Long years ago, when I was four, my sister and I found a quarter outside a grocery/delicatessen named Browdy’s here in town. More appropriately, I saw said quarter on the ground, and my nine-year old sister pushed me out of the way to pick it up. No matter, as she bought a fistful of hard candies and bubble gum for us to share, and a candy bar for herself. At the time, I thought it was more than fair, as the quarter which made it possible was as though a gift from on high.
All these years later, I have spoken to a number of people in younger generations who don’t pick up loose change they see on the ground. In fact, they think I am wasting my time in so doing. As one person once told me: “the value of the time it takes for you to pick up a coin is probably worth more than the coin itself.” Be that as it may, I know of no one who is going to pay me to NOT pick up, say, a dime on the sidewalk. As such, I sometimes feel like I am ‘doubling my money’ just by stooping down to pick the thing up.
I bring this up for two reasons: 1) I am staring at a quarter on the carpet next to the floorboards near my desk, and; 2) I wonder whether my grandchildren or great grandchildren will even know what small change is or was?
In case you have missed it, precious metals and cryptocurrencies, like Bitcoin, have been on a tear recently. The pragmatist in me knows this is because the dollar has weakened due to the markets’ expectations the Fed will soon start cutting the overnight lending target to make money cheaper in the US. When any currency weakens, alternative stores of value become more attractive. This is pretty straight forward, depending on who you ask and what they do for a living. Ha.
However, what can possibly explain the vast difference between gold’s rally and, well, Bitcoin’s? If both are alternatives to the greenback, why would Bitcoin perform so much better in the same environment? The best answer, that I can concoct, has to do with certainties and potential.
What does a gold or silver coin do? What do you expect out of it? What is it’s potential? Are you really going to use a $1 1ounce silver coin to buy anything? Understanding the spot price of an ounce of silver is around $15? Let me answer those questions in short order: 1) nothing; 2) that it won’t lose its value; 3) maybe it will go up a few bucks if I am lucky enough; 4) no; 5) of course, duh.
You see, while somewhat scarce, precious metals are commodities. Investopedia.com defines a commodity as: “A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.” Put another way: a commodity is so much ‘been there and done that.’
But a cryptocurrency? Bitcoin? Man, this stuff is still relatively new. The math and technology behind them are immense. What if, I mean what if, global consumers and investors adopted a single currency, like Bitcoin? Hey, we can currently divide the thing into units as small as 0.00000001BTC, or one hundredth of a millionth (called a Satoshi). As the thing evolves, there is no reason why exchanges won’t divide it into even smaller units, making purchases of things like candy bars and hard candies feasible.
A $50 gold eagle? Not so much, unless the world is coming to an end.
With this said, I find it difficult to imagine the US Treasury scotching the dollar to use a public cryptocurrency as the primary method of exchange in our country. First, there isn’t any real reason to do so at this time, as inflation isn’t a problem and there is ample global demand for our currency. Second, the Treasury actually makes money by making money. Do you think it really costs $100 dollars to make a $100 bill? Or course not. Shoot, it doesn’t cost much of anything, and the fiat nature of our currency is such the monetary authorities simply tell us what the thing(s) is worth. This enables governments to finance deficits and spend beyond their true ability.
So much so, I imagine the powers that be will throttle any ‘alternative payment methods’ which eventually threaten the central government’s shell game, i.e. printing money. Put another way, and I like to put things in other ways, when the gang with the guns says “pay me in dollars,” I will do as they say and like it. As such, as long as ‘they’ do, Bitcoin and other cryptocurrencies will trade more like commodities than currencies, only with greater volatility due to their inherent uncertainties.
The question remains: are these uncertainties potentials or problems?
As I type, I fully envision cryptocurrencies will eventually become part of the asset allocation process, much as commodities and currencies are or can be. They will be another ‘non-correlated asset class’ portfolio managers and investment advisors use to reduce portfolio volatility and risk. When this happens, volatility will lessen significantly from what ‘we’ have seen over the last 24 months due to more stable demand. With this reduction in volatility will come a reduction in return expectations. Basically, Bitcoin, and others like it, will grow up.
Ultimately, cryptocurrencies will gain in popularity as a method of exchange, a transactional currency if you will. I just don’t envision they will completely supplant the dollar, yen, pound, euro, franc, etc. In fact, I think it more likely monetary authorities around the world will gradually phase out, or lessen, the physical nature of their currencies. This isn’t that hard to imagine, is it? Ever buy anything online with a credit card? Swiped a debit card at the grocery? Venmo-ed someone? Not stooped to pick up a penny on the ground? I think you get the picture.
On top of the trend towards ‘cashless’ economies, inflation, even modest levels, will make it so it won’t make economic sense for Treasuries to mint coins, especially low denominations like pennies. Heck, Canada stopped making the things back in 2012, and has plans to melt down the 35 billion pennies it has in circulation. From what I understand, cash transactions are rounded up to the nearest fifth cent. This makes perfect sense. The nickel will be next, and so on and so forth. So, if you get a Canadian penny, keep it, as they are going away in totality.
So, taking this full circle, my sister and I found a quarter 47 years ago and bought a bunch of candy with it. In other 47 years, I can’t imagine my great grandchildren even using quarters at all. Technology and good old-fashioned inflation are to blame…and there will be money in there to be made somewhere.
That is sort of cool when you think about it.
Have a great weekend.
John Norris