Cryptocurrencies were originally conceived as an act of resistance to the establishment that includes banks and governments around the world. But in the mother of all ironies, crypto is now part of mainstream conversations. People are talking about an asset class that should be actively considered. And why not? If the prices of cryptocurrencies like Bitcoin and Ethereum are indicators among others, it has delivered exponentially high returns. To add more salt to the damage, veteran investors are witnessing teenagers and young people investing early and making millions. Did the veterans miss a trick or two?
To make matters worse, the government’s position on cryptocurrencies remains hazy. Back in 2019, a bill was introduced in the Lok Sabha banning it. But after it was challenged and restrictions lifted, a new law was introduced in 2021 and Finance Minister Nirmala Sitharaman proposed that all crypto transactions must be taxed. Does this mean that cryptocurrencies are now legal tender?
Perhaps we would do well to recognize that neither the youth nor the government know what they are doing. But it takes a legendary investor like Warren Buffet, chairman and CEO of Berkshire Hathaway, to put it in so many words: “If you offered me all the bitcoin in the world for $25, I wouldn’t take it.” That’s not to say that cryptocurrencies are not worth looking at, but to emphasize that you don’t bother with what you don’t understand.
Speaking to young people studying in colleges and young professionals in Mumbai, no one could explain the history of money, how the current system works, or the underlying technology that powers cryptocurrencies. If anything, trying to decipher their answers made it sound like most were crafting the next “shiny toy”. Saying that there are now at least 20,000 cryptocurrencies in circulation, that bitcoin was the first, and that anyone who understands how to code can create a cryptocurrency makes most people’s jaws drop.
To prove that this is possible, two software engineers, Billy Markus and Jackson Palmer, created a cryptocurrency called Dogecoin eight years ago. They meant it as a joke. But a month after they made it publicly available, there were over a million users doing business with it. And last year, it reached a market cap of over $85 billion. Since then, a lot of water has passed under the bridge, its value has plummeted, and Dogecoin holders don’t know what to do with it.
That’s why it pays to look at cryptocurrencies through the long arc of history. Adam Mosseri, the head of Instagram, did an excellent job at the beginning of April this year. He argues that every time a technology emerges, the existing systems of power are attacked. For example, knowledge was once held in repositories that were only accessible to the facility. Then came the printing press. What followed were innovations that democratized knowledge to include everything from billboards to newspapers and everything else. The floodgates of knowledge opened and led to the European Renaissance. Meanwhile, the Ottoman Empire and the Catholic Church tried to enforce restrictions, but their attempts didn’t work.
Extrapolate this analogy to today’s world. Cryptocurrencies were conceived by early internet pioneers as part of an alternative payment infrastructure built on top of a technology called blockchain. “The most important thing to understand about a blockchain,” explains Mosseri, “is that they remove the need to trust an intermediary. How many of you have money in a bank? When you did that, each and every one of you trusted an intermediary, in this case the bank, to handle that money on your behalf. A blockchain, on the other hand, allows you to directly hold digital money, in this case cryptocurrency, without depending on a bank. So the blockchain offers the potential for power transfer.”
His bigger point is that people like content creators on the internet don’t like the “establishment” like banks and big tech companies like Facebook, YouTube or Amazon. You “own” the relationship between the creator and the end user. And to service each transaction, the “owners” charge a service fee. But if the technology is in place to allow consumers to pay creators directly, creators can “own” the community they serve. Cryptocurrencies allow this and eliminate the need for setup. The question now is, which cryptocurrency must be the dominant one? Nobody knows.
What is also clear is that governments around the world are accepting that cryptocurrencies are here to stay, although they remain unclear as to how far they will go. That is why politicians come up with ideas such as bans and taxes without thinking about them. History also suggests that public policy always lags behind technology. Traffic rules were only created after the invention of the automobile. It will be a while before the dust settles on cryptos.
Which brings us to our starting point: do you invest in cryptocurrencies or not? Buffett won’t invest because he doesn’t understand. Another way of looking at it is that if there’s some money you’d like to lose but are willing to make an informed decision over the longer term, put it down. And then forget it for a few years.
Charles Assisi writes at the intersection of business, technology and politics