The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
Subscribe to the Flinchum File
View Archives

Crypto Crash

This is NOT an “I told you so” blog entry!

Last week’s crash of crypto values was terrifying, with some losses as much as 90%.  There was a real human-dimension to this, with multiple bankruptcies.  Let us not be insensitive to their losses.

When Bitcoin and other crypto-currencies became newsworthy some years ago, I was not impressed.  Frequently, I wrote “tell me one thing – one legal thing – that Bitcoin can do, that the dollar cannot do.”  That was one of my first encounters with Ageism.  After all, how can someone with white hair see the beauty of anything as new and wonderful as crypto?  So, I studied and became a Certified Digital Asset Financial Advisor by NASDAQ.

One problem is how many currencies does the world need?  While there is a finite number of Bitcoins, there is an infinite number of crypto-currencies — well over a thousand different currencies already exist.  The mind shutters . . .

Another problem is that blockchain is very important — indeed, more important — than the currency.  Blockchain looks like the perfect record-keeping system.  Unfortunately, there is no ONE blockchain.  Each of the different crypto-currencies has a different blockchain.  Different industries have different blockchain needs, and each could will lead to yet another crypto-currency.  I expect blockchains will reach a critical mass some day, when only a few are needed, which means we already have more different crypto-currencies than we need.

Another problem is that the world – the criminal world – needs more secrecy than is available with a regulated currency, like the dollar.  While way above my pay-grade, the FBI has already confirmed several times that Bitcoin and a few other crypto-currencies have no secrecy and can indeed be followed.

The winning crypto-currency will probably not be Bitcoin, as it was the first, and its blockchain is primitive compared to ethereum, the second crypto-currency.  The winner will be the crypto-currency which has the most inclusive and flexible blockchain.

Crypto-currency is not a new and different asset class that is un-correlated to the stock market.  If you want to remove stock market risk from your portfolio, Bitcoin will disappoint.  The most recent correlation is .78, which means Bitcoin will only go down 78% as much as the stock market or only go up 78% as much as the stock market.  Last week should prove the point.

Crypto-currencies are for speculators, not investors.  Eventually, we will know the best blockchain and then we will know the best crypto-currency to buy . . . but not yet.