The word is about, there’s something evolving, Whatever may come, the world keeps revolving…
They say the next big thing is here, That the revolution’s near, But to me it seems quite clear, That’s it’s all just a little bit of history repeating.
The newspapers shout a new style is growing, But it don’t know if it’s coming or going,
There is fashion, there is fad. Some is good, some is bad. And the joke rather sad, That it’s all just a little bit of history repeating.
Source: Propellerheads ft. Shirley Bassey, History Repeating
Bitcoin (BTC-USD) was revolutionary in the fact that it brought about a new technology to the world – the blockchain. This technology has the potential to become a greater part of society, but with great potential comes rampant speculation on the part of investors. History shows us that this is not a new phenomenon, and novel technologies generate a lot of hype, luring in the masses. Many problems can arise due to this phenomenon, and it is wise to keep in mind that an investment in Bitcoin is also not the same thing as an investment in the underlying blockchain technology.
Tokens are not new by any stretch of the imagination, but speculation on tokens is somewhat of a new thing in modern history. However, because a token or coin is limited in number, or novel, does not make it valuable to society. There are examples of this in history which we can learn from, such as Civil War tokens.
In my opinion, cryptocurrency seems to be a trading vehicle and nothing more. If you wish to trade digital coins in this vast sector, please consider the possibility that in the long-term, many cryptocurrencies could fail as a store of value. I am neutral on Bitcoin in the short-term, and bearish for the long-term.
Bitcoin, as well as other ‘alt-coins,’ have declined precipitously in value since last November, to the point where many market participants are now wondering if it is the right time to buy into the sector. Trading in cryptocurrencies has gained in popularity over the years, and while many in the younger generation see this sector as the ‘future of finance,’ some notable investors in the older generation sees this, as Charlie Munger eloquently put it in a recent interview, “an open sewer full of malicious organisms.” While some in the older generations are starting to warm up to the idea of cryptocurrency, most of the investors are between the ages of 18 to 29. According to Forbes.com, only 8% of of people aged 50 to 64 are buying cryptocurrency, and even less over the age of 65, at about 3%.
While Bitcoin appears to have put in a short-term bottom, the future remains uncertain. My take on cryptocurrencies is somewhat similar to what Howard Marks recently said on the sector – “assets that don’t have cash flow don’t have intrinsic value.” In my opinion, it seems that the crypto sector is merely a trading vehicle, and not a long-term store of value for investors.
For money to be considered money, it must be both a medium of exchange and a store of value. Bitcoin is most certainly a medium of exchange, but the main problem is that no one is obligated to take it from you as payment for goods and services – the debt aspect of crypto is hazy. Throughout history, the idea and acceptance of what was considered to be money has varied. It used to be that the dollar was pegged to a fixed quantity of gold, and there have been long stretches in history where gold and silver were thought of as money. Like Bitcoin, it could also be argued that gold does not produce cash flow, so it has no intrinsic value either. Many notable investors will have differences of opinion on this matter. The main difference is that many people are still unsure whether Bitcoin should be considered a currency, an asset, or a commodity. In my opinion, it fits none of the criteria for any of these classifications.
In today’s modern era, one cannot have money without also having debt, as this is why paper dollars exist and are circulated in society. If a government, business, or other entity is not required to take Bitcoin or other cryptocurrencies as payment, then it has no value and problems may arise. Such an entity may choose to accept cryptocurrencies as payment, but there is no obligation to, and this is where things get tricky legally. History shows examples of this problem which far predate modern cryptocurrencies, but the underlying phenomenon remains apparent.
Paradoxes, Stores Of Value, and Sentiment
A paradox of cryptocurrency is that there will always be another coin that comes along, similar to Bitcoin but improved upon on some small way. To upgrade the existing coins and how they function, such as Bitcoin, one must have something of a committee that decides on changes, which makes the prospect inherently centralized. This has proven to be a nightmare in the past, with multi-year and drawn out discussions, and even Bitcoin Core contributors quitting development as a result. The whole point of cryptocurrency is that it is supposed to be decentralized, so the paradoxes continue to mount and one struggles to make sense of the complexities.
In my opinion, if there is always a coin that comes along which is better, or more enticing for a use-case, then cryptocurrency will never be a true store of value and the speculators will just abandon ship for the better, more novel coins. This makes trading and speculating on the sector inherently risky. Due to the nature of speculators, as well as government intervention like we have seen recently with China, there is much uncertainty in terms of price movements within the sector. History has shown on numerous occasions that as manias and bubbles happen, the underlying object of speculation always goes back to its true value, which I will discuss later in this article.
