A cryptocurrency is either legal tender or a token or a tulip bulb. At least you can look at it that way.
The Legal Tender Benders
Let’s begin with “legal tender.” Governments are concerned — well they might be — that cryptocurrencies will usurp national currencies. They have no idea if it will happen. Nobody does. But it’s possible.
Here’s what keeps them awake at night:
- Cryptocurrencies are stateless. Governments cannot stop their use, no matter what laws they choose to pass.
- Governments that outlaw cryptocurrencies will kill the goose that lays golden eggs. Some countries (Estonia is a good example) know this; they are investing heavily. Even Russia is enthusiastic (click here if you don’t believe me). Putin dreams of Russia taking a dominant position in the crypto world. Dream on Vlad.
- If politicians cannot manipulate their belovèd national currency, they lose one of their favorite tricks for juicing the economy ahead of an election, and they lose one of their levers for stimulating the economy when it goes into deep recession, and banks start collapsing.
Caught between Scylla and Charybdis (the original rock and the original hard place) they are not sure how to proceed. But he who hesitates is lost.
Those mollycoddled national currencies have never had to compete, and now they do — with the likes of Bitcoin Cash, Litecoin, and Monero, to mention but a few. These coins are thoroughly modern currencies, imaginatively designed and leveraging the latest technology. It’s just not a fair fight.
Those Talented Tokens
Only a few cryptocurrencies yearn to be legal tender. Most are tokens that serve as money within a closed commercial ecosystem.
Think of casino chips. They have value and but can only be used to play Blackjack, Roulette, and other such games. Alternatively, think of Air Miles. You earn them by travel or credit card use, and you use them to buy more travel or objects that lurk in brochures.
Tokens are similar. Siacoin pays for data storage; Populous funds invoice trading and Permission.io rewards consumers for viewing ads. There are hundreds of tokens designed for a specific business environment. The defining difference between these tokens and Air Miles is that they live in your crypto wallet and you can trade them on a crypto exchange. They are fungible, and thus you are not locked in like you are with Air Miles.
Also, a token’s utility is not fixed. The team that created it can build on its capability. The magic of the blockchain is that you can add new functionality. A token designed for gaming might later enable a dating app or a shopping app. A successful token can become a platform for multiple apps.
The Tulip Bulb Mania Myth
In early 17th century Holland tulips (and hyacinths and other pretty flowers) became highly fashionable and a large market for them emerged. By 1636 tulip bulbs were Holland’s fourth leading export after gin, herrings,, and cheese. At this time the Dutch were experimenting with a new financial idea: futures markets. So, naturally, they established a futures market in tulip bulbs. And it didn’t go well
In early November 1636, the futures price per bulb was just below 10 guilders and by February 3rd, 1637, driven by speculative exuberance, it had risen to 200 guilders. That was the peak from which it collapsed. The futures market closed and the price returned to about 10 guilders. Examine the historical record and you discover that tulip bulb mania was a little less dramatic than it is usually depicted. It only lasted three months, but — credit where credit is due —it was a bigger flash crash (-95%) than Bitcoin has ever experienced.
The mania didn’t kill the tulip business; it just dented it. Nevertheless, tulip bulb mania etched itself in the mind of man as the epitome of absurd valuations.
In truth, very few cryptocurrencies have mirrored the tulip bulb trajectory — shooting up like a rocket and falling like a lead balloon— although one or two have. BitConnect (clearly a scam) is a good example: click here to see the chart.
Instead what many cryptos have done is to rise and fall on the tide of Bitcoin’s price — suggesting that their value is mainly speculative. If a crypto’s price just follows Bitcoin, it can have little or no intrinsic value. And for most cryptocurrencies, that’s very likely. Many of these young coins and tokens are not yet out of diapers.
Whether they think they are a currency (Litecoin, Monero, etc.) or a token (Siacoin, Permission Token, etc.) they cannot be valued by their underlying business activity — it’s just too early. They are tulip bulbs, but in this sense only, they have not flowered yet.