Cryptocurrency investing is like choosing Democracy over a King. That is, you are investing in an idea. You believe in decentralized currency and the freedom of economics and money.
That being said, the market is hyper inflated. I personally do not invest in this. This post is wild speculation on my part and I have not tied it to any micro economic foundations or macro theory.
I get into enough trouble with investing in things I know something about, why should take a long or short position on something I do not know anything about.– Warren Buffett on Cyrpocurrency investing
However, from a theoretical perspective, my question to skeptics is, if you were to bet on a political system that would be the convention in the next 100 years would it be monarchy or democracy? Analogously so it is with money, once people get understand the idea, I believe the monetary convention in the future will be decentralized currency. It is a paradigm shift. I can not image in 100 years people will be walking into Walmart and pulling out crumpled up dollar bills, or at least to buy things online. I am not saying that Altcoins will go up forever in value, but once the idea catches fire, it will be a revolution in monetary economics. Science fiction movies describes this reality with electronic credit. The central banks will see their power decline and fade. I do not know if that will be in ten years or one hundred years, but it probably will happen as the evolution of money continues.
You can burn books but you can not stop and idea, once it catches fire. – Mark Biernat
I teach economics and want to clarify the emergence of Bitcoin and other private currencies from a historical perspective.
Historically people have used various commodities as a medium of exchange
Money has evolved. What is money? It is anything that functions as a medium of exchange. In order to function as a medium of exchange it needs to be generally accepted and people have to trust it. Initially this medium of exchange was something that had intrinsic value. For example, beaver pelts, to salt (that is where we derive the word ‘salary’ from Latin) to species (e.g. gold and silver). Latter governments issued coin and fiat paper money. However, banks, insurance companies railroads and private individuals also issued money, for example in The US, Canada Scotland in our Gilded age. The government monopoly of money for most of us started in 1914 with the Federal Reserve system. In fact, if you consider the evolution of money in civilization, the government monopoly of money is an anomaly. Money is evolving. Money continues to evolve as economies and our economic understanding evolves.
Is one system of money better than the other?
Each monetary system serves a purpose and functions to serve the people who live in that time. At this point in man’s economic evolution, the currency that works best is, fast, something that can not be forged and circumvents the government’s misuse of monetary policies, something that is durable and can be transmitted electronically and lastly since fiat money does not have any intrinsic value and has worked, it does not have to be tied to anything tangible either. The logical conclusion at this juncture is private money.
Why the fiat currency system is archaic?
For example, the chairman of the Federal Reserve is similar to a despot. At anytime without any real checks and balances could over stimulate the economy and exacerbate the boom and bust cycle. There is an argument that, the Federal Reserve caused WWII. When the world needed economic help most, both the Central Bank in the US and Germany made mistakes that exacerbated the global depression and contributed to people looking for extreme political ideas to either fix their economic woes or look for blame.
Since 1914, how many business cycles have we seen? The Great Depression, the Great Recession, the Dot com boom, it seems that the existence of the Federal Reserve system and government control over money does not liberate people, but tries to manage them and fails. Its primary objective is to stabilizes prices and lessen the trade cycle but it does not necessarily do a better job than an alternative system.
Therefore, believing in a centralized government issued currency can be equated to believing in a king or a queen should be your ruler. Theoretically it can work, however, like all top down approaches it is prone to oversight. If you really meditate on this truth you understand why the world is gravitating towards cryptocurrency/ Altcoins are metaphorically like the Alibaba, Amazon or Ebay of the money market. That is, buyers and sellers come together in a market and determine value. That is capitalism and that is freedom.
The world will flat and it will always be
If you think the world will stay the same just like it is today especially in the financial markets think again. The world is always changing and reinventing itself. Economic paradigms are investing the way we interact. Although I do not have a crystal ball and I cannot see the future, I think this cryptocurrency is just the beginning of the S curve a wave that will eventually hit maturity in the long-term. If that is true, the current valuations of any of these cryptocurrencies, Bitcoin, Ripple, Ethereum or Litecoin are undervalued based on a social economic trend. I am not giving investment advice, but I personally am dollar cost averaging small quantities systematically. The idea of free money in the digital age is an advance over the altcoins in the 1800s in the US, Canada and Scotland when private citizens insurance companies, railroads and banks issued currencies. It was arguable our Gilded age.
How I invest
I do not invest. I put a few dollars in for fun into cryptocurrencies. If you do you can not invest based on technicals or traditional value because none of that makes sense. Buying altcoins is really is a bet that currency will be decentralized. If free banking and money continue to gain acceptance it will appreciate. I would dollar cost average in and diversity with money I can afford to lose. Those are time tested investment techniques. If it all fizzles out and we go back to gold coins or something then so be it. However, in the context of the evolution of money I think there is a greater chance fiat money will be the dinosaur. However, we do not know if that will be ten years or one-hundred years.
Investing in decentralization in contrast to speculating on government money
The reason buying cryptocurrency is investing, rather than rather than a gambit with FX zero sum game trading. Tune out the hype and yield to the logic of this argument. The idea behind Bitcoin, Ethereum, Litecoin and Ripple is you believe in the revolution of money. It is the idea that decentralized currency will rule over government controlled currency. In contrast, believing in the monopoly of money by a central bank is very little difference than believing that kings and queens should rule over you and determine your economic fate.
Analogously surrounding the inner circle of Kings and Queens are the aristocracy, that is, the investment banks and those looking for bailouts or favor. Under that are the little people, the serfs or workers, that means you and me. With free money you break the monopoly, circumvent the matrix and participate in the evolution of money. Money becomes a true medium of exchange, minus the politics and social engineering of governments.
The idea of decentralized currency in essence is a belief in freedom and free money. Money being the most important commodity, the lubrication for free transactions it would make sense it would be free rather than controlled, since economic experiments with control result in deadweight loss. When things are controlled they do not reach social or economic optimum.
The future of Crypocurrency
Is Altcoins or Cryptocurrency in a boom or a bust? There is no way, anyone can tell. I am an Economics Professor and former Stock broker and investment guru but I do not know and do not recommend putting more than lottery ticket money.
Yet, from a long-term theoretical perspective, and you look at macro-social-economics trends, Cryptocurrencies are the next logical step in the evolution of money.