In my opinion, cryptocurrency is for market speculators to make a quick profit and move on, and not something long-term investors should invest in with the hope that their coin will one day become the ‘standard’ currency. In regards to the current state of the sector, market sentiment has been so terrible and pessimistic with crypto platforms filing for bankruptcy and such, that it is more likely that at this time, the sector will invite optimism from contrarians. To quote Howard Marks once again,
Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.”
Source: Memo – The Limits to Negativism
While I cannot recommend buying into cryptocurrency at current prices, I can illustrate that this speculative phenomenon is not new and that this time is not different from times observed throughout history.
The best I can say for Bitcoin is that I am neutral on it, and for all intents and purposes, I view it currently as a Hold. Having something listed with a ‘Hold’ rating implies that one must first buy it, but I will leave this up to readers to decide if speculating on digital tokens is something that they are interested in after reading a quick history lesson.
Tokens Past – A Lesson From History
One excellent example that comes to mind from history is the phenomenon of Civil War tokens. These tokens were a revolutionary new technology at the time during the 1860s, which were privately minted and distributed throughout the United States of America. It could be argued that these tokens were some of the world’s first widespread ‘crypto’ currencies, as they were used in place of government-issued money in America but were not backed by anything.
During the Civil War, “government-issued coinage began vanishing from circulation” because of hoarding. The economy began to suffer, as this made it “difficult for businesses to conduct transactions.”
The solution was for businesses and merchants to turn to private minters to fill the void left by the government coin shortage. It is estimated that from 1861 to 1864, there “25,000,000 Civil War tokens, (nearly all redeemable for one cent).” Today, the tokens are collectors items, which vary in value based on their type and scarcity (more on this topic later).
Lindenmueller tokens “are one of the best-known and commonly struck types” of Civil War tokens, which at the time “had more than one million one-cent tokens… placed into circulation in 1863.” These Lindenmueller tokens are important and somewhat famous in the world of private money collectors because of their historical context.
Here’s the story –
The Third Avenue Railroad Company of New York, which had willingly accepted a large quantity of the Lindenmueller tokens in lieu of actual currency, asked Lindenmueller to redeem them. He refused, and the railroad had no legal recourse. Incidents such as these eventually forced the government to intervene.
Source: An Overview of Civil War Tokens
This debacle led to the passing of the Coinage Act of 1864. This act “effectively ended the usage of Civil War tokens.” Prior to this, the U.S. mint began striking small one-cent nickel-copper coins. These replaced the old, somewhat clunky, large cent pieces. The composition of the new one-cent coins was now changed from a nickel-copper alloy to 95% copper, which was lighter and less thick. These new one-cent pieces were accepted by the general public far better than the Civil War tokens, and the tokens quickly became obsolete.
It wasn’t until later that year, on June 8th, 1864, that the legality of Civil War tokens was decided as Congress enacted legislation which deemed all minting of non-government issued coins punishable by law. While the tokens had become impractical already, they were now considered counterfeit money and a forgery. However, this law did not make it illegal to own Civil War tokens, just illegal to use them as money for everyday transactions. The tokens almost instantly became collectors’ items, and the rarity of the tokens determined their value.
Some of these Civil War tokens fetch high prices today, but nowhere near the cost of one single Bitcoin. Perhaps those who love to speculate on digital tokens could instead find some value in owning a piece of history.
Lesson Learned? – Why This Time Isn’t Different
Civil War tokens, and particularly the story of the Lindenmueller tokens, illustrates that a new development in technology and currency does not always turn out the way that you think it will. Actually, there are many parallels between the Civil War tokens and today’s modern cryptocurrencies.
At first, the tokens were generally accepted in society and used by many businesses, including the great and powerful railroads, but legal issues quickly mounted as people started to realize that they were under no obligation to make good on their promises using these tokens. As the government intervened, the new one-cent pieces became lighter, thinner, and more easily used in society like the Civil War tokens (similar to how Ethereum (ETH-USD) has gained market cap against Bitcoin). The newly minted one-cent pieces were a technological advancement which quickly made the former tokens obsolete, showing that there was no inherent value except for coin collectors who wished to own the tokens for old times’ sake.
