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Crypto-currencies lack real basis

Crypto-currencies divide opinions sharply. Some rave about them while others are scathing.

Supporters embrace them enthusiastically. Take, for example, the start of Bitcoin trading on the two Chicago futures exchanges. There is also at least one Bitcoin fund aimed specifically at the institutional market. Meanwhile, libertarians often love such currencies because they see them as a form of money that is outside of state control.

The most notable of the critics is probably Jamie Dimon, the chairman and CEO of JPMorgan Chase, who has reportedly called Bitcoin a “fraud” and its investors “stupid”. Another concern aired by many is that they will make criminal activity easier by facilitating illicit transactions.

Much of the discussion is confused because of the lack of clarity about what crypto-currencies represent. Most view them as a high-tech form of money but that begs more question than it answers. Conventional money has been around for thousands of years but its significance has never been fully resolved. That is despite some of the greatest minds in human history – including Aristotle, Goethe and Shakespeare – pondering it.

Naturally the question will not be settled here but at least one distinction should be introduced. That is the difference between money as a medium of exchange and as a store of value. Crypto-currencies perform the first function but not the second.

There is no reason why crypto-currencies cannot thrive as a way of making payments. They provide a mechanism for monetary exchanges between parties that can arguably be more secure than cash and other payment methods.

crypto currencies lack real basis

But, unlike cash, crypto-currencies have no intrinsic value. Their worth seems to be backed by nothing except the readiness of others to pay for them. It is not that they are fraudulent in the sense that they are necessarily part of a conscious attempt to deceive people. But they are not backed by anything of substance.

In this they are entirely unlike, say, bank notes. It is true that notes can be put under the most powerful microscope and their intrinsic value will not be revealed. But that is because their worth comes not from the paper they are made of but because they are underpinned by their respective states. They are ultimately supported by an entire set of legal and political institutions as well as an army.

From an investment perspective most assets are ultimately backed by something real. For example, a share certificate, whether paper or electronic, has no value in itself but it is accepted as a legal claim on corporate earnings and assets.

Crypto-currencies have their uses but they are not money in the full sense. Their price often swings violently up and down precisely because they lack a real foundation.

Daniel Ben-Ami, Deputy Editor
daniel.ben-ami@ipe.com

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