FLOODING YOUR HOUSE TO INSURE AGAINST FIRE To be fair, crypto has defied expectations thus far. Its price soared even though it was never clear what its value was. As Eugene Fama, the father of modern finance, recently said: “Unless it becomes a widely used medium of exchange, bitcoin should eventually implode. The alternative is that all I learned from monetary theory about how currencies acquire value is meaningless.” He has a point. Cryptocurrencies don’t pay dividends, and a currency that is not backed by a government has no intrinsic value, because it has no claim on real assets. The technology may have worth as a way to facilitate payments. But that is not enough to justify its current value. True, any specific coin is in finite supply. In theory, this should make it a hedge against the dollar. But many things are finite supply – Franklin Mint collectibles, for example – and no one thinks they are worth billions of dollars. Besides, it is hard to argue that even Bitcoin, the most established of the coins, is a good hedge of anything when it is so volatile. It is much more volatile compared to the dollar (the asset it is meant to hedge) or to the stock market, which is a better inflation hedge. Investing in crypto to hedge dollar risk is like flooding your house to insure against the chance of a fire.
Commentary: Crypto is going mainstream, which means it’s over
