Crypto currencies are not currencies at all.  They don’t have any of the normal characteristic of currency; they are not stable, they are not easily transacted and they are not backed by a sovereign government.  Crypto currencies are stored-value assets. 

I collect old sports cars.  Crypto currencies are similar to my old cars.  I use cash to purchase an old car, I can trade the car, use the car for collateral or I can sell the car.  When I sell a car, I am releasing the value of the car and turning it back into currency.  One significant difference is that collector car values are generally stable, whereas crypto currencies have tended to be highly volatile and can lose all of their value.

So why are people buying crypto?  Some have argued that it’s a hedge against inflation or it’s the new way to send currency around the world.  However, neither of those reasons appear to be practical in execution.  In reality, Bitcoin and other popular crypto currencies have become the new way to gamble.  I think there is a combination of factors including hype, fear of missing out, a way to get rich quick, etc.; that have driven people to purchase the popular crypto currencies and to drive the prices upward.

However, like any other asset bubble, the value only goes up as long as the masses believe.  I’ve even heard people refer to crypto currencies as the Tinker Bell of investments.  It’s real as long as the children believe.  Once people stop believing in crypto currencies the “hustle” is over and the value will drop to near zero.

All that said, there is a new class of “safer” crypto currencies coming to the market.  These are called stable-coins.  These crypto assets are backed by hard currency.  The first of these stable crypto currencies were backed by and priced to match US dollars.  The concept is that the issuer purchases dollar denominated assets in an equal amount to the crypto being purchased.  The theory being the value of these crypto assets will be stable and the owner will be able to use these stable-coins in exchange for US dollars.

The weakness in these stable-coin crypto assets is that the owner relies on the issuer to purchase the offsetting dollar denominated assets and guarantee the crypto asset.  There is already calls for stable-coins to be regulated to ensure the underlying dollar assets are maintained and that any losses in those assets are covered by the issuer. 

Many people who own crypto assets are using them to “yield farm.”  Yield farming is basically doubling down to increase their return on the bet.  They do this by using their crypto assets to borrow funds to purchase more crypto currency or deposit their crypto currency with another investor earning a high rate of return.  This type of activity is called decentralized finance of “defi.”  Some might call it a house of crypto cards. 

“My Take” is an opinion blog series written by CEO Kevin Jones. Mr. Jones received his Bachelor’s degree in accounting from Indiana University, and MBA from Florida Southern College, is a certified public accountant of the State of Indiana, and has been with MIDFLORIDA since 1992. The views expressed by Kevin are solely his own and do not reflect the opinion of the employees, Board of Directors, or Senior Management, except for Kevin.  If you would like to express an opinion regarding the blog or ask a related question, please email kevinj@midflorida.com.”