Crypto Dip-Toe – Part 4: ProDigital ConCurrency (of Digital Currency)

“The true currency of life is time, not money, and we’ve all got a limited stock of that.” -Robert Harris

It never hurts to have a reminder of the things that matter in life, and it’s fair to say that many people would be willing to exchange money for more time if only it were possible (I suppose it is indirectly possible, as money can improve longevity via better healthcare, nutrition, personal training, etc.). While we cannot have life without time, we certainly can have life without money; however, that doesn’t mean money isn’t important.

Today’s title consists of a fun-to-say phrase I cobbled together from the pros and cons of digital currency. It loosely translates to the “willful parallel happenings (within digital currencies),” which is just what I’m planning to work toward today: improving our understanding of money and where things currently stand within the realm of digital currency. Continuing where we left off in Part 3 of this series, we find ourselves in a front-row seat for what may be one of the most notable developments in the history of money. The only problem is that we won’t know that until decades have passed and the ongoing “digital currency revolution” can be placed within a historical context. Here we go!

Pluses and Minuses

Let’s start by thinking through the money attributes from last time and determining which are most desirable or undesirable for an ideal currency (if that’s even possible). To refresh our collective memory:  those attributes are anonymity, centralization, openness, limit of supply, and physicality. Each of these could result in lengthy research projects on their own, so the goal here is just to scratch the surface.

Anonymity:

Would we want our money to be completely anonymous, fully traceable, or somewhere between the two? I hear many people voice privacy concerns. I’ve even encountered some who won’t use email because they’re so paranoid about securing their information (though I’d venture to guess “big brother” knows some things, regardless). Those people would probably love for every transaction to be done anonymously, in cash, for eternity. Too extreme and impractical? I’d say so.

Others are more indifferent to privacy concerns, and I find myself in that camp. I say “indifferent” because it’s partially that I just don’t have the time or energy to care about it (sorry, just the truth) to a significant extent. There are also clear advantages accompanying traceability, like proof-of-payments, enhanced ability to prosecute criminals, and recovery of funds. I’ve never met anyone in what would be the third cohort, which would include those enthusiastically trying to give up all privacy possible.

What I find amusing is that there’s a lot of talk about how the anonymity of Bitcoin allows criminals to transact in nefarious dealings without consequence. To that end, my questions are 1) “what about CASH!?” and 2) what about criminals being arrested because of following the Bitcoin? Cash has been essentially anonymous since like the advent of modern money (aside from when specific dollar bills are used in sting operations), and – as we’ve already learned – Bitcoin isn’t even fully anonymous. My take is that pseudonymous currency (which, as a reminder, is “anonymous with publicly accessible transactions”) is a pretty good happy medium.

Centralization: I couldn’t hope for a more in-depth overview of the financial application of centralized vs. decentralized ledgers than this SWOT analysis from AIMS Press. Their takeaway is that “centralized ledgers are still critical in the record-keeping of financial transactions, despite the strengths and opportunities of decentralized ledgers outweighing those of centralized ledgers.” So, while I think the aspiration is for fully decentralized currency ledgers (for maximum transparency, fraud reduction, etc.), the reality is that there are practical challenges within the current financial system (e.g., jurisdiction, audit). Again, I’d assume we’ll see increasing decentralization but utilize a mix of centralized/decentralized ledgers for the foreseeable future.

Openness: “Open” seems to be the easy answer, as all of the money we’re already using or contemplating falls into this category. There are situations where the closed-ledger access makes sense (central bank transactions), but not for our general currency application.

Limit of Supply: An unconstrained system allows for ongoing “printing” of additional money (or, more accurately, increasing the money supply), making that money worth less over time. We measure that “worth” against a basket of goods, and the inevitable decreasing value is known as inflation (a topic no one is talking about these days 😊). Since everyone is so afraid of heightened inflation, does that mean inflation is bad? Not necessarily. Many economists believe that modest inflation is a good thing – but that’s another conversation.

What’s clear is that either too much inflation or deflation is not good. With the advent of digital currencies, we can control a particular currency’s inflation directly, as an inflation rate (whether that’s no inflation or modest inflation) could be baked into the code itself. But no one may know what an ideal inflation rate is. Even if we wanted modest inflation for one currency in a vacuum, what about how it interacts with other currencies and the implications for global trade? Would you then have the same old story of currency manipulation instead expressed via digital currency inflation rates? This topic obviously gets VERY complex. I also don’t know if it should be a function of the currency itself or continue to be left in the hands of government officials – although I do know that things left up to the government usually have room for improvement.

