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Cryptocurrencies are a hard topic to ignore these days. Whether you’re at Christmas dinner, scrolling on Twitter, or watching the news, not much time will pass before you’re sucked into a discussion about the latest developments for Bitcoin, Ethereum, Dogecoin, or any of the thousands of other cryptocurrencies out there.
People demand to know more about cryptocurrencies. Since cryptocurrencies in general are relatively new, there is a shortage of true experts on the topic to satiate the public’s desire to learn. It’s common for “experts” in the financial world to have to field questions about cryptocurrencies whenever they participate in an interview for news media, a talk show, or a podcast. A handful of these finance experts have spent some time trying to understand cryptocurrencies and what they offer. The vast majority of them know nothing about crypto, but try to seem like they have all the answers anyways. After all, who wants to look uninformed on national television?
Jeff Currie, the Head of Commodities Research at the investment bank Goldman Sachs, recently found himself in the latter camp. During an interview on CNBC this week, Currie doubted the correlation of cryptocurrencies at large with store of value assets like gold, instead comparing them to “risk-on” assets like copper and oil. While Currie can be forgiven for not being a cryptocurrency expert, his willingness to spout off in an interview on a topic that he doesn’t understand serves as an important lesson to us all: You can look like a fool by pretending to have all the answers when you don’t.
Inflation: Let The Good Times Roll?
Currie got several things wrong during his interview, but perhaps the most egregious were his comments on inflation:
There’s good inflation and there’s bad inflation. Good inflation is when demand pulls [prices up] ... bad inflation [is] where supply is being curtailed.
Oxford Learner’s Dictionary defines inflation as the following:
A general rise in the prices of services and goods in a particular country, resulting in a fall in the value of money.
Do you notice what’s missing from Oxford’s definition? References to inflation as “good” and “bad”. Such arbitrary usage of those words in the context of inflation is opinion at best and subterfuge at worst. When the purchasing power of your money decreases, you’re not concerned in the least with supply and demand. Your primary concern is the fact that your paycheck doesn’t last as long as it used to.
Scarce assets like gold are valuable in times of inflation (i.e., always) because they can’t be produced near as quickly as a society’s money. Take the year 2020 as an example. Governments around the world printed trillions of dollars in misguided attempts to stave off the economic effects of the Coronavirus. Gold, on the other hand, saw an increase of about 106 million ounces to the pre-existing supply. At the current gold price of about $1,900 U.S. dollars per ounce, the new gold mined in 2020 had a value of just over $201 billion. A drop in the bucket compared to the world’s money printing.
Store of value cryptocurrencies, of which Bitcoin is the prime example, share Gold’s ability to hedge against inflation caused by rampant money printing. Only 21 million Bitcoin will ever be “mined”, or, in other words, released into circulation. The supply of government money with which to buy Bitcoin will increase forever. But the number of Bitcoin available for purchase will remain unchanged. Bitcoin will maintain and increase its value, especially over long time frames.
Crypto and the Business Cycle
Listen to this next quote from Currie:
[Bitcoin’s] demand is through payment systems. It’s going to be correlated to the business cycle.
At least he’s not completely wrong this time. Bitcoin’s pseudonymous creator Satoshi Nakamoto originally envisioned it as a “peer-to-peer electronic cash system” and to a certain degree Bitcoin is used in payments today. Payment processors like Paypal and Bitpay allow you to pay with cryptocurrencies, including Bitcoin, at millions of merchants around the world.
However, Bitcoin’s primary role, and by proxy its primary demand, is not currently for use in payments. Bitcoin and other cryptocurrencies may one day be the primary payment method for purchases of groceries to cars and everything in between. As we learned above though, cryptocurrencies like Bitcoin are primarily purchased to store value and hedge against inflation. Not all cryptocurrencies are scarce like Bitcoin though, and those that aren’t are primarily demanded for investing purposes.
For the foreseeable future, demand for most cryptocurrencies will be tied directly to their appeal as investable and/or store of value assets, not for their payment capabilities.
Copper is not Crypto
You're forgiven if you don’t spend too much time thinking about copper, especially in comparison with cryptocurrency. Copper is a metal that is primarily used for wiring in buildings, appliances, cars, gadgets, and more. Around 20 million metric tons of copper were mined in the year 2019. When demand for copper goes up, miners ramp up production to overcome supply constraints. When demand for copper goes down, miners shrink their mining operations to ensure that excess supply doesn’t tank the price of copper. Copper’s supply is rather elastic.
Cryptocurrencies on the other hand, can be used for a variety of purposes. Perhaps you recently heard about Decentralized Finance (aka “DeFi”) which allows users to access traditional financial services like mortgages, loans, and insurance without having to go through traditional financial companies like banks. Or maybe you read about Non-Fungible Tokens (aka "NFTs"), which allow people to cash in on art and other collectibles in a secure and digitized way? Comparing a single, unchanging metal like copper to a collection of cryptocurrencies that are each unique and useful in their own way is a stretch to say the least.
Cryptocurrencies are becoming more ubiquitous every day. It is the responsibility of all of us, even so-called “financial experts” to learn more about what makes cryptocurrency unique and to decide how, if at all, we will use them in our lives.
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