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Crypto currency: Money, mania or mayhem?

Cryptocurrencies
An illustration photo of several popular cryptocurrencies here, as represented by physical coins, from the top clockwise: ethereum, ripple and bitcoin. |

Crypto currencies have lit up the financial news lately like lightning bolts piercing the night sky. It’s the stuff news stories are made of. Everything from seven Crypto whales breaching onto the list of The 2021 Forbes 400 Richest Americans, to the crypto market shedding a trillion dollars last week. And in unprecedented marketing efforts, millions of sports enthusiasts watching the 2022 Superbowl will be inundated with challenges to get in the game—by FTX and Crypto.com—companies that make their money exchanging these block-chain currencies.

Which begs the question, “What is this thing?”

A crypto currency, as the name suggests, is first and foremost money. Ultimately, this is its sole value proposition. Those who espouse the virtue of crypto currency argue that it is the inevitable evolution of money. They argue that all fiat money—that is, money backed by a specific government—is past its prime. Just as the gold standard evaporated over the past century, when governments failed to have sufficient precious metals to back their printed currency, fiat money needs to go. Governments can’t be trusted. And neither can their currencies.

How, then, do crypto currencies measure up against money as we know it?

So far, not good.

Economists explain that there are three uses of money. A medium of exchange. A store of value. And a unit of account.

As a medium of exchange, money eliminates the inefficiencies of the Barter System. No longer do you need to determine how many bushels of wheat to trade for a sheep. Or pounds of coffee for a tennis racket. Let alone the odds of bringing together two parties who actually want what the other has to offer.

How do crypto currencies stack up against traditional currencies as a medium of exchange? So far, terribly. The opportunities to purchase something with a dollar are infinitely greater than with cryptos. Crypto enthusiasts will rightly point to rapidly growing mediums of exchange for these currencies, including over 30,000 ATMs across the US that will now convert Bitcoin to your digital wallet. But be warned that Bitcoin ATM fees can range from 7% to 20%, with many hidden fees as well. For now, virtually no venders take crypto currency. And therein lies the rub. Cryptos are a reversion to the Barter System.

As a store of value, money can be reliably saved, whether in the bank or under your mattress. You can’t put time in a bottle, but you can put money there. And for money to succeed in this second function—that as a store of value—it needs to be worth as much when you take it out as when you put it in.

How do crypto currencies stack up against traditional currencies as a store of value? So far, terribly. So bad, in fact, that the volatility in cryptos is their dominant attraction for most crypto holders. The hope that these currencies will make you rich overnight is a euphoria more associated with holding a lottery ticket than a dollar. And unfortunately, volatility cuts both ways. Yes, fiat currencies are subject to inflation, as felt deeply by anyone on a budget this past year. But even the record setting inflation we’ve all just experienced is a gentle breeze compared to the cyclone winds of cryptos. Add to this the fact that crypto currencies are frequently stolen by hackers. Indeed, hackers stole over $14 billion in 2021 alone, more than double the previous year. Taken together, these facts suggest cryptos are a dubious store of value.

As a unit of account, money is used to measure performance. We measure our net worth and budget our income to pay our daily bills and plan for the future. The stable monetary unit assumption is one of financial accountants’ key tenets, with the U.S. dollar the common denominator for every Balance Sheet and Income Statement, from the largest publicly traded companies to newly-weds starting their journey.

How do crypto currencies stack up against traditional currencies as a unit of account? So far, terribly. Every crypto’s claim to value is tied inextricably to the claim that it can be exchanged for real money, whether a dollar, euro, or other fiat currency. Not the other way around.  

Bottom line: Crypto currencies fail every test of money miserably when compared to the real thing.

If not money, then what?

Two obvious options are mania and mayhem.

Mania, “a mental illness marked by periods of great excitement or euphoria, delusions, and overactivity” (Google Dictionary), seems well-suited to describe the huge run-up in interest over the past couple of years in cryptos. Elon Musk appearing on Saturday Night Live shouldn’t move a currency 30%, up or down. Still, the range of financial manias across history is too broad to prove informative for the current crypto craze. For example, the Dutch Tulip Mania, 1634-1637 is widely held as the first speculative market bubble, where near its end, one tulip bulb sold for 10 times the annual salary of a skilled laborer. When prices plummeted, however, there was little widespread harm outside individual speculators. Not so 80 years later, when Englishman John Law took over the monetary system for the French monarchy. In a combustible mix that eventually led to the French Revolution, King Louis XVIth lost his head, with thousands of French citizens as well.

Are cryptos just the latest, greatest pyramid scheme—a fraudulent system of making money based on recruiting an ever-increasing number of "investors"? Perhaps not. But the idea seems less far-fetched when the seven billionaire Crypto Whales are all entrepreneurs whose riches come from companies like Coinbase and Gemini, the ones they created to profit from exchanging crypto currencies, as opposed to just owning them.

Which leaves us with mayhem. “Needless or willful damage or violence.” I first learned of Bitcoin in 2013 while teaching a graduate class on forensic and investigative accounting. At that time, Bitcoin’s use as a currency seemed to be limited almost exclusively for nefarious behavior, from money laundering to drug money to hiring hitmen. Forbes columnist Andy Greenberg reported of one person’s audacious goal of establishing an “Assassination Market,” crowd-funding murders with Bitcoin. The promise of anonymity to criminals greatly outweighed the down-side risks from crypto currencies inferiority to fiat money. The attraction for criminals is obvious. Evil deeds love darkness.

Should we as Christians have a position on crypto currencies, if fraud and abuse are disproportionately rampant with them compared to traditional currencies? It seems there is no shortage in opportunities for fraud within the current monetary system.  

My biggest concern is for novice investors, especially with mounting evidence that crypto currencies are attracting a disproportionate share of them.  As someone deeply involved in accounting ethics research and education through the last two financial crises—the dot-com bubble and the Great Recession—I’ve found that nobody cares about ethics until they’ve been harmed. Then they ask, “Where’s the justice?” And as the finger-pointing starts, we rarely point at ourselves—that we didn’t understand the markets, or that we couldn’t afford that loan.

So permit me one small piece of advice. Investing in something you don’t understand can be ruinous.

“A person’s own folly leads to their ruin, yet their heart rages against the LORD” (Proverbs 19:3).

Are crypto currencies money, mania or mayhem? What you don’t know can hurt you.

John Thornton is the L.P. and Bobbi Leung Chair of Accounting Ethics at Azusa Pacific University, and author of Jesus’ Terrible Financial Advice: Flipping the Tables on Peace, Prosperity, and the Pursuit of Happiness.

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