Cryptocurrencies have become a hot topic of discussion around the world as more people see them as a better option than the dollar and other national currencies. The gains currencies like Bitcoin have enjoyed are sending people racing to apps like Coinbase to buy their share and participate in the rush. Fans of cryptocurrencies talk about its limited supply, its encrypted nature and quickly increasing value as its benefits as they abandon fiat currencies. But, how are cryptocurrencies not just another form of fiat money? They are not backed by anything with intrinsic value. So, this negative attribute they share with the dollar, euro, yuan, etc.
I am no fan of the dollar or any other fiat currency. I have long believed that the US Dollar should be backed by something with intrinsic value, for example a metal like gold. Fiat money’s value is predicated on the ability of a nation to pay its bills, the supply of the currency and the ease of borrowing the currency. The Federal Reserve controls both the supply and ease of borrowing our money and thus controls inflation. Inflation is a transfer of wealth from poor and middle class people to rich and wealthy people. Why should bankers operate a scheme that transfers wealth in this way? The dollar should be backed by a valuable metal that holds its value and this scheme should be ended in every nation that has fiat money.
An important difference between traditional fiat money and many of the popular cryptocurrencies is that those cryptos have limited supply. Bitcoin, for example, is limited in its total supply. The US prints billions of dollars every year and has over a trillion dollars in circulation. Printing and destroying dollars impacts its value. With a cryptocurrency like Bitcoin this is not possible. And, as no fan of the practices around fiat money I have to admit that the limited supply of certain cryptos is appealing. I feel safer invested in a cryptocurrency with limited supply than I would in a currency with unlimited supply.
I have said that cryptocurrencies have limited long term viability. But, I want to amend that statement to include that those with unlimited supply are the most vulnerable. Many cryptocurrencies have failed including SpaceBIT, Dogecoin, PayCoin and probably most famously DAO. As we have seen in these failures, security of cryptocurrencies is also a major risk in investing. In one of these failures, the designers simply ran off with the money. In others there were major hacks that led to currency thefts. Bitcoin, probably the most trusted cryptocurrency, has experienced several hacks. As you may have read recently, cryptocurrency marketplace NiceHash experienced a hack where more than $70M of Bitcoin was stolen. If cryptocurrency enthusiasts are serious about keeping their currency into perpetuity they must address supply and security concerns.
In the end, the question remains: are cryptocurrencies fiat money? The answer is yes and no. Yes, they are not backed by anything with value making them immediately less appealing than a currency backed by metal. But, in some cases, no also. When you are dealing with a cryptocurrency with limited supply that is a major advantage. A central authority is not controlling the supply of the currency so its value will not be effected in that way. So, while I did not answer the question definitively I hope the answer elucidated the issue. I remain a crypto skeptic even though I do own some. It is obviously interesting to many people that the currencies have been exploding in the past year. When people rushed to gold ten years ago and started to abandon the dollar as an investment, I could appreciate the instinct. People wanted to invest where there was intrinsic value. So, if that is what you are looking for you will not find it in cryptocurrencies. But, if you do want to own an alternative currency that does offer certain advantages over your national currency, do your research and find one with which you are comfortable.