SMI on the Radio: What You Need to Know About Cryptocurrencies (audio & transcript)

Feb 16, 2022
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Cryptocurrency appears to be more than a fad. But are Bitcoin and other cryptos good investments?

Listen as SMI’s executive editor Mark Biller discusses the crypto world with host Rob West and takes caller questions on Moody Radio’s MoneyWise Live.

Click the play button below. Scroll down for the transcript.

MoneyWise Live airs daily at 4:00 p.m. ET/3:00 CT.

For more radio appearances by members of the SMI team, visit our Resources page.


Transcript

Rob West:
Hi, I’m Rob West. Two questions we often get are: "What is cryptocurrency?" and, "Should I invest in it?" Well, Mark Biller joins us today to answer the first one. The second one? Well, you’ll have to decide.

Then, it’s on your calls at 800-525-7000. That’s 800-525-7000. This is Moneywise Live — biblical wisdom for your financial decisions. (theme music ends)

Well, our guest, Mark Biller, is executive editor at Sound Mind Investing, and there’s no one better to shed some light on this mysterious thing called cryptocurrency. Mark, glad you’re with us today.

Mark Biller:
Thanks, Rob. Always a pleasure to be back with you.

Rob West:
Well, I’m looking forward to this topic. I know a lot of our listeners have questions about it and I’m excited you’re going to unpack some of these key concepts. So where do you wanna start?

Mark Biller:
Well, Rob, it is a big subject, but I think the best place to start is probably to set this up, this whole broad topic of cryptocurrency, as a new form of computing technology. And that may be a different way than some of your listeners have thought about this before. But I think it’ll help us to understand really what’s going on here. So to set some context, let’s think about how we got personal computers in the 1980s. Then we kind of evolved to the internet in the 1990s, mobile computing by our phones and other devices since then. And crypto is, potentially at least, the next evolution in this computing sequence. So the primary focus of crypto, at least at this point is creating a new digital financial system. Now it’s bigger, broader than just trying to come up with a new form of money, but since everyone is already familiar with money, that’s probably a good place for us to dig in.

Rob West:
And the key to this new kind of money is that it’s decentralized — that is, not controlled by governments, as with other currencies, right?

Mark Biller:
Yeah, that’s exactly right Rob. And this is where Bitcoin comes into the story and kind of kicks off this whole crypto era, if you will. So in 2008, this anonymous White Paper was released that outlined a new digital currency called Bitcoin. Now, this vision was for a peer-to-peer currency, like you mentioned, that was outside the control of any government. Now, surprisingly this whole White Paper is only nine pages long, so you can download it off the internet and read the whole thing. And it’s captured the attention, the imagination of millions of people in the dozen years since then.

Y’know, besides being decentralized and outside of any government control, Bitcoin checks a lot of the boxes of functional money. So things like durability portability, scarcity, divisibility, those sorts of functions. And importantly, and this is in direct contrast with most fiat currencies, like the dollar, the Euro, the yen — we see today the impact of the inflationary, monetary policies that drive those currencies — while Bitcoin was designed right out of the box from the very beginning to be sound money. So there’s a fixed cap on the total number of Bitcoins that can ever be produced.

And so it was, it was designed as a contrast to our inflationary currencies, government currencies. So when you think about it that way, Bitcoin has a lot of the same "sound money" appeals that have attracted people to gold over the years. And that’s actually how it’s often described, as "digital gold."

Rob West:
Let’s talk about the investment side. There’s been a lot of attention given to cryptos as an investment. Give us a bit of an unpacking of what’s happened just in the last several months.

Mark Biller:
Well, let’s, let’s go back to the decline in 2020 when the stock market fell and the COVID crisis began. So, at that point, Bitcoin and the other cryptos fell dramatically along with most other investments as everyone wondered whether we were facing the end of the financial world as we knew it — and the regular world as we knew it. But then crypto rallied strongly 2020 and 21.

