If You Plant Bitcoin, Do Tulips Grow? The Cultural Case for Crypto

Cryptocurrency is by far the most controversial and volatile asset class of the last ten years. Vast wealth has been transferred among crypto investors and rampant speculation about its value defined its short history. The more one learns about crypto currencies, the less one seems to understand their future. Even less clear is which coins are part of that future. Many crypto investors really have no idea what they have bought into, except the potential promise of riches they’ve seen others realize, and now most have probably lost money in it.

Is cryptocurrency a currency, a store of value, a property right, a technology, a political statement, or a scam? I believe cryptocurrencies are a financial instrument here to stay, and its characteristics, like other currencies and financial instruments, will evolve with time and broader market acceptance. Financial instruments are not just economic, they are cultural. The key to the success and stability of a medium of exchange is broad acceptance and use by a community. In that respect, crypto currencies are just beginning their journey. Cryptocurrencies will succeed because they reflect the cultural values of the present generation and of generations to come, who will invest in and support the development of crypto and its underlying technology over more traditional financial instruments in the future.

Many draw analogies between cryptocurrencies to precious metals. Limited quantities make them a potential store of value and they also have a partial industrial application as a transaction technology. Like precious metals, their value is not particularly linked to their industrial application. The characteristic that there are limited quantities is technically true for most coins, but they certainly have not traded to date as a financial hedge or store of value. Investors do not understand their qualities and replicas and gimmick coins abound with the same frequency as the stock and mining frauds of the last 120 years. Too volatile and speculative in their present form, cryptocurrencies are best correlated in price with tech stocks. When tech stocks rise, generally so does crypto, and when they fall, so does crypto.

Why might this be the case? At this time, crypto currencies are a bet on a technological instrument that will find its utility in those willing to engage with it, hold it, trade it, and sell it and build programs that work with it. Their future is inextricably linked to the digitization of commerce and as a core financial technology. Its broad acceptance in the near term will be linked to its intermediation of transactions with payment processing networks and dominant online fintech intermediaries like Paypal and Stripe. As future generations become increasingly comfortable with digital transactions and payments, and recognize their independent decentralized value, certain crypto currencies will be held as a store of value and their volatility will decline because its fundamental characteristics will emerge. People will begin to associate the value of goods and equate it with a certain amount of bitcoin or ETH, or whatever coin survives the test of time.
Our crypto future is, however, dependent on its acceptance by a community that is comfortable with it as an asset class. Here, crypto currencies reflect a few important cultural trends: the rejection of political authority and the nation state, opposition to manipulation of the monetary system by government (which to many is really stealing from current US dollar holders), and the definition and protection of property rights through technology (i.e., blockchain). Ultimately, faith in crypto is accepting the full faith and credit of technological systems over faith in political intermediaries that issue currency to denominate our national wealth.

The tolerance by the US government of crypto currencies is an interesting case in political science. The current US political stance on crypto really is not defined, with different government agencies staying in their lanes on how they interact with crypto technologies. This is largely because crypto currencies are not significant enough to have any real impact at this time on a US-dollar based global monetary system and so a uniform view has not emerged. It is a current policy of learn, wait, and see. Do we ban it, control it, regulate it, monitor it? Do we encourage crypto as a means of reducing the horrendous transaction costs that saddle the current US payment systems network with 3% transaction fees or, worse, the higher opaque fees associated with international payments systems. Last week, the US treasury sought comment on the risks and benefits of digital assets because it does not know which way it should go from here.

To date, the US Treasury has enabled crypto trading and promoted its stability by recognizing it as an equity eligible for capital gains treatment, different from other currencies. On the other hand, it has not offered to include crypto intermediaries (like Coinbase) from government insurance programs and bankruptcy protections afforded other financial intermediaries like SIPC insured broker-dealers or FDIC insured crypto accounts. The SEC kindly and quite selectively required Coinbase to disclose the lack of regulation and government insurance support of their platform, injecting further volatility and uncertainty into an already volatile crypto market. And coin offerings are as opaque as one could imagine, the disclosure and differentiation between coin technologies well beyond the comprehension of the typical purchaser. The market does not know how to price it because it does not widely understand the technology itself. The market remains forward leaning on all of it, however, because it wants something different, with more integrity, than what we have now.

On the other hand, there has been a clear blemish on crypto currencies and mining when it comes to the environment. Huge draws of energy required to mine crypto have caused alarm. At the request of Congress, the Environmental Protection Agency and Department of Energy have begun to monitor the amount of energy used for bitcoin mining that rely on proof of work consensus. Tesla dropped the acceptance of Bitcoin over climate concerns. As an ever-evolving financial technology, environmental concerns about crypto have been met with a battery of solutions, including increased use of renewable energy solutions for mining and proof of stake programs like Ethereum 2.0.

But crypto currencies, if broadly culturally accepted as a store of value in the future, will threaten to weaken the instruments of state to control the value of its currency through its own printing and borrowing policies. Some governments and administratively controlled economies like China and Russia have caught onto this and banned crypto transactions, digital payments and mining and supported the development of their own digital currencies. Some smaller governments have seen this as an economic opportunity and widely accepted crypto currencies as legal tender (e.g., Central African Republic, El Salvador). They view it as an opportunity to become a haven state in a future, more prominent, global crypto economy. Being friendly to crypto means that all those that hold crypto in quantity are more likely to participate in the economy of these places, open bank accounts, buy property, and hold assets there.

Interestingly, after a decade of fiscal and monetary policy that has injected huge liquidity into our financial system, we have entered a period of volatility and inflation where the US has largely lost control of its instruments of economic policy. It still has economic brakes now with interest rate hikes, but not much gas to accelerate past a down cycle. This is an interesting precursor to a global crypto economy where assets can be held outside the control and manipulation by a nation state and cycles will return with less state monetary intervention, and perhaps more social disparity. A more defined US policy towards crypto will emerge but is unlikely to ban these instruments or, for that matter, their underlying technologies. The cat is out of the bag. The government may seek to regulate it, and probably do so poorly, but it is unlikely to ban it. The reason returns to the basic assertion of this note, which is that cryptocurrency has become accepted by a significant part of our financial community and by future generations as a cultural entitlement – a precious technology that sits outside the existing financial system. It is a financial asset free from government manipulation. It is institutionalizing as an asset class as we speak. Crypto also promises to use financial technology to lessen several problems that are a drag on our economy, freeing us from intermediary systems and payment networks that have unfairly feasted on commerce for the last 60 years.

Crypto currencies are the technological expression of the political and economic value systems of our current and future generations. Which coins will win, who knows, but acceptance of the technology reflects things missing from the current system that we value. Crypto is a cultural asset that is here to stay.