Why Cryptocurrencies Won't Replace Fiat Currencies

Despite all the hype, mouth foaming, price rises and fascination with cryptocurrencies, there's a simple reason why they will never replace fiat currencies.  In times of economic stress, whether it's from asset bubbles bursting, pandemics, or whatever else, governments are expected to intervene and provide aid for the distressed, stimulus to the economy and central bank accommodation to the banking sector.  These interventions are done largely by printing fiat currencies.  By design, cryptocurrencies can't be printed by governments.  Thus, they are useless for government policy when times are hard.  

It's no longer optional for governments to step in and provide support when the economy nosedives.  We're way past the days when Herbert Hoover could credibly wax eloquent about sturdy American self-reliance and turn a cold shoulder toward pleas for federal assistance.  Government intervention is embedded as deeply in the economy as the banking system and the transportation system.  Fiat currencies are the primary weapon of government intervention.  Take away fiat currencies, and we're back to the days when gold and silver were the currencies of choice, economic downturns worked their cruel consequences, and Oliver Twist would have been nonfiction except for its happy ending.

Cryptocurrencies really aren't all that different from gold and silver.  It's no accident that the U.S.went off the gold standard in the 1930s and the Federal Reserve hasn't issued silver certificates (redeemable for silver at any federal reserve bank) in some 60 years. Tying government currencies to commodities like gold and silver prevented the kinds of interventions that can aid massive numbers of people. Fiat currencies, for all their flaws, have played a crucial role in government policies that have prevented a great deal of suffering and loss.  In hard times, if you're in need, don't hope for the holders of cryptocurrencies to give you a helping hand.  But you can expect the government to step in and provide cash, food assistance, health insurance coverage, housing subsidies, educational subsidies, unemployment comp, and more, because it can print the money it needs if all else fails.  Carefully managed, the money printing that is used for economic support and stimulus has not proven particularly inflationary.  While central banks must remain alert to the risks of inflation, experience has taught us that prudent money printing can be of great benefit.  

So invest in crypto, if you like.  It's a free country.  But don't think it's a substitute for the dollar.  When times are tough, the cavalry will ride to the rescue with their saddlebags full of greenbacks.

The Cryptocurrency Bust

Cryptocurrencies are down about 75% from the beginning of the year.  See https://www.cnbc.com/2018/08/20/after-the-bitcoin-boom-hard-lessons-for-cryptocurrency-investors.html.  Many investors have taken losses in the range of 70% to 90%.  Those who borrowed to buy cryptocurrencies learned the hard way that investments may or may not work out, but debts have to be repaid either way.  There may be some winners, but clearly there are plenty of losers.

The problem with cryptocurrencies is that they basically have no intrinsic value.  They're only worth what someone else will pay for them.  If buyer interest falls, people holding cryptocurrencies end up holding the bag.  If you want to buy cryptocurrencies, that's your choice.  But understand it's a speculative choice and lots of speculations end badly. 

The reason why stocks, bonds, real estate and a few other things have stood the test of time as good investments is they generally have underlying value.  If you want to build wealth, invest in value.  If you want to speculate, hope to win but don't be surprised if you lose.  If you want a decent retirement, avoid wishful thinking and focus on the higher percentage plays.  See  http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.

How to Cash In on Cryptocurrencies

Nowadays, it seems that anything connected to a cryptocurrency or a blockchain is bounding upward in value.  Companies that claim to have something to do with either are seeing huge leaps in market valuation.  People who were worth next to nothing a year or two ago now claim to be millionaires or maybe even billionaires.  There are lots of Cassandras out there warning against this latest fad, including, among others, Warren Buffett (https://www.cnbc.com/2018/01/10/buffett-says-cyrptocurrencies-will-almost-certainly-end-badly.html).  Buying a crypocurrency can be difficult because the markets for these things can be murky.  You may feel like you're getting a pig in a poke.  So how do you profit?

Well, I'm changing my name to CryptoLeo.  I expect my income and net worth to instantly increase by zillions.  Maybe cryptocurrencies are a bubble and will soon become a crisis.  But, as they say, never let a crisis go to waste.  Instead, cash in.