Over the weekend, we stopped at Kerbey Lane in Austin to grab breakfast. Our waiter, Chris, overheard our conversation and determined I worked in the investment world. Immediately, he gushed about how great cryptocurrency is. For him, he watched it go straight up and had become a committed fanboy.
As the 20-something gushed, he used the words “crypto” and “blockchain” interchangeably.
The waiter acted as though tomorrow was Christmas and Santa was filling his stocking with Bitcoin. He spoke nonstop for a seeming eternity. Finally stopping and gasping for air, he asked what I thought.
I told him our office discusses blockchain technology daily. It will change the way we document asset ownership.
Today, if we buy title insurance on a property, a title company does research to determine the rightful owner of that property. In the future, blockchain will have a permanent and irreversible digital record conceivably attached to every asset. In each block, the current owner — and every previous owner — will be listed in a permanent digital record.
As such, blockchain will significantly change how audits are done or determine who owns a house or who the original owner of a piece of art was, for instance. Governments like this as it potentially aids in determining how terrorism is financed, how people launder money or evade taxes. Governments are adopting blockchain technology for their currency simply because producing and tracking digital currency is easier and cheaper than paper money.
Chris could not sit on his hands any longer and he returned to using the words “blockchain” and “crypto” as equals. They are not equals. Blockchain is a type of technology for building and tracking a permanent digital database of every owner of an asset.
On the other hand, there are many types of cryptocurrency. It is a form of digital “cash” for lack of a better description that uses blockchain technology.
As Chris danced back and forth, he pronounced that Dogecoin is up more than 7,500% this year. Ethereum is up 300% year-to-date while Litecoin and Bitcoin are up more than 100% this year.
His data was right. However, I asked Chris three questions.
Who stands behind any cryptocurrencies? I may not like the way the U.S. government devalues the U.S. dollar, but I know the largest economy in the world stands behind our currency.
Chris’s answer was “the people” stand behind cryptocurrency. Really? What people? Is it a government or regulatory body? Chris did not know. His response did not make me feel any better.
What gives a cryptocurrency value? When Starbucks buys beans, adds hot water and sells the miracle elixir as caffeinated soup I understand the input components, why people pay for it and what gives it value.
However, for the most part, cryptocurrency does not produce a good or service. As such, it has value simply because a bunch of people say it has value — and that is dangerous.
It will have value until someone decides it does not.
There is an argument that cryptocurrency is a method for transferring something. However, that “something” is really opaque.
How do you value cryptocurrency? There are dozens of accepted methods for valuing traditional assets whether rental property, homes or financial assets. However, if cryptocurrency does not produce anything —other than a method of exchanging units from one person to another — then I have a hard time assessing valuation.
Chris did not like my questions because it made him question his position.
I finished with two final comments.
I asked Chris if he would rather own a cryptocurrency or a productive, profitable business. He rightfully concluded that although cryptocurrency may serve as a quasi-substitute for green dollars, it is inferior to the value creation from owning productive and profitable businesses.
Chris then doubled down, declaring that cryptocurrency would revolutionize the way we operate.
True, blockchain technology will absolutely change the way the world operates. But I remain skeptical of cryptocurrency. There may be huge winners. However, I have no idea who they will be.
As such, I asked him to consider some of the most significant inventions that changed the world over the last century. The invention of the automobile, the airplane and the internet changed the world. However, they have all been terrible investments.
Just because an invention changes society does not mean it will lead to riches.
Ironically, as we concluded breakfast and our conversation, our young waiter was more than happy to accept my tip in green dollar bills.
Dave Sather is a Certified Financial Planner and the president of the Sather Financial Group, a “fee-only” investment and strategic planning firm. His column, Money Matters, publishes every other week.
