Cryptocurrencies and NFTs

“I think the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable e-cash.” – Milton Friedman

“You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe someone else can.” – Alan Greenspan

“It’s gold for nerds.” – Stephen Colbert

“Nothing so undermines your financial judgement as the sight of your neighbor getting rich.” ‒ J. P. Morgan

CHAPTER 16

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Cryptocurrencies

• Bitcoin and other cryptocurrencies
• Pure speculation – must “buy low, sell high”
• Very similar to gold and precious metals
• But even worse – no practical application or use
• Other than creating a great system for crooks
• However, the technology behind cryptocurrencies, blockchain, is valuable and will survive

“Aw, c’mon, Paiano. Whatcha’ got against Bitcoin and the other cryptocurrencies? You’re just old, that’s all! This is the future! We’re all gonna’ get rich, rich, rich!”

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Cryptocurrencies

Rebuttal: First of all, as mentioned, you can’t invest in a cryptocurrency; you can only speculate. The value is worth only what others believe it is worth. Cryptocurrencies do not pay interest, dividends, rent, etc. In other words, there is no cash flow. And more importantly, there is nothing backing the currency. “But what about the ‘fiat’ currencies, huh? Aren’t they the same? They are only worth something because we believe they are!” Not so fast …

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Cryptocurrencies

You will hear people say that our dollars and other “fiat” currencies are not backed by gold and are therefore worthless. Poppycock! (By the way, what is gold worth? As we have seen, gold, as an investment is also a speculation.) Our dollars are backed by our economy, the Great American Economic Machine! Our dollars are backed by what the U.S. can produce and consume, our Gross Domestic Product. Walk into any grocery store and look around and then tell me that our dollars are worthless. Ha!

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Cryptocurrencies

The job of the Federal Reserve Board is to make sure that there are enough dollars in circulation to match the production of our economy with the consumption of our economy. Too many dollars and you get inflation. Too few dollars and our economic output is stifled and opportunities for growth of our wealth are lost. It is not an easy job. I love it when I hear people scream, “End the Fed!” Oh, yeah, as if you could do a better job?!

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Cryptocurrencies

So now how does this relate to cryptocurrency and how do you explain the success of Bitcoin? Well, there is absolutely nothing to stop other individuals or groups from starting their own cryptocurrencies. Indeed, isn’t this what happened? According to who you believe, there are tens of thousands of them. (My favorite is Jesus Coin. Don’t believe me? Look it up!) It’s tulip bulb mania all over again! Some people will get very rich and many others will lose a whole lot o’ money.

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Motley Fool says there are over 2.4 million cryptocurrencies.

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Cryptocurrencies

However, as Stephen Colbert so astutely observed, “It’s gold for nerds.” Most likely, a few of the larger currencies will survive and eventually start to behave like gold, which we have seen, has barely kept up with inflation. Until then, prepare yourselves for some serious “volatility!” Stay tuned …

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Oh, by the way, there are no currencies more “fiat” ‒ meaning created by decree ‒ than cryptocurrencies!

Let’s revisit the graphic that compared gold to stocks, bonds, and inflation.

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Growth of $1 Investment

1801 – 2024

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Criminal Activity and Scams

• Given their unregulated nature, the criminal element has embraced the technology
• Statistics vary wildly but there is no doubt that they are being used extensively by criminals
• Pump ‘n’ dump and many other types of scams are rampant
• The owners of a Turkish exchange ran off with $2 billion
• A cryptocurrency based on the Netflix series Squid Games made off with $3 million

This is exactly what we would expect with an unregulated financial system. So much for “DeFi!”

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Non-Fungible Tokens (NFTs)

• Non-Fungible Tokens are digital assets that give someone the bragging rights that they “own” something that anyone can download from the Internet
• NFTs are proof positive that we are living through a bubble
• An NFT in 2021 sold for $69 million dollars
• Similarly, during the dot-com mania, a greetings cards company sold for over $700 million only to be sold again two years later for $35 million
• The website year2000.com sold for $10 million

All you artists out there! Quick! They are giving away free money! Sell your art now as NFTs! Get rich! (Don’t forget us, okay?)

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Cryptocurrencies and NFTs

Next: Chapter 17, Real Estate and Real Estate Investment Trusts (REITs)

CHAPTER 16 – REVIEW

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