Bitcoin and fiat currencies both fail the test of wealth protection, but for different reasons
“FIAT is a horrible long term store of value. Bitcoin is a horrible short term store of value.”
Advocates of Bitcoin have been trying to sell their point of view that it and other cryptocurrencies are a viable form of money. ¬†But like their primary competitor, that being sovereign fiat currencies, they each fail in their basic foundations under the definition of money.
These are the seven necessary characteristics that Money (not currency) must have¬†according to the well respected economist Richard Russell¬†of Dow Theory fame.
(1) It must be¬†durable, which is why we don‚Äôt use wheat or corn or rice.
(2) It must be¬†divisible, which is why we don‚Äôt use art work.
(3) It must be¬†convenient, which is why we don‚Äôt use lead or copper.
(4) It must be¬†consistent, which is why we don‚Äôt use real estate.
(5) It must¬†possess value in itself, which is why we don‚Äôt use paper.
(6) It must be¬†limited in the quantity that is available, which is why we don‚Äôt use aluminum or iron.
(7) It should have a¬†long history of acceptance, which is why we don‚Äôt use molybdenum or rhodium.
Fiat sovereign currencies do not possess value in themselves, and in fact devalue over time in their purchasing power. ¬†Thus they fail as a long term store of value, or as a means of wealth protection.
Bitcoin on the other hand fails in several of the above categories such as convenient (limited places to use, limited places to purchase, and only facilitates between 5-7 transactions per second), possesses no value in itself (virtual currency), and it does not have a long history of acceptance (since 2009). ¬†But unlike sovereign fiat currencies which lose value over the long term, Bitcoin and other cryptocurrencies are so volatile that they fail as a store of wealth in the short-term.
Do a Sharpe vs Sortino ratio comparison on both BITCOIN and all FIAT¬†to make our volatility point. We are sure the¬†Sharpe ratio¬†will show up as lower in both ¬†Bitcoin and FIAT than their¬†Sortino ratios. And the Sortino ratios will show most volatility in Bitcoin is to¬†the upside, while all¬†FIAT will show volatility to the downside. ¬†
The USD:¬† slowly sucking you dry.
Sharpe Ratio says “Low Volatility!!” ; Sortino Ratio Replies: Yea but it is all to the downside Post Bretton Woods¬†
Bitcoin: All upside, unless of course you store your wealth in it today and are fine with it being +/- 20 % when ¬†you go to buy lunch with ¬†it.
We are not going to even show you a BTC chart because it will be obsolete by the time ¬†you read this. Suffice to say, until recently, it was alsmost all upside volatility if you mearued it in months. Now it is also showing some downside volatility. But overall, it is more than likely that BTCs Sortino ratio is awesome over its life.¬†Lets put our savings in it. I’ll buy Christmas presents with it in 6 months. What could go wrong?¬† Ok Fine. Here is a chart. It’s what you all came here for¬† isnt’t it? The shiny new thing? –¬†Zerohedge
Bitcoin and other cryptocurrencies do function in important ways in the global monetary and financial system, but not as their founders or their advocates try to promulgate. ¬†It provides a great way for individuals to perform currency arbitrage, especially in places where capital controls limit their ability to move currency out of the country, and it also has functioned as an incredibly well performing speculative investment, but with volatility that is also much greater than most regulated securities.
And while it does act in minimal forms as a medium of exchange since 100’s of thousands of businesses and entities accept it as currency, that does not mean that it functions on par with sovereign currencies that do the same thing, as day to day they are a much more stable mechanism for price valuation.
As with any investment, understanding the fundamentals completely while ignoring the hyperbole is vital to protecting your money, and potentially growing it. ¬†And in the case of Bitcoin, Ethereum, and other virtual currencies propagating the landscape, recognizing that as of this moment they do not fulfill all the necessary requirements to be considered good or sound money will ensure that you use cryptocurrencies as they are, not as one would ideologically desire them to be.
Kenneth Schortgen Jr¬†is¬†a writer for¬†The Daily Economist,¬†Secretsofthefed.com,¬†Roguemoney.net, and¬†Viral Liberty, and hosts¬†the popular¬†youtube podcast¬†on Mondays, Wednesdays and Fridays.¬†Ken can also¬†be heard Wednesday afternoons giving an weekly economic report on the¬†Angel Clark radio show.