I recently outlined some of my thoughts on the fundamentals of cryptocurrency. However, it occurred to me after receiving a few responses that there was something missing from that essay: why?
Why own cryptocurrency at all? What’s the point?
Most people fall into two camps here. The first camp sees cryptocurrency as an investment opportunity. The second camp sees cryptocurrency as a completely parallel track to the current financial system.
It’s hard to tell the difference between the two because anyone in the first camp pretends to be in the second camp. Getting rich feels like a trite reason to invest in something. People want to hear a story.
The story that the second camp tells goes something like this:
- Investments that promise risk-free returns are often scams, pyramid schemes, or some combination of the two. Cryptocurrency is not risk-free, but it is a different type of risk.
- Buying cryptocurrency is like buying a piece of the future. You are choosing to own something that isn’t widely used as a form of payment because you believe it will one day become a major way to exchange value between two or more people.
- The risk of owning a cryptocurrency is that the future won’t turn out to be a place where cryptocurrency is needed. The risk of not owning cryptocurrency is that you will need it eventually, but it will have appreciated so much by then that you missed the boat.
- Most “normal” investments are correlated in some way. Holding cash puts you at risk of inflation. Owning equities puts you at risk of an economic recession. Bonds risk government instability. The common theme across all of these investments is the idea of a nation-state government that controls the financial system. Cryptocurrency is one of the few assets that does not require this system to operate. You don’t need permission to send cryptocurrency — only an internet connection and a small amount of funds to get started.
- Cryptocurrencies are opt-in economic experiments. Normally, you need to be a government to print a new currency. Cryptocurrencies let you try out different monetary systems without owning a big chunk of land or an army. Buying cryptocurrency means you’re choosing to participate in a monetary system because you agree with it, not because you happen to live in the country that issues it.
- Wealth can be transferred through time or space. Some assets, like precious metals or art, hold their value well over time. Other assets, like currencies, are easily transferred from one place to another. Cryptocurrencies are intended to be both easily transferrable and to appreciate in value over time.
If you agree with any of the points above, then you might be interested in getting started with cryptocurrencies. The best way is to setup a wallet and conduct a small transaction with someone else (I would be happy to do this with you). The aha! moment happens when you realize that you can send money anywhere in the world with the click of a button. No permission needed.