Bad Argument (pun intended for programmers)

There are legit reasons to be wary of cryptocurrencies, maybe that will be another post. However, there is a common argument I’ve heard a lot recently that doesn’t match up with reality; “I can’t spend it in my local-fill-in the-blank store.  If you want to stay away from Bitcoin and others, fine.  But you should understand why you are staying away.  That is what I will cover on this soapbox, er… in this post.

First, this message: “Money” is not the only Basis for an Economic System

Let’s Commune

Communes aren’t just for the distant middle-ages and ’60s hippies.  Communes are very much alive and featured in Israel where the name for a commune is Kibbutz. As recently as 2005 there were 120,000 people (2.6% of the Jewish population) living on 268 kibbutzim – the plural of kibbutz.  There are many variations on how to construct the economy of a commune.  Suffice it to say that in addition to using money, or sometimes completely replacing money, the currency for investment is labor, and the store of value is property (anything that is an asset).

Bob the Barterer

Sure, Bob the Builder wants to get paid in cold hard cash, but Bob the Barterer is OK with providing his services in exchange for something else of value that you have.  People, and entire countries, have bartered (aka traded) since prehistoric times and continue to do so today. Motivations to barter range from philosophical, to matters of life and death in a hyper-inflating currency.

The point of the above paragraphs was to soften you up for my rebuttals to the “I can’t spend it” argument.  Money is not one thing, alternatives to money are not evil, money really is a construct, and money is not the only construct that exists for the exchange of goods and service and storing value.

Rebuttal #1: Love me Tender Love me Sweet (Sorry Elvis)

There could not be a worse reason to avoid cryptocurrency than the fact that it is not a legal tender – yet. The argument goes something like this, “I can’t go to my grocery store and use cryptocurrency as legal tender to purchase anything.”  That is true.  But money (what you think of as legal tender) has at least two functions. It serves as a medium for transactions and as a store of value.  There are many financial instruments and mediums of exchange that only fulfill one function or the other.

Medium for Transactions

Is the Euro money? Is the British Pound Sterling currency? Hopefully you said, “yes.”  But in most countries outside of Europe, and certainly in the United States, you cannot buy groceries with Euros.  Does that mean Euros are not real, and should not be part of your investment portfolio?  Of course not.  You may have other reasons for not wanting to have foreign currencies s as part of your nest egg — but the inability to spend it in your grocery store does not factor into it.

Are “food stamp” (SNAP: Supplemental Nutrition Assistance Program) vouchers a form of money?  Well, you can spend them in a grocery store.  And what about coupons and gift cards?  You can by almost anything with them, but they are not money and in most cases neither are redeemable for cash, so they are not a store of value either.

Just because you can’t use something printed on a piece of paper (Euros) at your grocery store doesn’t disqualify it as money.  And just because you can use something printed on a piece of paper (like a coupon or voucher) at your grocery store does not mean it is money.

Rebuttal #2:  Is it Safe?  Is it Safe? (this time a movie reference, “Marathon Man”)

As a Store of Value

Says the concerned investor, “Cryptocurrency can lose value, or be wiped out!”  To which I reply, “That’s right, Virginia, there is no Santa Claus.”  Below is a list of investments, stores of values, that can drop dramatically in value or be wiped out.   How many are you excluding from your investment portfolio?

• Bonds, incl. government bonds!! (default risk, inflation risk, interest rate risk)
• Cash  (inflation risk, currency manipulation)
• Stocks
• Foreign Currency
• Commodities / Futures
• Derivatives in general
• An insurance policy based on market-tied performance
• Direct ownership of gold, silver, diamonds (coins, bullion, or jewelry)
• Real estate
• Collectibles

So… everything may lose value – even cash and bonds. Your job is to align what you believe to be true about risk versus return, and diversify your portfolio accordingly.

Not an Endorsement of Cryptocurrencies

Only you can decide what to hold in your portfolio, and what percentage of your portfolio it should represent. Your goals, risk aversion, timeline, and ability to recover from financial setback is on you and you alone.  I am not telling everyone, or even anyone, to invest in cryptocurrencies.  But if what is holding you back are the points reviewed in this post, then maybe you should re-evaluate.