Crypto has no intrinsic value; neither does paper money, nor does gold.
A friend who regularly uses both the Financial times and my posts on EconLog and on my Substack sent me the following email:
I spoke to a friend who is an asset manager at JP Morgan, and he is advising some clients who fancy more risk and volatility to consider investing in ‘Crypto Plays’. Maybe something like a crypto ETC to start.
Traditional economists seem to be evaluating the crypto economy from their rearview mirror. A recent FT article repeated common assumptions as accepted reality. That crypto “has no inherent value” and if there is a “liquidity crisis in crypto, there is no lender of last resort.”
I bought and sold Bitcoin years ago when it was still under $100. I actually think certain investors should consider investing in the crypto space. We plan to do this in 2025.
What do you think of the future of crypto in the global economy?
Here’s my answer:
I don’t know the future of crypto. Nobody does that. Especially because I don’t follow it enough. But when I talk to friends who buy and own crypto, I usually hear one or more of three reasons to do so. Here are the reasons, along with my comments on each reason.
(1) It is a protection against inflation.
It is. It’s fleeting, but it is it is a protection against inflation.
(2) It is a way to keep assets away from the intrusive prying eyes of the government.
I don’t know enough about this, but my impression is that that’s not as true as it was, that the government has different ways to pierce the veil.
Commenters on this site, many of whom probably know more than I do, may wish to respond.
(3) It is a reasonable asset to hold as part of a diversification strategy.
This makes sense. That begs (and doesn’t raise) the question of why I don’t invest in crypto. The basic answer is that I don’t need it. My wife and I’s wealth is significant and we are well diversified, with a market index stock fund, a much smaller (by value) bond fund, a huge inflation-indexed bond in the form of our Social Security benefits, and my federal employee pension. and real estate (mainly our house, but also a small percentage of a large apartment complex.) So I don’t want to buy another asset that I have to pay attention to.
I would like to point out the problem with the criticism that crypto ‘has no inherent value’. Of course not. But nothing does. Value, as we learned from the marginal revolution in economics of 1870, is subjective. It’s in the eye of the beholder. That is indeed pillar #7 of my ten pillars of economic wisdom.
What the critics may have been getting at is that crypto is not like gold, because gold has non-monetary uses. That’s true. Crypto, and certainly Bitcoin, which is what I know best, is more like paper dollars. Paper dollars have no non-monetary use. (Well, not quite. In one of my drawers I have a Canadian $1 bill because when the Canadian government introduced the Loonie, I knew the paper dollar would disappear. I have the bill as a collector’s item, a trivial exception.) But paper dollars have value.