LECTURE Cryptocurrencies “I think the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable e-cash.” – Milton Friedman “You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven't been able to do it. Maybe someone else can.” – Alan Greenspan “It’s gold for nerds” – Stephen Colbert

Cryptocurrencies Bitcoin and other cryptocurrencies Pure speculation – must “buy low, sell high” Very similar to gold and precious metals But even worse – no practical application or use Other than creating a great system for crooks However, the technology behind cryptocurrencies, blockchain, is valuable and will survive “Aw, c’mon, Paiano. Whatcha’ got against Bitcoin and the other cryptocurrencies? You’re just old, that’s all! This is the future! We’re all gonna’ get rich!”

Cryptocurrencies (continued) Rebuttal: First of all, as mentioned, you can’t invest in a cryptocurrency; you can only speculate. The value is worth only what others believe it is worth. Cryptocurrencies do not pay interest, dividends, rent, etc. In other words, there is no cash flow. And more importantly, there is nothing backing the currency. “But what about the “fiat” currencies, huh? Aren’t they the same? They are only worth something because we believe they are!” Not so fast …

Cryptocurrencies (continued) You will hear people say that our dollars and other “fiat” currencies are not backed by gold and are therefore worthless. Poppycock! (By the way, what is gold worth? As we saw, gold, also, as an investment is a speculation.) Our dollars are backed by our economy, the Great American Economic Machine! Our dollars are backed by what the U.S. can produce and consume, our Gross Domestic Product. Walk into any grocery store and look around and then tell me that our dollars are worthless. Ha!

Cryptocurrencies (continued) The job of the Federal Reserve Bank is to make sure that there are enough dollars in circulation to match the production of our economy with the consumption of our economy. Too many dollars and you get inflation. Too few dollars and our economic output is stifled and opportunities for growth of our wealth are lost. It is not an easy job. I love it when I hear people scream, “End the Fed!” Oh, yeah, as if you could do a better job?!

Cryptocurrencies (continued) So now how does this relate to cryptocurrency and how do you explain the success of Bitcoin? Well, there is absolutely nothing to stop other individuals or groups from starting their own cryptocurrencies. Indeed, hasn’t this already started? There are now over 2,000 cryptocurrencies, yes? (My favorite is Jesus Coin. Don’t believe me? Look it up!) It’s tulip bulb mania all over again! Eventually, the bottom will fall out and some people will get very, very rich and many others will lose a whole lot o’ money.

Cryptocurrencies (continued) However, as Stephen Colbert so astutely observed, “It’s good for nerds.” Mostly likely, a few of the larger currencies will survive and eventually start to behave like gold, which as we saw, has barely kept us with inflation. Until then, prepare yourselves for some serious “volatility!” Stay tuned … Let’s revisit the graphic that compared gold to stocks, bonds, and inflation.

Growth of $1 Investment 1801 – 2016