The development of Civil War tokens eventually led to the Coinage Act of 1864, which introduced several important revelations in terms of currency in the United States of America. One was that the composition of the one-cent piece became almost entirely copper, which was a major improvement, and another was that “In God We Trust” was first minted on government currency. Both of these developments still exist today (“In God We Trust” was changed to E Pluribus Unum in 1956). Because the new one-cent pieces were 95% copper, they became true token-coins, due to them trading for their face value as opposed to their precious metal content.
More importantly, the Coinage Act of 1864 led to legislation being passed by Congress which outlawed privately-minted money and labeled such coins as counterfeit and forgery. Today, cryptocurrencies have been allowed to flourish in America because these digital coins do not use the terms ‘cent’ or ‘dollar’ and are more considered assets than currencies. The ‘currency’ in cryptocurrency is actually somewhat of a misnomer that stuck, which causes further confusion for the public. When anyone can create their own digital asset, crypto platform, or NFT project, there is bound to be rampant speculation on the part of investors. Eventually, the mania ends and prices of such things revert back to their true value.
A modern problem which somewhat resembles the Third Avenue Railroad Company’s predicament is the subsequent rise, and fall, of crypto-lending and brokerage platforms. Over the past few months, various platforms which all promised high-yield returns on crypto accounts have struggled with solvency, and it is being reported that many are now filing for bankruptcy. Voyager Digital (OTCMKTS:VYGVQ) and Celsius Networks (CEL-USD) are two that come to mind, with millions if not billions of dollars lost for investors. Much like the Third Avenue Railroad Company, there may be no legal recourse in these cases, and it is likely that it will be years before a conclusion is reached. Even if there is some precedent that becomes established as a result of this, the customers of these crypto platforms will most likely not recover their whole investment. After all, where does this money spontaneously come from now that it has gone to money heaven?
Risks To A Bearish Thesis
Under what scenarios would my outlook change? One development which could come along is government intervention in the United States of America. Regulation of cryptocurrencies as commodities or government adoption allowing taxpayers to be able to use crypto for paying debts would be a huge revelation, and would likely boost the price of Bitcoin and other ‘alt-coins’ further, giving them legitimacy. If the U.S. were to accept and recognize Bitcoin as the ‘standard’ cryptocurrency, then it could have potential as a long-term store of value. However, this is somewhat unlikely because it would undermine the U.S. Dollar (DXY) and further complicate trade with other countries.
While countries such as China have taken steps to ban cryptocurrencies, they have also been experimenting with creating their own digital currency. This e-CNY is not a typical cryptocurrency, such as Bitcoin, and it is not functional yet, but it is a part of China’s long-term economic plan through 2035. Developments such as these could be viewed as bullish long-term for cryptocurrencies. Nevertheless,
Unlike Bitcoin and other cryptocurrencies, e-CNY does not operate through a blockchain-based decentralized ledger; rather, it is a centralized operation, issued and supervised by the PBOC. At this technical level, the e-CNY is not fundamentally different from other online digital payment options in China such as AliPay and WeChat.”
It is possible that if the Chinese government can create a working digital currency, one that could act as a stablecoin based on the underlying blockchain technology, then the United States of America could also do this. If the U.S. were to set a precedent and accept Bitcoin or another cryptocurrency as part of our centralized system, along with a national stablecoin, then my views would have to change on this matter. However, this comes back to the paradox of making something which is supposed to be completely decentralized, decidedly centralized. In this future scenario, it is my opinion that we may go the same route that China has, but there is still much uncertainty when it comes to the widespread adoption of cryptocurrency in society.
In my opinion, Bitcoin and other cryptocurrencies seem to be merely trading vehicles, and not long-term stores of value. We have seen this phenomenon play out before with Civil War tokens. The end result was that the government had to step in with new improvements to the currency, which became broadly accepted by the general public and ultimately made the old tokens obsolete. Much like the Lindenmueller Tokens, cryptocurrencies lack the obligation element with which businesses, individuals, or governments require for paying back debts. In modern times, one cannot have money without also having debt – it is an inescapable part of the financial system. Perhaps a new precedent will be set in response to the many crypto lending/brokerage platforms which have gone bankrupt in recent months, or the status quo will stay the same and things will normalize in the crypto market, presenting a buying opportunity for contrarian investors. Bitcoin may actually continue to trade higher at this time due to contrarians piling in on the back of extreme negative sentiment, but in the long-term, my opinion is that it will ultimately fail as a store of value. Please keep in mind that speculating on digital coins is extremely risky, and there is a possibility of losing up to 100% of your total investment in the sector.