So Bill Gates says of Bitcoin and other cryptocurrencies — “As an asset class, you’re not producing anything and so you shouldn’t expect it to go up.” Last week the well known anti-cryptocurrency billionaires Buffett and Munger were also lambasting cryptocurrencies as a investment opportunity. For many of us in the crypto space this comes as no surprise. These guys are well known for their critique of crypto but is he right? Gates’ statement seems to 1) suggest that only assets that produce something should be expected to go up in value and 2) that cryptocurrencies produce nothing. Let’s look at these two points in turn.
First, if investors only invested in assets that produce something then investment markets like the art market would collapse. Gates himself is a huge collector of art and although it seems that he has amassed his vast art collection for the love of it, he is unlikely to reject any rise in value due to the art itself not having produced anything. We would also need to say goodbye to the wide and varied Collectibles Market currently worth around $400trillion. If a collectible meets two conditions: rarity and appeal then it is very likely to rise in price over time. While not all cryptocurrencies will meet these criteria there are plenty that do, most notably of course Bitcoin. Its limited supply of only 21 million coins in the world of currency is miniscule. We can also point to it definitely having appeal which is why having launched in January 2009 it is still around and growing in value in 2018.
The second and perhaps most contestable point is whether cryptocurrencies actually produce something? On the face of it you could argue that mainstream investments such as precious metals and stock produce nothing so should not go up in price. However, in the real world precious metals and stocks have an intrinsic value. The value of stock is produced by the underlying physical company that the share represents — a company that is generating earnings to justify the prices paid for its stock. In the same way as this traditional investment has an intrinsic value so too do cryptocurrencies.
Through the ICO process that launches most cryptocurrencies these days coins are bought to market support by a considerable amount of ground work that has already gone into creating a tangible service or product. For example, Zebi the company specialising in using the blockchain to offer data protection solutions, at its ICO launch, already had contracts with Indian States and a working blockchain platform which underpinned the cryptocurrency. The funding raised through ICO’s such as Zebi’s facilitates the development and implementation of technological improvements in many sectors of the economy leading to sector efficiencies and job creation.
As we all know the rise of the internet has generated enormous virtual economies some of which transact more value each year than the GDP of some countries. The economist Milton Friedman said, ‘I think that the internet is going to be one of the major forces …..The one thing that’s missing, but that will soon be developed, is a reliable e-cash.’ He was right. Virtual economies such as Amazon, Facebook, Google already exist. The new virtual economies that are being created by cryptocurrencies will require their coins/tokens to be used to access their goods and services. The virtual crypto economies of the future are likely to rival or replace the existing ones and as they establish themselves and grow so too will the intrinsic value and price of their coin/token. So what will be your choice — will you invest in art of crypto? JFW — Zeno Block.