prices updated 9/12/22
I just came home from buying apples at the grocery store today. Does that mean I was paid in apples?
This sounds like a silly question. And it is because I would never accept apples as payment for work despite how much I like eating them. However, if you change ‘apples’ to ‘Bitcoin’, many people start to think this is a real thing.
If you follow the news about cryptocurrencies over the past year, you may have seen stories about people being paid in Bitcoin. Everyone from NFL Players to the Mayor of New York City is promoting their dedication to the Crypto Cause by claiming to be paid in Bitcoin. It’s the future. It’s Digital Gold. It’s a better store of value than the dollar.
However, this is all false. It’s showmanship and good showmanship at that, but it’s no more real than when I buy apples at the store with my paycheck. When your paycheck is denominated in dollars, you aren’t being paid in Bitcoin (or apples or Apple stock even), you are being paid in dollars and you are choosing to buy Bitcoin at the current price. No one in their right mind would dare be paid in Bitcoin (even if they could find an employer that would) because it simply isn’t a good store of value.
Let's look at what that situation might really look like:
You agree with your employer to be paid a total of 2 Bitcoin per year, doled out as it normally would be 26 times per year.
If you made this agreement on January 1, 2021, you are agreeing to be paid the equivalent of approximately $58,660 per year ($29,330 each). Over the course of the year, however, Bitcoin’s price doubles to over $60,000 each on more than one occasion. Your employer is now effectively paying you 2x as much as they planned. They would probably try to renegotiate or fire you. They can’t run payroll using such a volatile medium.
If you made this agreement on January 1, 2022, you are agreeing to be paid the equivalent of approximately $95,478 per year ($47,739 each). As of today, your paychecks would be worth 53% less than you planned because the price of Bitcoin has fallen. You can’t base your expenses on such a volatile medium either. In fact, in our earlier examples of NFL Players and NYC’s Mayor, both saw the error in their ways during Bitcoin’s unceremonious tumbles.
The most important purpose of a true ‘store of value’ is to do one thing extremely well: maintain its value. This means neither losing nor gaining value quickly. Bitcoin can never claim this and neither can any other cryptocurrency.
If you look closely, you’ll notice that even the most die-hard cryptocurrency mavens intrinsically know this. Even while they rail against fiat currency or the current US inflation, deep down they know their coins are securities and gambles. How can we know? We know because everything is denominated in dollars(or other major global currencies).
Stablecoins are not pegged to Bitcoin or Ether. Products are not priced in Bitcoin or Dogecoin. Everything in the cryptosphere is priced in real currencies like dollars, Euros, Pounds, etc, and then it is converted to crypto prices. Do you think the organizers of Bitcoin 2023 would risk receiving less money for their ticket sales if the value of Bitcoin fell? They would not. This is why the price of a General Admission ticket was priced first as $249 and not the equivalent 0.005889 Bitcoins when the tickets first went on sale in April. As of this writing, those tickets cost $499 (2x increase) and 0.026504 Bitcoin (4.5x increase). Some store of value.
I would be negligent if I didn’t also address the dangerous stablecoin situation, which demonstrates as much risk as normal cryptocurrencies. The implosion of Terra and Luna earlier this year was the most catastrophic example to date. Throughout 2022, cryptocurrencies have been a target for outflows during a year when investors are overwhelmingly seeking safety. All of the major cryptocurrencies have seen their prices tumble and starting on May 10th, Terra UST was the latest major casualty. UST is a stablecoin (you can read more about what those are HERE) and it began to decouple from its dollar peg, drifting below a dollar per coin. It did not recover. The impact on its sister currency Luna was an all-out hyperinflationary collapse. Billions of dollars of value have been erased. Even more dangerous, the creators of Terra and Luna are back at it again with a new Terra 2.0, ready to fleece a new batch of believers amidst mounting lawsuits from the original project.
This is all “Futurist” fun and games until people start losing substantial amounts of money on your crypto project. Fortune reported in May that the Luna founder’s wife is under emergency protection because real live people are furious over losing real money. Many investors rightly feel that they have been misled by Terraform Labs about the security and stability of UST and Luna. Crypto may be a billionaire playground, but regular people are the ones that usually get hurt when these things go wrong.
I can’t end this on a completely negative note. It’s apparently now a rule of the internet that if you don’t say something nice about cryptocurrencies once in a while you’ll be trolled online. So here goes:
I don’t want you to confuse my points about Bitcoin or other cryptos' lack of consistent value as a knock against it as a speculative investment. Some have proven to be some of the best investments someone could have made in the past decade. Is it logical? No. Did it reward many investors handsomely? Yes, it did, and then some. Investors in Bitcoin who believe(d) it would be a new fast payment system or store of value or something else altogether, were rewarded. Not because they were right, Bitcoin is actually not good at either of those things, but they were rewarded nonetheless because other people believed too and the price rose. Will it continue to be the best investment? No one actually knows and anyone who offers a guarantee is a liar. Bitcoins and all cryptocurrencies are investments. Some are good and some are bad. Usually, the difference between the two all depends on when you bought or sold.
As a close friend and financial advisor said to me when discussing this very topic: “Investing involves risk.” Never forget it.
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