Cryptocurrencies Pennies from Heaven or Fool’s Gold

Cryptocurrencies: Pennies from Heaven or Fool’s Gold?

Cryptocurrencies have been receiving an ever-increasing amount of press in the past couple of years though there doesn't seem to be any middle ground on the subject. In short, there are those who hail it as the savior of a hopelessly corrupt and intrusive global banking system intent on enslaving us all and those who dismiss it as proof positive of PT Barnum's famous aphorism "There's a sucker born every minute." A paper recently published by the Bank of Finland comes down solidly in the latter camp.

Accounting for What is Not There

The author of the paper, one Aleksi Grym, is digitalization advisor to the Finnish central bank and he makes no bones about his opinion that cryptocurrencies are not real forms of money, no matter how much their proponents will attempt to convince us otherwise. To him, they represent nothing but "accounting systems for non-existent assets." That's a harsh assessment to be sure, but it also has a disturbing air of truth about it.

But the air of truth is not by itself enough to establish truth so what else does Mr. Grym have to say to back up his statement? Plenty, as it turns out and some of it plenty persuasive.

accountant encoding on laptop

The Heart of the Matter

According to Grym, the illusion of crypto viability stems almost entirely from how poorly most people understand the concept of money. Adding to the problem was the choice of what Grym calls "confusing terminology" that accompanied the white paper that started the whole crypto movement. That paper, authored by a person or persons calling himself, herself or themselves Satoshi Nakamoto was published in 2008 and was entitled "Bitcoin: A Peer-to-Peer Electronic Cash System."

weighing bitcoin and real gold

As Grym sees it because people have no practical understanding of what money is they are prone to believing those who trumpet the cryptocurrency blockchain as being something revolutionary. It is anything but, says Grym. To him a blockchain is nothing more than an elaborate accounting system, a ledger, that's spread across a network of computers. As opposed to the ledger of a particular bank that is held in-house. Beyond that, there is no difference between the two other than the fact that some people have become convinced that the numbers on the blockchain ledger have some intrinsic value, when in fact they don't. To Grym the blockchain is nothing more than an accounting exercise and has no potential ever to replace ‘real' money.

If one buys into Grym's view, then the digital currency craze as currently constituted represents little more than con men taking advantage of people's ignorance by offering meaningless ICOs (initial coin offerings) and then pocketing the money gained from a gaggle of unsuspecting rubes. Not unlike the snake oil salesmen of yore.

The Emperor’s New Digital Clothes

This whole discussion over whether cryptocurrencies are in fact currencies at all runs parallel to the freight train of crypto-momentum that seems immune to criticism, even when its seedy underside is laid bare. It's all very much like "The Emperor's New Clothes" where people, for whatever reason, only see what they want to look at (or are told to see) while those with nothing to lose stand next to them pointing out the truth.

I Want to Believe

Two recent cases shine a light on both the potential for cryptocurrencies to attract scammers and the immense slack people will grant to those crypto ‘entrepreneurs' who veil themselves in the cloak of legitimacy, even though they too may be peddling little more than digital snake oil.

In one case the offices of a cryptocurrency in Mumbai, India were raided in the midst of a sales meeting where they were promoting the virtues of their product to potential investors. 18 employees of the company were jailed, and millions of dollars that had been gleaned from investors seized. It was later revealed that the "blockchain" they were purporting to use as a guarantor of their legitimacy was little more than an Excel spreadsheet and that they may have previously scammed as much as $350 million out of gullible investors.

Bitcoin believer

At virtually the same time an American company called Gnosis was able to sell more than $12.5 million of their digital currency in just a few minutes, mainly because they received some glowing press, could flaunt the participation of known "experts" and could demonstrate that they did indeed have a blockchain of their own to verify transactions. But if Mr. Grym from Finland is correct these shiny, seemingly trustworthy entrepreneurs are no better than the guys with the spreadsheet in Mumbai. They have a fancier package and the right names on their marketing.

Self-Promotion as News and Information

There are other signs that one should be wary of sinking money into the crypto verse. For instance, an Internet search for crypto-related information will typically produce page after page of search results leading to websites with words like "crypto" and "blockchain" in their name, rather than to 3rd party news organizations with reputations for providing well researched, more or less objective financial news. Who knows who is behind all these sites? Yes, the fact that most seek to downplay legitimate fears and placate investors with gushy articles about crypto's unlimited potential to save them from the scourge of the global banking conspiracy seems to provide a clue.

Caveat Emptor

businesman holding a cryptocurrency

But in spite of all this, untold scores of people the world over continue to drink the crypto-Kool Aid either because they are ill-informed or because they think that any official rebuttal automatically means a thing is legit, (said rebuttal being just another example of the man trying to keep them down).

So just what are cryptocurrencies? Are you just throwing money down a hole with someone else's bucket at the bottom or are you taking a bold step toward financial liberation? As of this writing, it depends on who you ask. That by itself should give pause to anyone thinking of investing their hard earned money.

About the Author Aaron Grubbs

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