Why Cryptocurrencies Cannot Replace Dollar Or Gold, Ever

Look! Up on the ticker! It’s a bond! It’s a stock! It’s bitcoin! Last weekend, most investors must have recalled this dialogue from Superman.

However, the recklessness of Elon Musk was closer to the Hulk than to Superman, and that sent the bitcoin falling before it recovered, and then falling again, before recovering a bit again, and then continuing its fall.

When Musk was all Bruce Banner on bitcoin, it was hovering above $56,000, but after his Hulk-like rampage on Twitter, it is now trading below $44,000.

A fall of more than 20 per cent due to a couple of tweets. Speculated as the currency of the future, and all it took was one press release to wipe out $365 billion from the cryptocurrency market.

For the crypto bulls, this is the ride of the future. Perhaps, they are the same bulls who derive their inspiration from the brokers who made big gains during the few tech stocks that survived the Wall Street tsunami in the early 2000s, or the ones who, with great confidence, combined the subprime mortgages to create credit default swaps that resulted in a recession.

However, none of these bulls claimed that tech stocks or subprime mortgages can replace the US dollar, or any global currency, or even gold, for that matter. For the bulls, it was a gamble, fuelled by the excessive leverage, and they gambled. A very few won, and most lost. The story of cryptocurrency is playing out differently.

Therefore, in February, when Musk announced that Tesla was going to accept bitcoins for its electronic car sales, the bulls felt smart, because the world’s second-richest man, from an institutional perspective, had given a green light to cryptocurrency. The bulls celebrated as bitcoin soared by more than 15 per cent.

Last weekend, however, when Musk went back on his declaration, and worse, even speculated that Tesla may have done away with some of its bitcoin holdings, the bears felt smart, for the world’s second-richest man had excused himself out of the bitcoin market citing environmental concerns.

As the value of bitcoin tumbled by more than 15 per cent after Musk’s first tweet, the bears found validation for what they had always been saying —this will never work.

As one of the significant holders of bitcoin, Musk’s buying and selling would have and will always result in panic buying and selling. However, it is not about Musk alone, for he happens to be only one of the few big private players in this $2.2 trillion market.

Musk’s actions warrant the bigger question. Can a digital currency, vulnerable to a few tweets by one major investor, player, stakeholder, observer, or government ever be the ideal hedge against inflation, or be the ideal alternative to gold, or ever be considered as routine currency for people across the globe?

Tech stocks of the early 2000s and the credit default swaps before September 2008 were being marketed as great investment options, and even though an overpromise, they were purely market investments.

Cryptocurrency, especially bitcoin, has been marketed as the currency of the future, capable of replacing the gold and the dollar, and hence, the volatility of it is worrying for the bears while the bulls work overtime to normalise it.

Simply put, using bitcoin’s example, one can understand why cryptocurrencies will never replace the dollar or gold, for routine transactions warrant a stable currency value.

Sure, currencies are devalued, yes, but only in exceptional circumstances. Sure, gold loses value as well, but a 10 per cent decline in 15 minutes is unthinkable in the metal business.

Bitcoin, and consequently, other cryptocurrencies do not make for a reliable currency, or even a reliable gamble if one is looking to play safe, stable, and sane.

The other issue with cryptocurrencies is that the fall or rise in value comes without any accountability.

The big private bulls investing, as Tesla did, can influence the market to buy it and consequently push up the price, but when they exit, and consequently pull down the price, they are not accountable to anyone, and rightfully so, for that is how the market works.

However, this lack of accountability can be a breeding ground for speculative trading and whatnot. Put simply, the elephants can script a quarrel while the ants get dragged, beaten and trampled.

For the ones with enough money to gamble, the cryptocurrency market may make sense.

Even at $2.2 trillion, the market can be an alternative or minor investment option against the S&P 500 market of $37.7 trillion, gold market of $12 trillion, and all bonds market of over $128 trillion.

For the ones who can spare the bucks, it is a casino reimagined on Wall Street, and that is what essentially cryptocurrency is — a gamble.

Thus, it does not warrant a ban, or even a regulation, given it will go against the very foundational ethos of the programme.

However, at the end of the day, it is only a gamble and light-years behind replacing the dollar or gold.

However, for the sake of argument, even if one assumes that some displacement is indeed possible, it is imperative to factor in the growth of digital currencies backed by the central banks of the respective countries.

If it is all about easing payments, the digital currencies stand a better chance, and if it is all about replacing, as the bulls call an outdated monetary system, the volatility eliminates most prospects.

In other news, Michael Burry who predicted the housing crisis before 2008 has gone short on Tesla and Musk. While having to choose between Musk and Burry can be a difficult decision, choosing not to bet on cryptocurrencies as the displacement to the dollar is an easy one.

Musk’s reckless speculation about bitcoin had a reminder for all the cryptocurrency bulls and bears.

This will never work.