Cryptocurrency and Perpetual Motion

What goes up...

“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” – Proverbs 13:11 (ESV)

Cryptocurrency is everywhere in the news these days. There are multiple ads on mainstream radio stations promotion this or that guru who will teach you how to make a fortune by investing as little as $100 (after you pay him $50, naturally).

What’s right with cryptocurrency?

There are aspects of cryptocurrency that are appealing. First, the underlying technology — blockchain — seems to have real promise as a method for ensuring better security for individuals and businesses, alike. Artists and musicians can potentially use the indelible ledger characteristics to prevent fraud and ensure they get paid for their own work. Medical records and other sensitive information can remain confidential, due to the fragmented distribution of encrypted database entries.

The small-l libertarian in me likes the individual liberty aspects of a completely anonymous electronic money that is not traceable by any government. You don’t have to be engaged in illegal activities to want your business to remain your business.

And I won’t deny that some people have likely made a fortune (on “paper” anyway) speculating on cryptocurrencies, such as Bitcoin. Even so, I am skeptical. Here are my reasons:

Work that benefits others is noble

Cash, real, counterfeit, genuine, intimacy, value, valuable, Benjamins, currency, money

Ain’t nothin’ like the real thing, baby!

A year or so ago, I read a book in which the author made the point that worthy work benefits someone in addition to the one doing it. Firefighters, nurses, assembly line workers, sales reps, and engineers — to name a few examples — do work that feeds their families, but also delivers good to others. By comparison, day traders and currency speculators move money around in hopes they get to keep some. Cryptocurrencies may turn out to be a convenient way of buying and selling goods securely, but the current activity is nearly 100% exchanging money in hopes of getting rich. This is not noble or worthy work — it’s rather like playing roulette.

Ever heard of “The Emperor’s New Clothes”?

How about “Jack and the Beanstalk”? If you don’t recall either, note that in the former story, a couple of con men talked a king into humiliating himself by walking around naked in front of his subjects. Their strategy was to convince him that their virtual clothing was so rare and so fine that only people with refined taste could appreciate its beauty. In the latter story, the protagonist traded the family cow for a handful of magic beans — exchanging true value for a speculative promise of treasure. While it’s true that things turned out well for Jack in the end, I want to remind you that his story is a fairy tale.

Do you not think it’s a little strange that people selling cryptocurrencies want you to give up real money for virtual money? They will trade ones and zeros — and promises — for those wrinkled bills in your bank account. Seems legit.

The motivation seems all wrong

I once heard author and radio host Dave Ramsey advise a caller against buying gold. His counsel to the caller was that he should avoid buying or investing in anything motivated by fear or greed. Let’s be clear: profit is moral and generating a return on one’s talents is a biblical virtue, so what did Dave Ramsey mean? He meant that one should evaluate investment decisions as rationally as possible. Greed and fear engage the emotions at the expense of the mind. Math doesn’t have feelings. When you’re investing, math is your friend.

Besides, by the time everybody is talking about a

Cryptocurrencies are the Hotel California of investing

Let’s say you take some of your hard-earned cash out of the bank and buy Bitcoin or Ethereum. And let’s say your timing is perfect and you have become a millionaire. You now have a problem. The problem is not that you’re rich. The problem is that very few establishments accept payment in Bitcoin or Ethereum tokens, and many of the sellers of cryptocurrencies limit the amount of cash you can take out of your account. If you became a millionaire by speculating in cryptocurrencies and you wanted to buy your parents a million-dollar house for cash, it would take you almost three years to withdraw your purchase price. And that’s if the currency value doesn’t crash.

As the song says, “You can check out anytime you like, but you can never leave…”

You might prefer cash

Electronic anything can be hacked. The blockchain logic makes this much less likely, but it is still theoretically possible.  But even if your cryptocurrency isn’t stolen, your electronic keys could be corrupted or held by a ransomware attack. A thief doesn’t have to attack the entire database — just your e-wallet. On top of this, people in favor of individual liberty might be reluctant to sign on to an electronic currency of any kind. When all your money is on a computer — all binary code — it’s much easier for your government to access your assets — for taxation or simple convenience. Think negative interest rates in Greece and Cyprus, for example.

Full faith and credit

US dollars are backed by the full faith and credit of the United States government. They used to be backed by gold, then silver, then multiples of the tangible assets, then the verbal commitment of the US government to back their unit of currency. This is called “fiat money.”

The supposed benefit of cryptocurrency is that it is intended to be more stable than any one government. So, for example, if you’re holding Venezuelan Bolívars and Venezuela defaults, you aren’t wiped out. The comparative stability of the European Union and the US, respectively, make Euros and dollars attractive to investors and businesses around the world for this very reason. (The US dollar is still considered the world’s reserve currency despite challenges from the Euro and the Chinese RMB.)

Cryptos are supra-national, but they are not tied to anything other than the assertion of the members of the club that they have value. If your argument is against fiat currency, you have a logical inconsistency if you endorse cryptos as the antidote.

A store of value?

Ah, the old store of value! Goldbugs argue that in turbulent times, precious metals, like gold, are preferable to government-issued money. Gold’s relative rarity is what makes it valuable. After all, there are few industrial uses for it, and apart from its occasional use as a garnish for conspicuous consumers, you can’t eat it. Gold is valuable due to a consensus — that is, enough people agree that it’s valuable, so it is. At least it has physical substance. Miners physically dig it out of the ground. The mining of Bitcoin and its cousins is essentially a puzzle that requires massive computer power to solve.

I’d add that a true store of value wouldn’t bounce around quite so much.

Perpetual motion snake oil

Basically this is the old desire to get something for nothing.

Perpetual motion machines are physical impossibilities because our universe is subject to physical laws. It takes energy to generate energy. This cost is referred to as energy loss. Energy loss is a part of every technology for generating energy.

Take nuclear power, for example. It’s true that the reactor vessel contains fissile material, and that the process of nuclear fission releases radioactive energy. But the power company doesn’t send radioactivity through the power lines. Instead, the intense heat of nuclear fission is used to heat water to its boiling point and to use the resulting steam to power a turbine, and the turbine drives the generator that produces the electricity that flows through the power lines. At every point in the process, energy escapes without being harnessed — from friction, from electrical resistance, from imperfect insulation.

While the energy losses associated with nuclear power generation are better than, say, coal-powered generators, these losses exist all the same. I’m skeptical of cryptos because money is subject to rules as well. And just as energy loss dooms perpetual motion machines to failure, I think the sum of negative attributes around cryptocurrencies dooms them — for now — for anything more than a hobby. If you can afford to speculate, I won’t tell you not to, but I would prefer to use the money I earn to invest in companies or buy products that put my neighbors to work.

Tell us how you really feel

Proponents of cryptocurrencies argue that their creators have democratized and distributed control of money to “the people” away from banks and governments. To the extent this is true, it is worth asking how anonymous and unaccountable creators of cryptocurrency are more to be trusted than governments who must answer to voters or bankers who are subject to laws. You can swim in piranha infested waters, but the fish are not obligated to give you a pass.

I was intrigued when I first learned about blockchain, and I may invest in companies or technologies that make use of it in the future. But I am not going to buy another currency — especially one with the many downsides I’ve listed here (and we haven’t even talked about the extraordinary electricity consumption required for mining Bitcoin).

Next time, let’s talk about a biblical view of money and how that fits into a biblical worldview. I’ll be here.

So how about you? What am I missing on cryptocurrencies? What is your strategy for building wealth in an ethical way? Add your comments below.

Please note: I reserve the right to delete comments that are offensive or off-topic. Bring your best manners, please.

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