Tulips in Full Bloom

Tulips in Full Bloom

by Pat Rooney

Today’s crypto currency runup in prices reminds me of the famous Tulip Mania of 1636 in Europe.  There, inexplicably, tulip bulb prices started rising and people began speculating on the ever-rising prices of bulbs.  The end result was an unprecedented crash a year later.  It seems silly now but it was quite serious at the time.

Today it’s not tulips but digital currency, such as Bitcoin, Ethereum, litecoin and others.  My personal favorite is Dogecoin.  Started as a joke last year, the value of Dogecoin, per The Wall Street Journal, was up 8,000% or 50 billion in total as of April 20, 2021, which, as the Journal notes, is a higher valuation than Ford Motor Company.

Cryptocurrencies were probably inevitable, given the advances in technology today, and seem to be here to stay.  Figuring out what they are good for, other than speculation, is the trick.  I mean the digitalization of the dollar has already been happening for quite a while already.  U.S. dollars now move as blips on screens all across the world in seconds.

Today’s technological advances allow for much innovation and Bitcoin and its ilk are manifestations of that.  Created shortly after the last financial crisis in 2009, Bitcoin has been around for a decade.  “Coins” are mined using super computers solving complex mathematical equations to create new ones.  Like gold, Bitcoin today is more of a store of value than a real currency.  And, like gold, it has a limited supply creating a scarcity that helps it hold value.

Despite all the money rushing into cryptos, (several new billionaires based on a recent Forbes article), they remain to me a bundle of contradictions and complexities that make me wonder how this all ends up.  They are supposed to be simple blockchain transactions, yet one recent expert estimated that 20% of today’s Bitcoin supply is in accounts now “locked out” from their owners, perhaps forever.  This is because if you forget your password, you don’t get five tries.

Plus, cryptos are now touted as an “alternative to money” and are a way to avoid dealing with intermediaries such as banks.  A “lower cost” alternative to U.S currency.  As one politician put it recently “a way to make financial services available to everyone.”  Given the complexities of cryptos, I am not seeing the advantage.  Moreover, Coinbase, a crypto clearing house, just went public at a total valuation of 100 billion and serves as a testament to the complexity and cost.

And finally, supporters allege that blockchain technology allows for every transaction to be recorded.  That in itself is scary enough, but the reality is that today’s highest and best use of crypto is for payment of illicit ransomware and illegal drug transactions that seek anonymity and deception.

Maybe the contradictions will be worked out as the various cryptos seek mainstream status.  Maybe the various governments will sanction some of these or issue their own “crypto coins” and provide sorely needed stability and transparency through new regulations.  How today’s Bitcoins and Dogecoins fare in this process is anyone’s guess.  Like tulips in 1636, time will tell.