If I hear another story about the latest crypto-billionaire and how easy it was for them to simply buy into an early crypto-currency and then proceed to watch it go up 1,000x or more, I think I’ll be sick!  Yes, that is a statement of pure jealousy; why didn’t I get in?  Well, like most normal people, while I’m aware of crypto-currencies, bit-coin and ICOs, I’m not dialed into the network of providers and creators of these.

What is a crypto-currency, really?  What makes it so special, so potentially valuable, or so potentially worthless?  Simply stated, crypto-currencies are simply digital ledgers of credits you’ve purchased and hold that have a theoretical value outside of the currencies backed by various nation states. Wait, you say, isn’t that like my Kohls Cash I get when I shop at Kohls department stores, or my United frequent flier miles? Aren’t those too simply stores of theoretical value? The answer is yes, they are, but there is one major difference.  It’s tough to openly trade United frequent flyer miles for anything else. The same holds true with the reward points you get at any retailer.  Yes, they have value to that retailer but not really to anyone else.

So, a crypto-currency is simply a digital credit that you buy and trade with others who believe there is value to that credit.  So, you might ask, is it simply a confidence game like Beanie Babies or Tulips (just like the great Tulip bubble)?  Kind of but there’s a huge exception.  Crypto-currencies are built using highly complex algorithms that limit the creation of more supply as more “coins” are produced.  Bit-Coin, for example, has a limit of only 21,000,000 Bit-Coins that can ever be created. Therefore, there’s a “scarcity value” for properly managed cryptos that is akin to any scarce commodity.  Compare this to the U.S. Federal Reserve, a quasi-government institution that can create an unlimited number of dollar bills.  Is scarcity on its own value?  Perhaps. It’s been said that since there are millions and millions of pencils with low value. But what if there was only one pencil and no more could be created. Would pencils be valuable?  Art certainly values scarcity.

There are other reasons crypto-currencies are currently a hot-item.  When you buy, sell and trade crypto-currency, it remains invisible to other people. That stands in sharp contrast with banks that record and report almost everything or credit card companies. Many of us value our privacy, especially when it comes to our personal wealth.  History is replete with examples of governments that have confiscated wealth to satisfy their nation’s needs.  Holding anonymous crypto-currencies that are virtually untraceable globally certainly eliminates that problem.  In addition to this, as we enter what I’ve called “the Candy-Crush Economy,” companies will increasingly utilize their own crypto-currencies to buy and sell things just as companies in the old economy used their own stock to buy and sell things.  How many companies acquired other companies using their stock to complete the transaction?  Just as that was commonplace, so will the use of crypto-currencies to augment or even replace that.

So next time you read about a fancy ICO, you might want look closer at it. Full disclosure: I sit on the advisory board for You42, a media company that is launching its own ICO in July.  Who knows? Maybe I’ll be the next crypto-success!

 

Steve Beaman is the Chairman of The McGraw Council and the author of The Path to Prosperity.

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