Last year in 2021, though, summertime swoon. So Bitcoin and the rest of crypto sold off by more than 50%, bounced all the way back to set new highs late in the year, set a new all-time high around $70,000 for Bitcoin, just under that, in November, and then proceeded to roll over and have a second 50% decline.

So I know when I’m saying these numbers, Rob it’s maybe hard for listeners to really put this in context, but 50% declines — you can go back over the last 50 years in the stock market and there have been three of those. We had one in the early 70s, in 2000, and in 2008. And what I just rattled off about the last 18 months is we’ve had two of those in the last year-and-a-half in crypto!

So the type of volatility that we’re talking about — to put it in context for listeners, you need to be thinking about the volatility of tech stocks and then multiplying that by about four times. So at this point in the crypto lifecycle, you’re talking about the extreme edge of the risk/reward spectrum as you’re thinking about investment asset classes.

Rob West:
Yeah. That’s really important to understand. Does that volatility mark fly in the face of the design to be sound money?

Mark Biller:
You know, it certainly does at this point. But I think what the crypto-proponents would say to that is simply that this is so new, this technology and this whole asset class is so new, that it probably isn’t fair to judge it based on where it stands today, 12 years in. There is an expectation that as more institutional money comes into the space, which certainly has been happening over the last year — most of the major banks and investment players have been in some fashion have been, I wouldn’t say embracing the space, but getting involved to some degree in the space, putting some capital to work in the space that some of that volatility should come in over time.

I think that’s probably reasonable, but as an individual, trying to think about, "Is this something I should do now?" We clearly aren’t there yet as far as that volatility being kind of driven out of the space, it’s still a very volatile space. Very high risk/reward.

Rob West:
Well, that was helpful. So we’ve covered what cryptocurrencies are. You’ve touched on them as an investment. Let’s explore how they work. Give us a high-level explanation.

Mark Biller:
Yeah, you’re right, Rob. It can get pretty technical, but the first thing to understand is that cryptocurrencies run on something called a "blockchain." Now a blockchain is just a record of transactions that’s updated and maintained by a decentralized network of computers. So think of this in contrast to what your bank maintains. Your bank is a centralized institution that maintains a ledger of transactions. And so a blockchain is a decentralized version of that that takes this out of the control of the big institution and puts it in the hands of a group of individuals, of networked computers that can accomplish a lot of those same goals.

Now, someone listening to that may be thinking, "Well, why would I ever want that?" But if you think about it, we’re seeing kind of all around us today the breakdown in centralized institutions. So distrust of the Fed and what they’re doing with our money, distrust of the global health institutions and what they’re telling us, you know, about different health things. And then, of course, you’ve got specific examples popping up all the time of these big tech companies, de-platforming people, trying to censor different opinions they don’t agree with — all these sorts of things.

So you can understand why there’s a big appeal of being able to accomplish a lot of these same tasks or goals in a decentralized way that doesn’t require trust in a centralized institution. So the bottom line here, Rob, is most crypto projects are taking something that we’re already familiar with, something like currency or saving lending, these different financial functions that normally require us to interact with a big institution, and crypto is trying to redesign that particular function using computer code in a way that enables groups of people to accomplish it in a trustless, decentralized way.

Rob West:
Yeah, really helpful and interesting. Well, we’re gonna pause for a brief break. When we come back, Mark Biller will be with us to talk about the risks of cryptocurrency. Again, a bit more on investing. And your questions: 800-525-7000. Questions on cryptos, Bitcoin, or anything investing-related. We’ll be right back on MoneyWise Live. Stay with us.


Rob West:
Mark, let’s head to the phones.

Frankfurt, Illinois. Hi, Mary! Thanks for calling. How can I help you?

Caller:
Hi, thanks for taking my call. I was just wondering how Mark felt about crypto being accepted for your church — like for them to say you could give with crypto.

Rob West:
Interesting. Yeah, Mark, we’re seeing more and more of the major retailers beginning to think about and even accept cryptos. What about a church?

