Peter Morici | Posted: Apr 15, 2021 10:12 AM
Coinbase
Global Inc. was valued at $85 billion in
its market debut this
week and was greeted with some considerable fanfare.
Coinbase
provides an exchange for bitcoin and about 50 other cryptocurrencies, and it is
already recording significant profits—something unusual for newly traded
tech-centric companies. It has a solid, established business with 1000
employees and over 56 million customers across 100 countries—but only as long
as bitcoin and other cryptocurrencies are perceived as genuine assets by a rich
enough following of investors.
For
cryptocurrencies, Coinbase’s coming out was characterized as a sector defining
experience similar to Netscape’s 1995 IPO for
internet businesses. In recent months, the Bank of New York Mellon announced
it would treat bitcoin like other assets, Goldman Sachs, J.P. Morgan and Morgan Stanley are
in various stages of acceptance, and billionaires Elon Musk and
Norway’s Kjell Inge Rokke announced
investments in bitcoin.
However,
this could all evaporate like the Dutch tulip bulb craze in the early
1600s, because bitcoin cannot deliver on its most fundamental
promise—to supplant or exist along side greenbacks as money for everyday purchases.
Bitcoin is
terribly expensive to use.
Transactions
are validated on a blockchain simultaneously maintained by a network of miners.
Individual miners earn the right to record a payment and movement of bitcoin
among users by solving complex mathematical puzzles—that’s an expensive process
because it uses a lot of computing power and energy.
According
to BitInfoCharts, since the
beginning of this year the average transaction fee has
varied between $5.55 and $31.48. Why would anyone pay $10.00 to purchase a $4
latte at Starbucks with bitcoin?
In addition,
the IRS and accounting
profession treat bitcoin as a financial asset. For each transaction, the
capital gain/loss against the original dollar purchase price must be calculated
for tax reporting. Corporate “cash” held in bitcoin is subject to fluctuations
in value that must be reflected in end of year financial statements.
The intent
of bitcoin’s creators was to bypass monetary authorities and banks to create an
asset of lasting value and an alternative to fiat money. To ensure its limited supply and
blockchain integrity, they created those expensive-to-solve, high-carbon-footprint mathematical
puzzles. Those are even more fundamental to bitcoin than is the face of Caesar
to fiat money and can’t be eliminated.
High
transactions and carbon costs are here to stay.
An electronic dollar,
similar to the digital yuan China is introducing,
could cut out the banks and would be vastly more efficient to use, financially
and environmentally, than conventional fiat money and bitcoin. It would
eliminate those expensive credit and debit card swipe fees that
enrich banks and could be validated without mathematical puzzles and
blockchain.
Should the
Federal Reserve and the Treasury decide that China’s digital currency is
a threat to the global supremacy of
the dollar, stop blindly protecting the banks exclusive franchise in
validating most everyday transactions and issue digital dollars, those would
provide a securer, more stable and much less costly venue for transferring
funds among households and businesses than bitcoin’s network of blockchain
computers.
As assets,
the good and services the U.S., Chinese and European economies produce stand
behind the dollar, yuan and euro—there is no Bitland making stuff.
As assets,
the phones and automobiles produced and their potential profitability stand
behind the stock values for Apple and Tesla—there are no BitPhones or BitCars.
Bitcoin is somewhat
like digital art—lines of
ones and zeros but you can’t look at bitcoin or gain any visual pleasure from
it.
Sooner or
later environmentalist and the progressive media will take aim at bitcoin’s
growing carbon footprint and make owing cryptocurrencies
terribly unwoke. Then how would billionaires owning bitcoin
show up at the World Economic Forum.
Perhaps they
would be called out by corporate keepers of moral purity, Coca Cola, American
Airlines and cabal of progressive appeasing CEOs.
Don’t take
solace in the fact that big banks are permitting customers to invest in
bitcoin. Experiences with derivatives and junk bonds indicates their penchant
for profits will let them hawk rich folks some pretty questionable stuff.
In fact,
investing in bitcoin is more like playing Monopoly with real money. Everyone
agrees to bid with dollars for the fixed supply of game money, but what happens
when the players find a new novelty?
The
popularity of Monopoly and other board games persisted for decades but declined
dramatically when computers offered children aliens to slay.
At any time,
Messrs. Musk and Rokke could find a new way to gadfly attention with their
investors’ money.
At least
tulip bulbs could be planted for flowers.
Peter Morici
is an economist and emeritus business professor at the University of Maryland,
and a national columnist.
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