In recent weeks various voices have confirmed the fact that bitcoin is not a currency. First there was the Israeli central bank who came out to state that they do not recognise virtual currencies such as bitcoin as actual currency. Then there was Stripe, a leading global payment processing company and one of the first to enable bitcoin transactions who announced that they will not accept bitcoin payments any longer.
The core purpose of a currency is to be a token of exchange used to purchase goods and services, but the significant volatility of bitcoin, whether positive or negative, makes it too risky for merchants to use as their currency of trade. Then there’s the transaction times, but I am not even getting into that. At the moment the volatility is the main issue in my view.
The fact that you can search for the market capitalisation of any cryptocurrency should be a clear giveaway. The market cap of cryptocurrencies depicts the total value of all tokens, coins etc in circulation in US dollar denomination. If you search for the term “US dollar market cap”, you will find many things, but none of them will provide you with the total value of all dollars in circulation.
If they were in fact currencies, the only measure of success would be its adoption by buyers and sellers of products and services. The overwhelming information about every cryptocurrency seems to be how much they would be worth in future, rather than its adoption. Cryptocurrencies are therefore vehicles of pure speculation at the moment, nothing more and nothing less.
If someone is serious about creating an alternative blockchain-based currency, it should be pegged to a more stable currency, like the US dollar, until its adoption is significant enough to stand on its own. Then, once it is widely used, it can be taken off the “dollar peg” to see what happens.
1. Similarities between cryptocurrencies and financial instruments
During an Initial Coin Offering (ICO), the issuer can choose what the cryptocurrency will represent. Some represent tokens (like vouchers), others represent the right to income (like a type of preference share) and others represent a form of ownership, like ordinary shares.
While the stories of a decentralised currency sound beautiful and idyllic, it is still a few years away.
In the meantime, people who intend to buy cryptocurrencies must treat cryptocurrency investments like share investments. So, at least ask: “What is the underlying value of the asset that is represented by this financial instrument.” Before you decide to invest. You can take a view on the future value of the underlying asset or service, I don’t mind, but at least understand that the cryptocurrency in itself is worth nothing. It is only a representation of an underlying asset or service.
Let me give an example of how I see some of the cryptocurrencies in circulation.
2. Comparing cryptocurrencies with financial instruments
So many people are telling me that bitcoins have a value because there is only a certain amount in circulation. Others explain to me that bitcoins have value due to their absolute trust in the blockchain as a decentralised trust authority.
So, while taking this into account, let me ask you a few questions:
1. Do you know of anyone who had their shares stolen on a public stock exchange?
2. Do you know of any public stock exchange that “lost” someone’s shares because their systems are not trustworthy?
If you answered no to these questions, then the value of the blockchain as a trusted method to exchange financial instruments is nothing new, since the world was already able to do it faultlessly without the blockchain.
So, let’s say bitcoins were shares (securities) listed on the New York Stock Exchange and it is impossible to authorise more than 21 million shares in the bitcoin company.
Then, these would be the facts about the company:
- The company holds no assets;
- The company earns no revenue and has no intention to earn revenue in future;
- The shares can be transferred from its owners to any buyer who has a trading account;
- The company will increase its issued shares slowly until it reaches 21 million.
That’s it, nothing more and nothing less.
Many companies buy the shares of other companies through the transfer of shares. Shares are therefore also instruments to transfer value. With the only difference between shares and cryptocurrencies being the method through which it is done.
Yes, I understand the value of the blockchain as a transparent decentralised trust authority, but we must see it for what it is. It is a method to transfer financial instruments that represent the value of an underlying asset or service, not a currency.
*Neither this post not any part of it is intended, or must be considered to be financial or legal advice. It is written for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses.
D’Niel Strauss is director at Stocks & Strauss.