“The best way to destroy the capitalist system is to debauch the currency.” Vladimir Lenin

Although I am not an avid day to day watcher of the financial markets, I feel that I have a reasonably close finger on the pulse of what is taking place across the various dimensions of equities, bonds, alternatives.  Had you asked me to guess the number of cryptocurrencies available however, I probably would have counted the names of the ones I have heard of and maybe double it for good measure.  The resulting number would certainly not have exceeded double-digits.  So when I read in this week’s Economist[i] that the number of cryptocurrencies is about 6,000 I scratched my head in disbelief.  More mind boggling was the cited market capitalisation of $1.6trillion.  I had a look at the website referenced in the article, coinmarketcap.com and that market capitalisation had grown to $1.91 trillion, up 2.6% on the previous day.

I scrolled down the list of the currencies named on the website and only a few of the names were familiar to me.  The question sprang to mind ‘but what do all these cryptocurrencies actually do?’  As I often do when I’m in doubt of the answer, I plugged that very question into google.  One of the top hits was a site called breakingdowncrypto.com with a very helpfully referenced sub-page ‘what-does-each-cryptocurrency-do’.  By every currency listed was an explanation of the purpose of each, ranging from the benign ‘a cryptocurrency which can be used to pay for things’ through to those sounding more sinister in their objectives ‘a currency which enables you to make payments anonymously’. 

The Economist article discusses the rationale for people to invest as ‘fundamentalists’ – those who believe cryptocurrencies are the future and governments will eventually transition to them; ‘tacticians’ those who see the weight of money piling into these companies as supporting the ever growing prices and the ‘speculators’ who will gamble on the short term changes.  It then goes on to predict the likely fallout if these markets crashed and the implications for other segments of the financial markets. 

I started the article by some proverbial head scratching and have to admit to ending it similarly baffled.  Undoubtedly a number of people have made a lot of money in cryptocurrencies, although I feel equally certain that there have been plenty who had lost significant amounts too.  Worryingly, the ability to lever some of these investments may end up with individuals losing and having to stump up more cash to close out positions.  But I can’t help but think there is large chunk of ‘Emperor’s new clothes’ to cryptocurrencies.  I do have sympathy with the fundamentalists argument that cryptocurrencies are the way forward, but surely governments will create their own currencies rather than enable Bitcoin or others to replace paper and metal cash?  I can see that there will be a need for new payment systems to accommodate the transition, so some of the platforms may benefit.  Most worryingly, this is no longer a retail play.  “Institutions account for 63% of trading, up from 10% in 2017.”  Perhaps I’m just being overly concerned or maybe I am missing something more fundamental about the value of these instruments, but for now I will have more trust in the notes and coins in my pocket!

[i] The Economist, August 7th – 13th, pp56,57

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