Inflection Point (Part 4): Cryptocurrencies, Commodities, or Collectibles?
In Part 3 of The Inflection Point series (https://markonomics101.com/2018/07/17/inflection-point-part-3-the-ultimate-cryptocurrency-surprise/), we demonstrated from a trading perspective, Cryptocurrencies are more accurately classified as commodities than currencies. They have virtually no impact to the economy in terms of facilitating transactions but have a strong foothold in the “Black Economy”. According to a recent study, Bitcoin facilitated up to 50% of illegal transactions (https://thenextweb.com/cryptocurrency/2018/02/07/study-44-of-bitcoin-transactions-are-for-illegal-activities/).
In fact, the Federal Bureau of Investigation is the second largest holder of Bitcoin behind the mysterious and potentially fictitious owner, Satoshi Nakamoto and substantially exceeds that of the almost infamous Winkelvoss Twins https://steemit.com/bitcoin/@loryon/fbi-is-global-stakeholder-in-cryptocurrency-currently-owns-largest-bitcoin-wallet).
While Cryptocurrencies have some utility to non-criminals, they couldn’t possibly be the source of value. Some objects or “assets” carry high prices whether they have a single use or not. Art derives much of its value from being aesthetically pleasing but one can’t use art for any reason other than to view. These are known as collectibles. Remember the craze over Beanie Babies? (https://www.wsj.com/articles/sorry-collectors-nobody-wants-your-beanie-babies-anymore-1519234039). Crazes occur over fairly silly items, but none have reached quite the heights of “Tulipmania” in 1637 when a single Tulip became worth 10 times the annual wages of a skilled craftsman and 12 acres of land (https://en.wikipedia.org/wiki/Tulip_mania).
Collectibles have, in many cases, experienced returns that have well exceeded the stock market but still can’t approach those of Cryptocurrencies (https://www.lifestorage.com/blog/storage/collectible-toys-worth-money/). The annualized returns for collectible toys, for example, have been led by Baseball Cards at more than 3000% with Beanie Babies ranked 5th over the 1990 to 2018 period.
The first crypto-currency, known as Bitcoin (BTC), was introduced in 2009 and initially sold for roughly 6 cents. That same coin at the height of the market fetched approximately $19,000 sporting a monstrous 300,000-fold increase in its short 8 years.
The Cryptocurrency Sector has had a total market capitalization hovering between $300 Billion to $250 Billion for the last two months, (https://coinmarketcap.com/charts/) with continued high correlation and diminishing volatility. In the near term the Cryptocurrency Sector is rated NEUTRAL. A break below support at $250 Billion would turn the sector BEARISH, whereas a move above $300 Billion would be a BULLISH indication. Currently, the total market is $265 Billion.
The biggest negative of owning a commodity or a Cryptocurrency is they do not produce a cash flow. While some Cryptocurrencies pay what are known as “Crypto Dividends”, these create no value. They more closely resemble a stock split, but are commonly known as “air drops” (https://coinsutra.com/cryptocurrency-dividends/). With interest rates still historically low, the opportunity cost of holding a Cryptocurrency is quite low. An investor with $7500 can either purchase 1 Bitcoin, ride the volatility, and suffer from high blood pressure or a 10-year Treasury Bond yielding 3%. The Bond pays $225 per year ($7500 times .03), with dramatically lower volatility. However, when interest rates eventually begin to rise to higher, but more normal, levels (https://markonomics101.com/2018/07/12/inflection-point-part-1-the-long-term-equity-valuation-cycle/), it will make bonds relatively more attractive than other assets. A more historically average rate of 6% would generate an annual coupon of $450 ($7500 time .06) and create enticement for holders of Cryptocurrencies to swap into cash paying assets.
As collectibles, Cryptocurrencies have ZERO intrinsic value since they do not exist in any type of physical form but are simply data entries on a computer. Even Beanie Babies are tangible. Baseball Cards are tangible. Collectibles all possess some sort of aesthetic appeal. But so far, the virtual aesthetics of Cryptocurrencies are non-existent.
As commodities, Cryptocurrencies also have ZERO intrinsic value except to those who are willing to pay for anonymity. If used to avoid taxes and the risk of law enforcement, their value, while difficult to calculate, could be SUBSTANTIAL. But for how long? The anonymity continues to be chipped away by the transparency of the Blockchain. The possibility that Tax Collection Agencies like the IRS will not be interested in taking their pound of flesh from transactions in Cryptocurrencies is nil. Even less likely is that those authorities fail to stiffen enforcement and collection of capital gains earned by anyone selling at a large profit.
The Cryptocurrency Sector can only lose the miniscule sources of value they currently possess and their competitiveness vis a via other cash producing assets ought to continue to put downward pressure on prices for the currencies. Therefore, these virtual assets appear doomed to suffer REAL losses.