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With so many cryptocurrencies, why do any of them have value?

Doubts grow about the long-term value of cryptocurrency in 2022 as number of tokens expands

Movie star Matt Damon has attracted unfavourable media attention for appearing in an ad for Singapore-based Crypto.com comparing crypto investors to brave historic risk-takers of the past.

Movie star Matt Damon has attracted unfavourable media attention for appearing in an ad for Singapore-based Crypto.com comparing crypto investors to brave historic risk-takers of the past.

Photo: (crypto.com)

RCI

A financial report this week celebrated the launch of yet another cryptocurrency, this time a new LGBTQ-focused coin that aims to « fight against homophobia. »

If it takes off, the maricoin, a name which, as Reuters reported (new window), is derived from a Spanish language homophobic slur, may be the kind of niche token that will survive in a very competitive field. Its founders hope so.

With fortunes having been made by many who have introduced coins of their own, there is certainly plenty of competition. But for people turning their hard-earned money into crypto tokens, that raises a bothersome question.

Even if crypto tokens really do have a use and a real-world value — something that remains disputed — and if those tokens can be reproduced infinitely, which blockchain mathematicians say they can, why are so many being traded as if they were in short supply?

As cryptos proliferate, informed sceptics worry a nose-dive could destabilize conventional markets.

Is there really a shortage?

The supply of any one crypto, such as bitcoin, may be limited by the algorithm that generates the tokens. But if you need something that acts like a bitcoin, say experts I interviewed, there are plenty of choices.

According to CoinMarketCap, known as a credible source for crypto data, at last count there were 16,394 different crypto tokens (new window) trading on 451 different exchanges, valued at something over $2.2 trillion US.

Giant electronic billboards display adverts for cryptocurrency investment companies in a London tube station in 2018. Since then the number of cryptocurrencies has exploded to more than 16,000.

Giant electronic billboards display adverts for cryptocurrency investment companies in a London tube station in 2018. Since then the number of cryptocurrencies has exploded to more than 16,000.

Photo: (Simon Walker/Reuters)

For whatever reason, maricoin had not yet made the CoinMarketCap listing (although you can find it listed elsewhere (new window)) indicating that the 16,394 number, while large, may be an underestimate.

Many credible financial authorities say it remains uncertain whether cryptocurrencies will eventually have a real-world purpose that justifies buying a stake. Others are far more dismissive.

A recent report in the Financial Times called them "worse than a Madoff-style Ponzi scheme. (new window)Writing in the Globe and Mail's Report on Business, finance professor George Athanassakos's advice on Bitcoin was Just say no (new window)."

Not so good as a unit of exchange

Henry Kim, part of a team of about twenty at York University's Digital Currencies project working on crypto and blockchain — the complex math that makes each cryptocurrency unit unique — says that, so far, the electronic tokens have not been as useful as hoped.

Bitcoin's intended purpose, to be used as money, has limitations, said Kim, an associate professor.

As many people, including me, have pointed out in the past, the value of the tokens go up and down wildly (new window), meaning few people are willing to make deals that will be settled in bitcoin. Also said Kim, with rare exceptions, central banks frown on its use as actual money.

Kim, who holds a crypto stake in his personal portfolio and as a teaching exercise has generated a non-fungible token (NFT) of his dog Smudge for sale for 0.01 of an ether (new window), said that as yet the only proven value of crypto is as "electronic gold (new window)," for a crisis when other assets fall in value. And he says that only applies to the most widely traded examples, with bitcoin and ethereum at the top of the list.

Bitcoin is a finite resource, it is a digital asset and for very similar reasons as to why people own gold ... you can make the same argument as to why you would own bitcoin, said Kim.

I have made the case in the past, that just as with gold, the value of any crypto asset is what someone will pay for it (new window) and so long as markets decide it has value, it will have value. But without some other appreciable core purpose for the crypto units, that strikes some critics as a circular argument.

One way to keep those valuations high is to convince more new investors to participate. Actor Matt Damon has attracted attention on places like Twitter for doing that very thing, appearing in a sophisticated online ad for the Singapore-based cryptocurrency platform Crypto.com, comparing investors to risk-takers of the past, with the tagline Fortune favours the brave.

Another sign that Crypto.com is reaching out to a wider investor public is news this week from the Wall Street Journal (new window) that the company is planning an advertising blitz, including a commercial at next month's Super Bowl. It has already paid $700 million US for naming rights on what has been the Staples Center arena in Los Angeles.

As a teaching exercise, Henry Kim, a blockchain expert at York University's Schulich School of Business, created an NFT of his dog Smudge using the same tools used to preserve the value of crypto tokens. So far, no bidders.

As a teaching exercise, Henry Kim, a blockchain expert at York University's Schulich School of Business, created an NFT of his dog Smudge using the same tools used to preserve the value of crypto tokens. So far, no bidders.

Photo:  (Henry M. Kim)

For some, that may be a warning sign, like stories of the shoe-shine boys giving out stock tips before the crash of 1929, that crypto investing is becoming a little bit too democratized. But if so, analysts at New York investment bank Goldman Sachs aren't worried. They say digital assets are not just becoming like gold, they are stealing investors away from gold (new window), according to a Bloomberg report.

But Canadian financial technology expert Ryan Clements is worried about the  flood of money into so many different varieties of unregulated and speculative crypto assets. 

Rather than being a new egalitarian form of commerce, Clements said that in each case a vast share of the assets is held by the founding private whale investors, who could exacerbate a crash by selling out.

Accident waiting to happen 

Clements, a securities lawyer turned assistant professor at the University of Calgary who advises Canadian investment regulators on cryptocurrencies, sees the market as an accident waiting to happen that could have impacts on the wider real economy. 

And while it might be possible for governments to trace and regulate a limited number of crypto coins, what he calls the process of infinite synthesis and copycat means there is no shortage in the proliferating spectrum of electronic tokens trading on international platforms.

He says there is little evidence payment cryptos like bitcoin and its many, many imitators are being widely used as a legal payment mechanism. 

And while there are potential uses for so-called utility crypto assets similar to Canadian-invented ethereum, such as providing loans or other financial products, Clements says that is not yet the way they are being used. 

Where we see a huge amount of interest in crypto right now, is because people think that the price is going to go up, said Clements. You have capital flows that are chasing returns in an asset class that doesn't have an underlying economic purpose.

Don Pittis (new window) · CBC News

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