Crypto – Welcome to the Grand Illusion

Cryptocurrencies. What are they? Should you own them? Are they going to replace the dollar and other currencies? How should I buy them? What is Paragon’s view?

Let me be direct:

Stay away. It is a classic bubble akin to an outright Ponzi scheme.

If this is not what you wanted to hear, I must say I am not sorry. Call me what you will — old-fashioned, out-of-touch, etc. I have heard it all, but I am telling you straight that the whole “crypto” craze is built on a false premise. Now I know your neighbor (or more likely nephew) has become an overnight millionaire by “investing” in crypto and you are feeling the intense desire and pressure to follow suit. After all, if they can do it, then why not you?!

Consider the following from Styx classic song, “The Grand Illusion” (italics are mine):

“Welcome to the Grand illusion
Come on in and see what’s happening
Pay the price, get your tickets for the show
The stage is set, the band starts playing
Suddenly your heart is pounding
Wishing secretly you were a star

But don’t be fooled by the radio
The TV or the magazines
They show you photographs of how your life should be
But they’re just someone else’s fantasy

So if you think your life is complete confusion
Because you never win the game
Just remember that it’s a grand illusion

And deep inside we’re all the same
We’re all the same

So if you think your life is complete confusion
Because your neighbors got it made
Just remember that it’s a grand illusion

Unless you have been living under a rock, it is nigh impossible to avoid all the attention and hype surrounding “crypto.” I recently made the following comment on social media: 

“Call it anecdotal, but when I’m at social gatherings, kids’ sporting events, etc., and I overhear so many conversations about crypto, you know it’s time for a little caveat emptor. None of them can ever explain what it really is that they are throwing their money at. The longer the explanation the less so. Greater fool theory in action. It’s so ripe for fraud because people are desperate to chase the action.”

It is the same type of conversations I used to hear during the tech boom that ended in 2000 or during the housing bubble that ended in the “Great Financial Crisis” in 2008. In both eras, the bubbles hit a crescendo as nearly everyone became involved or interested in one way or another. I don’t think the “crypto” craze is as generally pervasive amongst the entire general population, but among certain segments it certainly is. Most notably the younger crowd — but I have seen quite a few of the older set also become enamored.   

There are now over 10,000 other cryptocurrencies, and the number increases every day. Bitcoin being the most famous, along with Ethereum, Dogecoin and others. You could even start your own crypto. My kids have already overdrawn their accounts at the Bank of Dad, so maybe I should start to issue them “DadBucks” instead. I wonder if the college I recently dropped my daughter off at will accept them? I’ll tell my boys to try and use them when they want more virtual credits for their video games.

Now, if you still need to be involved even after all my sarcastic and mean-spirited derision of crypto, for heaven’s sake, please only use a small amount you can afford to lose. It is gambling — pure and simple. You could get lucky, but probably not. If you want to gamble, then go to Vegas and at least have a fun time. The Crypto Craze has been fueled by low interest rates, excess money, and good old-fashioned greed. Better pray the Fed keeps the liquidity bubble going. 

Once everything gets quoted in Bitcoin instead of dollars, then I will eat my words. But even Tesla, which bought $1.5 billion Bitcoin, stopped accepting payments in Bitcoin! I am sure it was all because of Elon Musk’s environmental concerns due to the massive electricity required to “mine” a coin, and nothing to do with the nightmare it was causing in accounting due to the volatility.

Blockchain technology and cryptocurrency are not the same thing.

Blockchain is a real technology with the promise to improve many of the processes and transactions of our society, but nothing definitive has come of it yet. Cryptocurrencies are touted as a medium of exchange or an asset. But let us be straight forward: The reason everyone is interested in them is because they have gone up. Anything can go up if people throw their money at it, but that does not mean it has any intrinsic value or utility. People are just chasing a fad. It is a classic bubble fueled by easy money. 

As readers know, I am no fan of the central bank and government monetary/fiscal irresponsibility. I certainly sympathize with the idea of an alternate medium of exchange or unit of account that could not be manipulated by the government. Gold has even had a checkered history of trying to provide this function. Unfortunately, cryptocurrencies will not be able to perform this function. You also cannot have hundreds or thousands of cryptos for use in this manner — it does not make any practical sense. Their own success is the basis for their ultimate failure. 

Governments, as slow as ever, are catching up to the cryptocurrency craze and placing on new controls every day.

Much of this action is valid to reduce fraud and criminal activity but also to control the flow of capital. Governments don’t typically like competition and alternatives for their currencies. Don’t think it can happen in the U.S.? Look up Executive Order 6102, signed on April 5, 1933, by FDR that forbade ownership of gold in excess of $100 and required all persons to deliver excess quantities in exchange for $20.67/ounce. 

As to the timing of when all this Crypto craziness will end, I simply do not know. Calling the top of bubbles is next to impossible. My best guesses are either some sort of government-induced restriction or monetary tightening by the Fed. Resist the “get rich quick” mentality that incentivizes people to chase the crowd. It is the classic Siren’s song that is once again calling to the unwary. Better to steer clear.