Crypto will Never Rival a Fiat Currency

The sucker playing poker is the person who has no business playing the game in the first place. However, losing money in Vegas at least accompanies a reprieve from our soon-to-be cold Canadian weather for a few days.

Last year, the Ontario Securities Commission published a survey about cryptocurrencies. Its findings weren’t particularly surprising. Too many people own it, and few understand it. Despite investing their own money behind crypto, only 51% of the people surveyed could accurately define a crypto asset. Furthermore, the survey found that the majority of purchases were due to word of mouth (41%) and social media influencers (21%).

This week, we speak with psychologist Dr. Jack Muskat about cryptocurrencies and the reason why it attracts speculators.

Whenever countries debase their currency by printing more and more money, inflation creeps into the system. Some cryptocurrencies, such as Bitcoin, promise to have a fixed supply to prevent its owners from losing their purchasing power.

Because of this appeal, many feel that crypto will inevitably act as an alternative currency to any government-backed fiat money. However, we don’t expect this to happen. To be called “money”, the item must act as a medium of exchange on a widespread basis. Due to its exceptional price volatility – sometimes changing plus or minus 10% in a single day – one could never write a forward-looking contract or price a good or service for any reasonable length of time using a commodity like crypto to act as its currency.

Though largely unregulated until recently, that’s starting to change. Money is often laundered nowadays using crypto, hence the need to have greater regulatory oversight. Crypto will lose much of its appeal as regulations continue to mount on the industry.

Avoiding bad purchases can often be just as important to achieving long-term success in the market. As the “greater fool” theory rightly suggests, people will buy something strictly on the hope that another person will be willing to pay a higher price for it later. 

For these reasons, we’ve never traded any cryptocurrencies for our clients, nor will we do so in the future. Instead, we focus our efforts on investing client savings in companies backed by profits, revenues, assets, and actual cash flow.