In December 2017, a small and unprofitable producer of ready-to-drink beverages embraced a then-popular strategy to attract investors. Long Island Iced Tea would henceforth be called Long Blockchain Corp. and shift its focus from consumer drinks to blockchain technologies, the computer application associated with newly hot cryptocurrencies.
Long Blockchain shares subsequently soared 500%, despite management acknowledging that “there can be no assurance that the Company will be successful in developing (blockchain) technology, or in profitably commercializing it, if developed.” The shares are now worthless.
Investor mania over digital currencies has only intensified since that earlier frenzy. With trillions of excess dollars looking for an edge, cryptocurrencies have joined meme stocks and Special Purpose Acquisition Companies (SPACs) as another toy in a speculative playpen specially built for a post-pandemic market. A recent crypto conference in Miami attracted 12,000 devotees to, as a New York Times account put it, “worship at the altar of cryptocurrencies.”
Exchanging this for that
Money has taken dozens of forms since mollusk shells replaced bartering in post-Ice Age China. Whether the instrument of exchange was cowries, coins, wampum, gold or paper (fiat), money had three purposes: as of a medium of exchange, a store of value, and a unit of account.
In one sense, digital or cryptocurrencies are not unusual. Until the first precursors of banks appeared in Renaissance Italy, money in its various iterations moved outside public or private institutions. The U.S. Federal Reserve was not created until shortly before World War I.
Writing in 1997, author Jack Weatherford (“The History of Money”) noted that as the new century dawned, “the world is entering the third stage of its monetary history — the era of electronic money and the virtual economy. The rise of electronic money will produce changes in society as radical and far-reaching” as earlier monetary revolutions.
A quarter-century later, the e-payment revolution that Weatherford predicted is so much a part of our daily lives that we scarcely notice our near-empty wallets. Over the last decade, cash as a percentage of total transactions in the U.S. fell from about half to barely one quarter, according to the global consulting firm McKinsey.
Monetary anarchists
If cryptocurrencies are a solution, it’s logical to ask: What exactly is the problem?
“There are people who are philosophically opposed to government-provided currencies,” said Connel Fullenkamp, an authority on financial market development at Duke University, in a recent phone interview.
“Some people don’t like government currency because it is traceable and has reporting requirements; they want to use the dark web to sell drugs and (conduct) other illicit activities. So for them, cryptocurrencies are actually a solution to a problem, if you want to call it that, but for most of us, they don’t really solve a problem that we have.”
Warren Buffett famously opined that he would never invest in anything he didn’t understand. It’s likely that many retail participants in the crypto craze — there are thousands of such currencies, in addition to Bitcoin — have little or no idea what they are buying, or could coherently explain the technology behind it.
Rather than fake it by throwing around buzzwords, I’ll let Fullenkamp take it from here:
“Blockchain is a combination of public-private encryption technology plus cryptographic hash functions,” Fullenkamp said. “These are two existing cryptology technologies that were mashed together to create distributive ledger technology, and that’s what creates the so-called tamper-resistant electronic record. Most cryptocurrencies have some variant of blockchain at the heart and most distributive ledger technology are variants of blockchain.”
Got that?
Potentially the greatest risk to financial stability from unregulated cryptocurrencies arises from digital loans devoid of reserve requirements. That concern could partially explain China’s recent crackdown on crypto mining, given worries about a credit bubble. Eventually, some countries will issue “gov-coins” to retain control over their money supply.
Until then, cryptocurrencies could have value facilitating international transactions and as a medium of exchange in emerging economies whose populations have limited access to traditional banks. But in the developed world, cryptocurrencies are impractical as a medium of exchange and many times more volatile as a store of value than the supposedly “debased” fiat currencies they propose to replace.
Manias can have a long shelf life, however, and until the bubble fully deflates, maybe more companies like the former Long Island Iced Tea could use it to sweeten their appeal.
So what’s next? Crypto-Cream Donuts, anyone?
Tom Saler is an author and freelance journalist in Madison. He can be reached at tomsaler.com
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