I’m asked for thoughts on digital ‘currencies’ so often I’ve finally relented on writing my opinion:
Unless it is built, operated, and backed by a major government, your so-called ‘crypto-currency’ is trash. Are they a fun way to speculate in the near term? Yes! Will they ever truly compete with the dollar, euro, yen, etc. as a ubiquitous standard of commerce? No.
Bitcoin, ethereum, XRP, dogecoin, and all the other ‘crypto-currencies’ are - however seemingly well-intentioned - ultimately traps to separate fools from their money. There are endless reasons why these ‘crypto-currencies’ are illegitimate:
- Obscene environmental cost: Bitcoin’s annual electricity use generates a carbon footprint comparable to New Zealand, with each transaction creating ~326 pounds of CO2.
- Deflationary: A fixed number of ‘coins’ in most ‘crypto-currencies’ suggests value will rise over time as demand increases and ‘coins’ are lost. This dissuades spend - the main purpose of any currency.
- Proliferation: There are literally thousands of ‘crypto-currencies’ available and only a few have scale. Even for ‘crypto-currency’ proponents, isn’t the point of the internet that only one is needed? Why bother with multiple digital currencies when one could do?
- Vulnerability: ‘Crypto-currencies’ are vulnerable to fraud and price manipulation.
- Criminal Haven: ‘Crypto-currencies’ provide ample anonymity and are a haven for money laundering and criminal transactions.
- Profit Deal: Do you really trust an individual or company launching a so-called ‘crypto-currency’ to act in an unbiased, reliable manner with your stored value for the next year? Decade? Century?
- and the list goes on…
But my concern with these ‘crypto-currencies’ runs deeper than these issues and is with the basic concept of non-government currencies. It seems to me the architects of ‘crypto-currencies’ fundamentally misunderstand the point of a currency.
the trouble with ‘crypto-currencies’
Currencies exist to establish and facilitate trust. Once societies emerged in which direct relationships between all members was impossible, governments formed to mediate interactions between strangers. Codified norms (i.e. laws) allowed diverse swaths of peoples with different languages, religions and so on to interact with one another in a standardized manner. In this way, money allowed governments to establish a ‘common language’ of value (e.g. indebtedness ).
This concept is huge - a performer can (i) sing for a stranger; (ii) receive tokens representing the song’s value; and, (iii) exchange those tokens with a vendor for a meal. An ephemeral action is assigned an abstract value by two parties, and is exchanged for a real good with a third. In complex societies this common value standard is only sustainable when set by a government.
Why? Because governments guarantee their currency’s value through their monopoly on power. This power sustains currency in a three part framework: (i) laws standardize currency interactions; (ii) courts enforce compliance and resolve disputes; and (iii) taxes establish present and future certainty of use. Ultimately, this power implicitly stems from force.
Indeed, this meaning is the value behind every true currency. A physical manifestation of an abstract concept, currency represents the complex organizations and systems which back it. In a positive feedback loop, this truth is accepted by society, which increases the currency’s use, which reinforces its value, and so on. But make no mistake. A true currency’s root value stems from the power of the government backing it - not a community’s collective acceptance. You can’t pay bail with a ‘bitcoin’.
‘Crypto-currencies’ are explicitly built to be government-independent. Just like the original currencies, they aim to establish trust between many different peoples - only this time at a global level using the internet. However their rules, adjudication, and value are designed as intrinsic. The premise is that these supporting functions, and its resulting value, will manifest from those who use the ‘crypto-currency’. This premise is false. ‘Crypto-currencies’ have no authority over their users - they are a proactively ‘opt-in’ construct. What influence does one user have over another? In other words, someone can just as easily discontinue using a ‘crypto-currency’ as they began.
“But wait!” is the protest, “‘crypto-currencies’ are certainly valuable if they are trading at U.S. ~$33,000 for one bitcoin!” Correct - value can be ascribed to anything and can even be standardized among a community. However, what may be of value to a niche group (no matter how large) is meaningless to broader society. A stamp may be rare, but you can’t use it to buy groceries. An affinity group’s value system cannot form a currency because it will always be irrelevant to broader society. The result are affinity value systems which are always expressed in relativistic terms to the currency of the broader society. In the same way, ‘crypto-currencies’ are worthless beyond those who have ‘bought-into’ their premise. This barrier is insurmountable.
Furthermore, ‘crypto-currencies’ will never match up with traditional stored-value assets like gold given their absolute intangibility. Recent research suggests Bronze Age peoples across the European continent used bronze trinkets of uniform weight as a form of currency. This was without the laws, courts and regulatory bodies of a centralized government. Rather, this was a communally derived system of value, and it worked. What made it possible is that the value was grounded in real-world effort - the intangible component (the work to manufacture bronze) was generally known and appreciated, and the tangible feature was valuable (bronze could be melted down). What is the intrinsic value of a ‘bitcoin’? Can anyone relate to what it represents?
a middle path
As much as neo-anarchists wish it otherwise, governments and traditional currencies are here to stay. However, the mania surrounding ‘crypto-currencies’ has raised valid needs for better digital functionality in the money supply. Nations worldwide have paid close attention and are beginning to introduce ‘Central Bank Digital Currencies’, or CBDCs.
CBDCs represent the future of money, in that they complement and expand upon existing currencies rather than replacing them outright. Essentially, CBDCs are a digital banknote or coin. Unlike today’s electronic money which represent a debt to basically a bank, a CBDC is a unique ‘token’ of value issued directly by the government. Their design, function and ultimate use cases are currently being trialed and worked out by various governments, all of whom are exploring different configurations. What CBDCs will ultimately be and how they’ll do it is still to be determined. Regardless, it is certain their release will enable countless new business models and commercial interactions.
The future of money is with governments and the societies they govern. ‘Crypto-currencies’ have sparked immense interest in a deserving field, yet themselves will never rise above a speculative thrill. For those curious on the future of money - I encourage you to look to governments and CBDCs. Until then, be thoughtful about your currency of choice.
I welcome your feedback. Please don’t hesitate to reach out through the contact section of the website if you would like to discuss, comment, or have any suggested edits.
 This is my amateur take. For a separate academic deep-dive on this topic, see “Debt: the First 5,000 Years” by David Graeber