Cryptocurrency versus the US dollar

Cryptocurrency comes in many forms. Bitcoin being the most notable, there are many others that go by names like Ethereum, Ripple, Stellar Loomis, EOS and Lightcoin to name a few. There are an estimated 10,000 crypto currencies now in existence.

Cryptocurrency, in its many forms, has taken the world by storm. While Bitcoin may be the most well-known cryptocurrency, there are countless others, including Ethereum, Ripple, Stellar Loomis, EOS and Lightcoin, to name a few. In total, there are an estimated 10,000 cryptocurrencies in existence today.

Cryptocurrency is designed to be accessible anywhere and everywhere there is internet. It’s not controlled by any one government and is instead “mined” using mathematical formulas, a process known as block chain technology. According to Wikipedia, “A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.”

As a currency, cryptocurrency does meet some of the characteristics required of a medium of exchange. A currency must be hard to replicate, be divisible, recognizable, have uniformity, be portable, have acceptability and maintain a store of value. When it comes to the first six characteristics, crypto coins could be said to fit the bill nicely. However, I have issues with the last characteristic: maintaining a store of value.

It goes without saying that at times, the price of cryptocurrency can vary tremendously. Lately, that has been an understatement.

Stories of skyrocketing prices and subsequent roller coaster-like plunges are common. Bitcoin itself briefly breached $100,000.00 a coin just a few weeks ago.

Although a rising price may convince some investors to believe crypto might make an acceptable currency replacement, the very fact it often moves so violently violates the store of value characteristic a usable currency must possess.

Store of value means both the buyer and seller of the currency must have faith in its stability. Stability means it doesn’t go up or down much. Certainly the buyer of crypto relishes the meteoric rise when it occurs, but like all things money, there is always someone else on the other side of the trade.

If a buyer of crypto makes an overnight fortune on a price spike, the seller of that very same crypto loses an equal amount in value.

To buy crypto, one must have exchanged something else for it.

For example, if it is another currency that is exchanged, the person who sold the crypto now holds a currency that has fallen in value by an equal amount.

Given the recent price instability of Bitcoin, the very definition of maintaining a store of value is almost nonexistent and therefore, at this place in time, Bitcoin cannot be considered a usable currency replacement.

Another attraction of crypto is the fact no one or no one government can shut it down. Again from Wikipedia: “It is a decentralized digital currency without a central bank or single administrator………….”

Since the internet is worldwide and unstoppable, the thinking goes that crypto coins can’t be confiscated by meddling governments.

However, governments of the world don’t have to confiscate cryptocurrencies to stop their usage. All they have to do is shut down the exchange websites that trade them. Sounds unlikely but many countries have already done so.

Quite simply, if your country of residence decides it doesn’t want you trading crypto, it can shut down all the ways you can access it.

Internet workarounds are certainly possible, but to the average Joe, cyberspace backdoors may be difficult to access.

Central governments will always strive to maintain strict controls over their respective currencies to ensure their viability.

A country’s currency is the lifeblood of their economy, so controlling it ensures the ability to use the government check book, which means the ability to deficit spend without restriction.

History has proven time and time again a government will ensure its currency remains valid and is not usurped by another. This would obviously include curtailing the use of Bitcoin or any other currency whose ownership becomes too widespread.

That said, to say central governments aren’t fully aware of the threat crypto coins may present to their specific currencies would be more than naive.

The U.S. government is already looking into issuing its own version of a cyber coin called the Central Bank Digital Currency (CBDC). President-elect Trump has also indicated the U.S. government is looking to expand its control of the Bitcoin market by establishing a Bitcoin reserve of its own.

The U.S. is not alone. The issue is being discussed among central banks worldwide.

That said, in this analyst’s opinion, it’s only a matter of time before governments bring down a harder hammer on the entire cyber coin phenomenon in order to ensure continued control of all things money.

“Watching the markets so you don’t have to”

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors,