Fiat currencies and cryptocurrencies

Good Morning Ladies and Gentlemen

Last week I wrote that I would come back to the beautiful quote in Ernest Hemingway’s  iconic book «The Sun Also Rises» or «Fiesta» in which his character Mike Campbell is asked how he went bankrupt, and his answer is:

«Two ways. Gradually, then suddenly.»

Fiat Currencies

Often I am asked why fiat currencies are called fiat currencies. I found this relatively concise definition by Investopedia (Investopedia: Sharper insight, better investing.). Fiat money is a government-issued currency not backed or only partially backed by a physical commodity, such as gold or silver, but rather by the government that issued it. Thus the value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global ones. The term „fiat“ is a Latin word that is often translated as „it shall be“ or „let it be done.“ Thus fiat currencies only have value because the government maintains that value. The national economy of the issuing country backs them.

Cryptocurrencies based on the example of Bitcoin

Like many other cryptocurrencies, the idea behind Bitcoin is that of a currency not linked to the monetary policy of any national economy and with an intrinsic anti-inflation mechanism built into its DNA, in which the maximum number that can be mined is capped at 21 million. Furthermore, transfers from one Bitcoin holder to another are possible at no cost 24/7 as long as there is electricity and internet. Last but not least, the word «crypto», which can be translated as «hidden» or «secret», means that owners of cryptocurrencies can stay anonymous while using them to purchase things or execute transfers for other reasons.
However, like most cryptocurrencies and as mentioned above, Bitcoin is not backed by any issuing government or anything else, really. This means Bitcoin has no intrinsic value in the traditional sense. In addition, until today, we, as the public, still do not know who invented and coded Bitcoin. Satoshi Nakamoto (Satoshi Nakamoto – Wikipedia) is the pseudonym for the person or group behind the development of Bitcoin. Finally, because Bitcoin is not a productive asset, it can only increase in price if someone is willing to pay a higher price than the current owner.

Crypto trading

As Ben Hunt from Epsilon Theory put it the other day, Crypto trading has a much laxer regulatory framework, especially regarding what would be considered insider trading and material, non-public information in the stock and bond markets. There is probably a reason that many of these crypto trading shops are based in Asia and the Caribbean.

Conclusion I

There are some undeniable positive features of cryptocurrencies, and there are risks. I wrote in «Stefan’s weekly» long ago that inflation is limited within many well-known cryptocurrencies because mining is capped. However, the issuance of new cryptocurrencies is not capped and may have an inflationary effect on the entire sector. According to Coin Market Cap (Cryptocurrency Prices, Charts And Market Capitalizations | CoinMarketCap), 21’908 exist today, much more than I would have thought.

Investment decision

Any investment decision comes down to anyone’s personal asset allocation principles and risk appetite. Make sure you know how much risk you want to take and how much risk you can take.

Conclusion II

Suppose you feel like «investing» in Bitcoin, not knowing who is behind the codes, understanding that there is no intrinsic value or tangibility, yet, very high volatility, and you still see enormous upside potential because it represents a limited «good» and is not linked to any national economy’s monetary policy, then maybe you want to take a shot at it.

Conclusion III

The FTX collapse struck many investors. Today they can share Mike Campbell’s experience of going bankrupt in two ways, gradually and suddenly. Greed and fear are part of the game and will always be. Think about it!

Ladies and Gentlemen

As always, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.
Many thanks, indeed!

I wish you an excellent start to the day, a great weekend, and peace above all!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li