In the seventeenth century, the Dutch Republic was arguably the most prosperous nation in the world and certainly was the financial center of the world. It even developed the first Futures Market, which gives investors the right to buy or sell a certain commodity, such as bushels of corn or wheat, at a certain price on a future date. Unfortunately, the Futures Market included the many varieties of tulips, which exploded in value. Pundits usually consider this as the world’s first “asset bubble.” By 1635, a rumored change in Futures regulation frightened investors out of the market and the price of tulips collapsed. Tulips were a vehicle for financial speculation and pretty to see . . . so what? They were not a vehicle for investment, only speculation.
Today, there is considerable concern about crypto-currencies, such as bitcoin. They are also a great vehicle for speculation and adored by criminals . . . so what? More worrisome, the regulatory sands are shifting. Last week, China clamped down on the use of crypto-currencies. In the U.S., the Fed is studying them now. Indeed, the new head of the SEC taught the first course on crypto-currencies at MIT and has promised to regulate them more closely .
Crypto-fans argue that the finite number (21 million) of bitcoins make it a real investment opportunity, but there is an infinite number of other crypto-currencies or “coins.” Already, there are over a thousand such coins competing with bitcoin. (Already, crypto-fans joke about a new “tulip-coin.”) This poses several problems. Nobody expects all those currencies to survive, but which horse do you bet on, when there are a thousand horses? Crypto-currencies will remain merely as a vehicle for rampant speculation . . . until winners are evident, if ever.
This crackdown by China deserves more attention. Few pundits ever expected China would be so successful in controlling the internet, but they have been. They can do the same on crypto-currencies. They already impose capital controls on the Chinese people, who are not permitted to move money or capital out of China freely. Crypto-currency was facilitating the escape of too-much capital. It had to be controlled, if not eliminated. Plus, the mining or manufacturing of crypto-currencies consumes a surprising amount of electricity, most of which is coal-produced in China. In other words, crypto-currency is bad for the environment. (Ask Elon Musk, who only realized this recently.)
It is no coincidence that the rise in ransom-hacks, such as the recent one on the Colonial Pipeline, has been accompanied by the rise in crypto-currencies. If the ransom is paid in crypto-currency, it is virtually impossible to trace. If it is paid in dollars, following the money-trail to the criminal is much easier. For that reason, criminals adore crypto-currencies.
This begs the question of what can you do . . . legally . . . with crypto-currency that you cannot do with dollars? Yes, you can save a few dollars on transfer costs, but you must therefore empower criminals and accept a risk to the world financial system. Forgive me for saying so, but China is right on this!
Ban crypto-currencies!
However, there is the problem of “throwing out the baby with the bath water.” Crypto-currency would not be possible without the “blockchain” to capture related data. The blockchain is an important and useful technological advance that offers many advantages, especially for inventory management. But, don’t confuse the danger of crypto-currencies with the opportunity of blockchain.
The asset-bubble in Holland was based on a biodegradable asset. A crypto-currency is not biodegradable and is “forever.” While the Dutch economy survived the collapse of tulip prices, the U.S. will survive the collapse of crypto-currencies, but an early collapse will be easier to survive than a later collapse.
