Published on December 13, 2021 in the Rochester Business Journal

In 2009 and in the wake of the Great Recession of 2008, the first digital currency was created by an individual or group of individuals identifying themself as Satoshi Nakamoto – a new “cryptocurrency” known as Bitcoin. Bitcoin is now one of over 7,800 different digital currencies in existence according to CoinMarketCap and it represents approximately half of the total market value of all cryptocurrencies combined.

Bitcoin’s popularity is attributed to its status as a largely-international payment platform that can be used in a decentralized manner without the need for a financial institution or any other trusted third party behind it. The platform relies on “blockchain” technology, which is essentially a distributed database of information that results in a permanent, irreversible timeline of data, available to and collectively verified by all users.

Bitcoin and other cryptocurrencies including Ethereum, Binance Coin, Tether and Solana are certainly investable, but may not represent a good investment. In each instance, we’re not talking about a company that provides a good or service; we’re not dealing with a business that generates a profit, has a sustainable growth rate in earnings or that has a history of distributed earnings known as dividends. What we’re really talking about is an unregulated medium that has value because one or more individuals say it does. Economist Nouriel Roubini calls Bitcoin the mother or father of all scams. Warren Buffet compares it with the 17th century Dutch tulip craze, a time when the rarest of tulip bulbs traded for as much as six times the average person’s annual salary. The craze was fueled by investor speculation and that speculation eventually ended badly.

According to Eswar Prasad, Senior Professor of Trade Policy at Cornell University and Senior Fellow at the Brookings Institution, using Bitcoin is an expensive and slow way to trade. He claims that the average fee for a Bitcoin transaction is approximately $20, although a recent Wall Street Journal article reports it to be much lower, and that it takes about ten minutes for a single Bitcoin transaction to be validated. He suggests that wild swings in market value make digital currencies an unreliable means of payment, and many other pundits have suggested that the anonymous nature of Bitcoin and other cryptocurrencies make them a perfect medium for illicit activity - even early Netflix coverage on the origins of Bitcoin point to its connections with “Silk Road”, an online black market or sorts accessible through the “dark web”.

Notwithstanding the above and though there are currently no international laws that regulate Bitcoin and other digital currencies, countries like the U.S. the U.K., Canada and Australia recognize them as a trading medium and allow for their use; other countries like China and Russia do not. In aggregate, all cryptocurrencies represent less than 5% of the world’s money and investors continue to speculate heavily on so-called “investments” in these platforms.

Bitcoin has traded from as low as $0.0008 per coin to more than $66,000 per coin since its debut over ten years ago. However, with great reward comes great risk, as evidenced by the price of Bitcoin fluctuating by more than 116% in a 30-day period ending as recently as May 24, 2021.

Bitcoin and other digital currencies may continue to be a popular trading medium and are likely to become regulated if their popularity persists. Keep in mind, however, that this popularity has coincided with a 12.5-year bull market run. No one really knows how one or more of these cryptocurrencies will hold up during the next market correction, recession or crash.

Investing in fiat currencies is a treacherous endeavor and one that most people should avoid. Committing money to digital currencies should be approached with even greater trepidation, in what could easily become a greater fool scenario. Appreciate the latest crypto craze for what it is and nothing more. Don’t let the prospect for higher returns cloud your judgment, in terms of taking on undue risk. In short, don’t let this latest craze make you crazy.

To see this column in the RBJ, click here.