Blockchain and Crypto: The burning question

Just last week, a major investment firm with almost €500 billion under management -  Allianz Global Investors - made a bold statement: “Bitcoin is worthless and the bubble may pop soon”, as Bloomberg reported.

Is this such a bold statement?  Personally, I believe it to be a true statement.

The idea of a cashless society is not utopian but just around the corner and I feel that the answer is not Bitcoin, or Ethereum, or Litecoin, or Ted&EdnaSmithCoin, or Whatever-Coin-Pops-Out-of-the-Toaster-Coin.  The answer is right in front of our faces!  I will come back to that in a minute.

Not so long ago, we all watched the meteoric rise in “value” of Bitcoin and investors were piling in.  We have known of the existence of Bitcoin and other crypto vehicles for many years and, over those years, simply wondered how and when this would all be put into practice.  When could we buy stuff with Bitcoin?

Meanwhile, during 2016 and 2017, the hype increased and we all started researching the hows and whys of crypto and found out it had absolutely no intrinsic value and was, in fact, the product of data mining, by tons of graphics cards, solving mathematical puzzles, while running up gigantic electricity bills.

Even the late Douglas Adams, who had the most beautifully bent science-fiction mind in history, could not have come up with this scenario!

Meanwhile, industry leaders, scores of financial news reporters, and most of the general population were afraid to utter the following four words: “I don’t get it”, just in case they were seen to look foolish.

Finally, last year, someone finally said, “I don’t get it” and most of the planet breathed a collective sigh of relief.  The response was usually, “That’s the beauty of it!  Nobody does!”

Even good people like Janet Yellen refused to be drawn on the subject: “It’s a speculative asset; nothing to do with me; stop asking me questions about it.”  (those weren’t her exact words, but you get the idea.)

When friends and family asked me about the concept, I would explain with a metaphor:  Imagine the Blockchain as a very secure highway or motorway running all over the world.  The data you want to send (Bitcoin in this case) is a vehicle driving along that motorway with a beginning point and an end point.  Sadly, this metaphorical Bitcoin vehicle has no wheels and costs an eye-watering amount of energy to run.

(At this point, please give me credit for not using the word “Tulip” (that was a previous blog) and I have purposely avoided the word “Currency”.)

You will say that, in fact, there are some companies who are accepting Bitcoin as a form of payment and that at least one broker is allowing traders to trade directly from an Ethereum wallet, but can we yet call “Crypto” a currency?

The idea of the Blockchain is fantastic and will surely revolutionise the way we live our lives and conduct business.  They tell us that the Blockchain is completely secure and, due to myriad redundancies, there is no record of any “outages”.  The idea of using the Blockchain for financial transactions is a no-brainer, for many reasons.  However, the concept of using one common global currency, as a vehicle for these transactions, is fraught with problems.

I am not necessarily referring to the wild fluctuations in “value” of Bitcoin or the fact that it is not backed by any tangible asset; I am referring to the fact that our global economy is made up of many parts, controlled by many central banks, with many individual currencies.  There are reasons for this which most of us know.

Those who postulate that Bitcoin will be a “global currency” haven’t looked at the big picture.

Anyone who knows me personally, knows that one of my favourite rants is the existence of the Euro.  From day one, it never made sense to me that diverse economies (take those of Portugal vs Germany for example) are forced to share one currency.  Central banks need this flexibility to protect and grow the economies and support the people within them.  Years ago, countries like Argentina and Brazil tried to peg their own currencies to the USD, with disastrous results.

Imagine Bitcoin, as a universal floating currency, being used by a teenager in Malaysia to purchase motorcycle parts from a supplier in the US.  He buys one wheel on Tuesday and, sadly, if he had waited until Thursday, he could have bought two and one-half wheels.  Online purchasing would grind to a halt during Bitcoin low periods and suddenly shoot up during Bitcoin high periods, thereby screwing up supply chains all over the world.

“What would you like for Christmas this year, Billy?”  “I dunno, Mom.  What will the value of Bitcoin be on December 15th?”

I can see a whole new industry being created to take financial advantage.  Let’s call it “eBay Arbitrage.”

So.  Here is my burning question:  Why not digitise all our existing currencies and use the Blockchain as it was intended?  Apparently, many central banks are “looking into it.”

I’ll stop talking now.