What about all those digital currencies?

A reader asks: what about all those digal currencies?

Archer replies: There are many imponderables in this world: is there a God? Are we all just living in a simulation? Why are there hexagonal screws?

Add to that the fascination with digital currencies. Bitcoin is currently trading around $29,000. It has been as high as $65,000 and as low as a few hundred dollars (or zero dollars, really). The question for investors is: why? The problem seems to be that the price isn’t tethered to any particular reality, and use cases, at least the legitimate ones, cycle in and out of favor. On the plus side, the supply of Bitcoins is algorithmically restricted so that mining new coins becomes harder, and more expensive, as it starts to cap out. But so what? Having more, or less, of something with indeterminate value doesn’t mean much.

Just ask the “family” of one-time OneCoin owners. In 2019 the BBC released a highly entertaining podcast entitled “The Missing Cryptoqueen.” It was, said the Beeb, a “story of greed, deceit, and herd madness.” The role of the queen was played by “Dr.” Ruja Ignatova, a German citizen born in Bulgaria. Like her honorific, the origins of OneCoin are a bit obscure but it’s sufficient to know that she somehow managed to attract billions of dollars to this fictive digital currency.

And she was very generous with it. At a meeting of OneCoin investors, she suddenly announced that in that moment she had created $1 billion in new OneCoins and that she was, effective immediately, doubling the OneCoin holdings of everyone at the event. A wild cheer went up from the crowd. They now had twice as much nothing as they had before. Can’t beat that. Something like $4 billion in real money ultimately disappeared, and Dr. Ruja did, too.

There is a school of thought that the whole digital currency thing is just a form of mass hysteria. Remember how stocks popped when they added the word “blockchain” was added to a company name? A 2017 Bloomberg story reported that shares in a British firm jumped 394% in one day after changing its name to “On-Line Blockchain PLC” from “On-Line PLC.” So you can’t say it doesn’t happen. People sometimes do dumb stuff.

And then there’s Mitch Maddox, the then 26-year-old Texan who in 2000 changed his name to “DotComGuy” and pledged not to leave his apartment for a year, living only off what he could have delivered from the Internet. It was early days for the digital economy and this seemed much more interesting then than it does now. Maddox attracted sponsors that included UPS and Travelocity, among others, and achieved a certain level of fame. The stunt did not age well, however, and not too long after he re-emerged Wired Magazine would call it “the most useless achievement of our time.” I guess that’s something.

Warren Buffett has said he wouldn’t “buy all the bitcoin in the world for $25. It doesn’t produce anything.” But that doesn’t seem quite right. In a world where Bitcoin is accepted as a medium of exchange, it could be used to do something productive, though too often it’s not.

Could it live as a funding mechanism for certain enterprises? Maybe. However, that utility creates a problem: if funds raised by issuing coins are used to build something, and the investors who buy the coins buy them with some expectation of a return, then they are likely to be classified by the SEC (and its less-than-fond-of-digital-currencies chair, Gary Gensler) as “securities.” And if they’re securities they have to be registered like any other offering, meaning the sponsor has to jump through all the usual regulatory hoops.

That does take some of the fun out of it; you’re not quite the same globetrotting swashbuckler when you have to ask your parents to borrow the keys to the pirate ship. But in return it does confer a bit of legitimacy.

We may never know whether Satoshi Nakamoto created Bitcoin or not. We may never know why William Allen invented a six-sided screw. There are some mysteries that are destined not to be solved. For good or ill, the final disposition of digital currencies is not likely to be one of them. There will be, at some time in the not too distant future, a “lady or the tiger” moment.* And then we’ll see.

Woof.

* For non-baby boomers, this is a reference to a short story published by Frank Stockton in 1882.