Physicality: Even if a physical form of currency continues (e.g., cash), most transactions are already done electronically, and the trend or momentum are very clearly in the direction of less cash and more electronic payments, and there’s no way to go back to a fully physical system. The question is not really should our currency be electronic, but should it be a fully digital currency created only within and because of computers (remember, US dollars – even if traded electronically – are still considered a physical currency).

Governmental Speak

According to Piper Sandler (one of our research providers) – the US Government is well-aware of the digital asset/currency evolution. The Biden administration is exploring the topic to develop a greater understanding for consideration of regulatory actions that may or may not be warranted (see Executive Order on Ensuring Responsible Development of Digital Assets for more detail). Still, it seems the Fed won’t be issuing a central bank digital currency (CBDC) anytime soon. In short, “crypto” is definitely on the government radar, though it does not sound like they’ll be rushing to any conclusions. Eventually, however, we should expect the development of a more concrete regulatory perspective and related policies.

Professionals and Confidence Men

Those in power not only need to determine where Bitcoin and other cryptocurrencies fit into our existing financial system and how they’re regulated; they also need to weigh the pros and cons of currency attributes (as we did above) as the money evolution continues. It seems that the path of least resistance is for new technology (e.g., blockchain) to be increasingly adopted by existing institutions, although it will just facilitate transactions of the same-old US dollar and financial securities in better ways (a “FinTech” conversation I’ll save for another day).

If there’s one cryptocurrency that stands out as the “professional” of the group, it’s Bitcoin (BTC). Of the many options, it’s the most well-established, understood, proven, and accepted – even if it’s barely any of those things in a global context. But it’s probably not good at being a currency. There’s currently no way Bitcoin’s blockchain can handle the number of transactions needed to function as a widespread currency. As you may already know – it’s also wildly volatile, and we have already concluded that stability is of utmost importance for a currency. Bitcoin does have the attribute of an eventually fixed supply (most of this will be in circulation by 2024) of 21 million coins that is highly unlikely ever to increase. Thus, if there continues to be more demand for Bitcoin, its limited supply means the price per Bitcoin would have to rise (e.g., in terms of US dollars). That scarcity is why some people believe it should have value. The unknown question is on the demand side of the equation.

The next most well-known crypto technology is likely Ethereum, and its related token, Ether (ETH), has an entirely different value proposition than BTC. Users can build new applications on the Ethereum network, generating revenues associated with the Ether cryptocurrency. That monetization means that ETH – unlike BTC – can be analyzed from a fundamental/cashflow standpoint, similar to many other businesses. Other solutions compete in this space, such as Solana (SOL), but the underlying design varies.

And then we have Stablecoins. These are cryptocurrencies designed explicitly for the currency use case by being directly “pegged to a currency like the U.S. dollar or to a commodity’s price such as gold.” They don’t need to have value in and of themselves but rather just facilitate transactions in a better way.

Bring It on Home

This current edition has already gone longer than expected, but we needed to reach a reasonable stopping point. The natural progression from here will be diving into the underlying differences between the above cryptocurrency types (Bitcoin, Ethereum, and Stable Coins) and how they fundamentally work.

Now having a better grasp on currency attributes, my initial impression is that fiat currency, cryptocurrency, and crypto technologies can and should coexist in the world for different reasons and use cases. Together they may simplify and enhance our lives – and perhaps even save us some of life’s most precious currency, time.

Until next time, this is the end of alt.Blend.

Thanks for reading,

Steve

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About the Author

Steven Tresnan, CAIA®, CFP®

Private Wealth Advisor

Steve is a Certified Financial Planner as well as a Chartered Alternative Investment Analyst®. He is also an Accredited Investment Fiduciary, which helps him offer guidance to clients with fiduciary responsibilities, such as board members of trusts, foundations, and endowments. Steve earned a Bachelor of Science degree in Industrial Engineering from Penn State University.

Steve serves on the board and finance committee of New Music USA – a national nonprofit devoted to the development and appreciation of new music in the U.S. – and volunteers as the Treasurer for Campus Fun & Learn, a child development center on the campus of Rockland Community College in New York.