The Real Value of Cryptocurrencies

Value Anchors

Some crypto critics, especially government officials, would have you believe that cryptocurrencies have no intrinsic value and should go to zero.

Others warn that Draconian regulation is going to wipe cryptocurrencies off the map.

Bah! We are so darn tired of hearing these arguments, we decided to refute both of them right here and now.

The “No Value” Argument

What defines the value of most kinds of money — whether cowry shells, paper greenbacks or digital currency — is not its so-called “intrinsic value.”

Heck, if that were the case, a $100 bill would be worth less than a cent, and a $10 million bank account would be worth only the half-second it takes to delete it.

Unless you’re talking about precious metal coins, anyone making that argument should know darn well that what truly gives value to modern-day money is acceptance and usage.

Let me spell that out…

Value Anchors

A currency will have value if it is accepted and used by a large community of individuals, businesses, financial institutions, governments and others.

Is that everything? No. In addition, a currency should have some sort of basic application that gets the ball rolling — a starting point from which an entire economy can be built. We call that a “value anchor.”

Consider fiat money like the British pound or the U.S. dollar, for example. Care to guess what the basic application is?

Historically, it’s been the fact that you have to use the currency to pay the taxman.

That’s right. It’s generally agreed that the original value anchor for a government’s fiat money is the payment of government taxes.

It makes sense: Almost all adult citizens of a nation are required to pay taxes in some form. Further, the volume of tax revenues is more or less correlated to the pace of economic activity.

Isn’t this why economists say a national currency is backed by the productive capacity of the nation? Isn’t this why foreign-exchange traders like to buy U.S. dollars when the U.S. economy is growing … or Australian dollars when commodities are booming?

Crypto detractors would have you believe that, unlike fiat money, no one is required to use cryptocurrencies. Here’s what they’re missing…

Cryptocurrencies for Everyone

First, although crypto is still younger and more volatile than the dollar or the pound, it’s already far more advanced in terms of anonymity, ownership and decentralization.

For the first time in modern history, individuals can truly own and fully control their own wealth without relying on — or being beholden to — any central authority.

Second, cryptocurrencies are much more than just currency. In fact, for most second- and third-generation cryptocurrency technologies, the term “currency” doesn’t really apply anymore. They are really platforms that are creating virtual economies and, potentially, even virtual nations.

Take Ethereum, for example, a platform capable of supporting a whole series of different functions.

You can use Ethereum to raise money with initial coin offerings (ICOs). And unlike initial public offerings (IPOs), which are restricted primarily to enterprises in advanced nations with relatively big budgets, ICOs are used by projects of any size anywhere in the world.

In fact, Ethereum is the basis for an entire economic system, called a “token economy.” And unlike the traditional economy, it is borderless, permissionless and decentralized.

Let’s say a gold mine decides to issue tokens that can be redeemed for gold. And let’s say these tokens are created and exchanged with ether. In other words, they are built on the Ethereum platform.

What does that mean? Well, it means that the ether token is backed by gold (at least partially and indirectly).

And let’s say thousands of similar projects start running on top of the same crypto-platform. It could be commodities, services, companies, governments, you name it.

In fact, if properly designed, a crypto-platform is capable of running virtually anything. With the potential for tremendous usage. And that means real value.

The “Draconian Regulation” Argument

If you’re worried about U.S. regulators, look again. Congressional testimony this month shows that the entire regulation debate is limited to two things:

Initial Coin Offerings: The folks at the Securities and Exchange Commission (SEC) previously made it clear that they consider ICOs to be securities. Nothing new here.

Exchanges: No one can deny they lack proper oversight. If the authorities can add some order and safety to the formula, great!

But the future of crypto is more decentralization. And that includes exchanges. Once the industry upgrades to fully scalable, peer-to-peer, decentralized exchanges, exchange regulations could become mostly obsolete.

What about Draconian bans, crackdowns and other random attacks by officialdom on the cryptospace?

There is no sign of any of that coming out of Washington. Instead, it looks like the SEC and the Commodity Futures Trading Commission are beginning to recognize that:

  • Cryptocurrencies are borderless and global. So jurisdiction and enforcement are, at best, uhm, cryptic.
  • If a country decides to crack down on crypto, business simply moves offshore. It has little meaningful impact on the industry as a whole. (As we saw in China when authorities decided to ban ICOs.) So…
  • Regulation would need a coordinated effort by major global institutions (such as the International Monetary Fund) before most rules could be effectively put into practice. Will that happen? Let’s see what they say at the G-20 meeting next month. Maybe that will provide some more clarity.
  • There could be many benefits for a government to embrace crypto in some way. They just haven’t quite figured out how.

Does countering these arguments remove the risk of investing in crypto? Of course not. But you can rest assured that they are true assets with real value.

Like anything else in the investment world, the trick is to buy the right ones.

Best wishes,

Martin Weiss, with Juan Villaverde

Founder, Weiss Ratings