Reader Mailbag: My Take on Cryptocurrency
I’ve received a number of emails from you asking for my thoughts on cryptocurrencies.
First and foremost, I must warn you, I am a no-BS type analyst. So if you want me to write something fluffy because you personally are a big fan of crypto, don’t read another word.
It’s not that I’m opposed to cryptocurrency per se, it’s that I know how the central banks work and what they have planned.
First let’s address the technology itself.
Two Phases of Tech
All technological revolutions follow two phases:
- The initial breakthrough phase. This occurs before social/legal frameworks are in place.
- The “normalization” phase. Social/legal frameworks are implemented, giving the technology a societal and financial legitimacy.
If you need a real-world example of this, think of the electronic music file or MP3 revolution.
The first phase was Napster: the sharing of music in what was later deemed as illegal activity (the legal framework was not yet ready for the technology).
Then along came iTunes: the normalized version of the technology in which MP3s could be bought and sold in a legally acceptable form.
Bitcoin and cryptocurrencies are currently in the “Napster” phase of their development. As such, I am inherently wary of them.
Moreover, we’re in something of a mania for this with over 5,000 currencies in the world.
I believe over 99% of them are ultimately worthless.
A Central Bank Digital Currency Would Wash Out the Rest
Because at some point, the US government will push for the introduction of some kind of cashless means of exchange. We know that as far back as 2017, the Fed was already studying this issue:
As the price of the cryptocurrency continues to soar, the Federal Reserve apparently is giving thought to having a product like bitcoin for its own.
William Dudley, president and CEO of the Federal Reserve Bank of New York, said at a conference Wednesday that the Fed is exploring the idea of its own digital currency, according to reports from Dow Jones.
Any product likely would be well off in the future, he said, adding that it would be “very premature” to estimate when the Fed would come up with its own offering, according to Bloomberg. [Emphasis my own.]
Fast-forward to February 5, 2020. Lael Brainard, who sits on the Federal Reserve’s Board of Governors (which is in charge of establishing Fed policy), stated the following:
In a Bank for International Settlements survey of 66 central banks, more than 80 percent of central banks report being engaged in some type of central bank digital currency (CBDC) work … a few central banks report that they are moving forward with issuing a CBDC. Building on the tremendous reach of its mobile payments platforms, China is reported to be moving ahead rapidly on plans to issue a digital currency.
Given the dollar’s important role, it is essential that we remain on the frontier of research and policy development regarding CBDC… we are conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC. We are collaborating with other central banks as we advance our understanding of central bank digital currencies. [Emphasis my own.]
Source: Federal Reserve
Here is a senior member of the Fed stating point blank that the Fed needs to introduce a central bank digital currency (CBDC) in order to maintain the geopolitical standing of the US dollar.
The fact that Brainard mentions this RIGHT after discussing China’s plan for a sovereign digital currency tells us that this is a matter of national security for the US.
The Most Powerful Competitor in Any Market
What do you think will happen to over 99% of cryptocurrencies when the Fed announces “Fed Coin” or whatever its CBDC will be called?
They will go to zero.
Also, once the Fed introduces its own cryptocurrency, EVERY other cryptocurrency would then exist in direct competition to the Fed’s CBDC. This opens the door to charges of counterfeiting and other federal felonies.
Currently crypto does NOT compete with the Fed because the Fed doesn’t have a CBDC yet. Once it does, everything changes.
Let me put it this way… what happened to Napster when iTunes showed up?
Bear in mind, Apple the company is nowhere near as powerful or formidable a competitor as the US government. Someone might win a lawsuit against Apple. Very few people win lawsuits against the U.S. government.
For that reason, I tend to steer clear of all crypto investing. Again, it’s not that I’m against the technology per se, it’s that I understand what central banks are doing.
Thank you again for the questions. If you have others, let me know by clicking here!
Editor, Money & Crisis