The Rise of Cryptoassets & Derivatives

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Bitcoin Cryptomoney Cryptocurrency Btc Cryptography

“I bought it when it was really cheap, around $300, and after it went up a ton, I decided to buy some more.. But after the crash, I think I’ll just sell it to break even.”

“I told you to get out of it sooner.”

Scrawling over a few open notebooks in the bubble tea cafe near my apartment, I can’t but overhear two students talk about the latest new “fad”, or “investment”. Depending on where you stand with new technologies that have enabled the rise of electronic currency, like Bitcoin to take off (and dive off, periodically), they were talking about the newest way to make a “quick buck.” But with all the focus on the currency itself, especially given the incredible potential profits, a lot of the focus has been shifted away from where many of them come from: ICOs, or, Initial Coin Offerings.

 

I think the choice of wording here is pretty misleading, despite the fact that it is an “initial coin offering”. The reason I don’t hesitate to make this claim is that it draws from the name of IPOs, or, “Initial Public Offerings”, which refers to when companies offer shares to the general public to raise money for reinvestment. The difference, of course, is that companies that offer shares back people’s investment using real capital- the building it may operate in, the computers it uses, the intellectual property it may own, etc.- and of course, generates real profits that it can choose to either reinvest or pay dividends to its investors. Given that many coins, like Ether, or Bitcoin, operate completely on the unfounded valuations made by people, and is effectively backed by nothing, (even if it claims  to be backed by, for instance, the “banana market in Laos”), I don’t think it’s a fair comparison. In a sense, it’s not that far from spending money on a video game to buy real things.

Beyond issues with a cryptocurrency (if it can really be considered a currency) not backed by anything, cryptocurrencies are not regulated, or institutionalized by any government, removing any knowledge of where, or how money flows- which is very useful for illegal activity, but not exactly the type of activity most people want to promote. And if it was regulated, in its current form I’m not convinced many people would buy into it.

Of course, one can argue that  if it was even used as a central currency for any country, it would be in a sense backed by that country’s economy- but because it does not allow for any government intervention through standard macroeconomic policies (i.e. changing the money supply to affect interest rates & inflation)- central pillars of our economy that we need in order to maintain a stable economy, it would not be tied the public institutions. One could go as far to argue Bitcoin seeks to replace them.  And even if a country could nationalize Bitcoin, for instance, wouldn’t have much sway, with only 21 million Bitcoins ever able to be produced.

As a political statement, it’s at least that much- an anti-establishment, anti-intellectual statement that central banks are not need as overseers, that regulation is not needed or wanted, and that government should have little oversight to the most powerful tool we have as economists and policy makers- our money. It’s no wonder, then, that so many countries have begun to ban it, like Algeria, Bolivia, Ecuador, Kyrgyzstan, Bangladesh, Nepal, Nigeria, China (for ICOs), while many more countries have begun research into the potential dangers of a cryptocurrency. [1]

Regardless of the amazing technology that has enabled us to create cryptocurrencies, I certainly think that ICOs, as well as the “currencies” themselves should be researched before we consider making any real effort in legitimizing them by buying them. While the profits are incredible for us as individuals, any significant population trying to conduct transactions on a “cryptocurrency” that since November,[2] has nearly doubled in volatility, which in the real world, discourage investment and spending, key aspects of a health economy.  

[1] https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country_or_territory

[2] https://www.bitmex.com/app/index/.BVOL

Image: http://maxpixel.freegreatpicture.com/static/photo/1x/Bitcoin-Cryptomoney-Cryptocurrency-Btc-Cryptography-1813503.jpg

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