Mark Biller:
Yeah. You know, I think that eventually, Mary, we’re probably gonna get there. I haven’t actually heard of any churches that are doing that. There may be some out there that are really technology-savvy and kind of ahead of the curve.

But I think the key Mary really is that cryptos’ hope, their goal, is that anything you would be able to do with regular dollars, regular currency, that you’ll eventually be able to do that with crypto as well. And so as more people have crypto, use crypto, and are wanting to give in that way, I would imagine churches will eventually add that capability much the same way some churches will allow members to give of shares of appreciated stocks or other financial securities. So there are some extra steps that go into that that have to be done by the church, so I wouldn’t expect that to be real broadly adopted real soon. But I tell you, this crypto space keeps evolving very, very quickly. So it probably won’t be long before at least some people are doing that.

Rob West:
And Mark, it doesn’t sound like you’d have any fundamental problem with folks using crypto as a currency, as long as they’re not investing. Is that right?

Mark Biller:
Yeah, I think that that’s true. I’m mean really again, ultimately the goal for crypto is to kind of be used interchangeably as you would currency in any other context. So I think that down the line that’s certainly likely to be an option. And again, for certain folks that are into the crypto scene and have these currencies already, then the flexibility to be able to use them in that way certainly would be attractive

Rob West:
Taking your calls and questions today for Mark Biller — 800-525-7000. Mary, thank you for your call.

To Warsaw, Indiana. Hi, William. Thank you for calling today. How can I help you?

Caller:
Okay. Thank you. Mark, you used two words: decentralization and then inflation. And so my first question is, my understanding is Bitcoin is the only one that doesn’t have a corporation or something it’s all peer-to-peer. And I didn’t know, is there another one where it’s 100 percent peer-to-peer? And if not, of the ones that are controlled by groups, are any of them having software and pledges to not inflate away their cryptocurrency so it loses value like my U.S. Dollars do?

Rob West:
Mark, your thoughts?

Mark Biller:
Yeah. So you’re hitting on a real important point, William, and that is that there are thousands of these different cryptocurrencies. And this is actually one of the criticisms of the whole space is there are so many that it’s impossible for anybody who isn’t dedicating every waking moment to following this space to keep track of them all. So what ends up happening is the largest projects tend to gather most of the attention, but there’s a lot of variety between these.

So you can’t assume, you know, when you hear me talk about Bitcoin, for example, you can’t turn to another project and assume that the same things are true. As you are pointing out here. William, a lot of these currencies do not have the same kind of sound-money principles built into them that limit the issuance of the number of tokens, the number of coins of that particular instrument. And that’s a criticism a lot of times that people who are fans of Bitcoin will criticize the other projects because of their lack of those types of controls.

The other thing that happens some within the space — we’ve seen this with the second-most-popular crypto, which is Ethereum — is we’ve actually seen them change some of the rules. Let’s just put it that way without getting into the detail. They’ve changed some of the rules about how their cryptocurrency operates. Now, the fact that they’ve changed them to make it more like Bitcoin, to make it more of a deflationary currency rather than an inflationary currency, the Bitcoin folks say, "Well, that’s all well and good, but the very fact that you could change the rules is a problem."

So there’s a lot to unpack there, William, but it is fair to say that Bitcoin kind has its own niche within the marketplace as kind of that sound-money representative. And while there are others that try to emulate that, there are a lot of other projects, a lot of other cryptos that really, that is not a focus. And to be fair, a lot of other cryptos are not really trying to be an alternative currency. A lot of the other cryptos are more, probably better thought of as mini tech companies or mini technology projects that are trying to solve a certain function that’s something different being an alternative currency.

Rob West:
Mark, let me ask you, you know — and we talked a bit in an earlier segment about investing in crypto — you said, "Boy, it’s gonna be highly speculative volatility off the charts." Any other risks we need to be aware of?

Mark Biller:
I think there really are three big risks that stand out. We talked about the volatility. That’s the first one.

The second is we’re at this early stage where, like I mentioned a minute ago, there are thousands of these different cryptos. And I think that we’re gonna see a winnowing process over the next several years where most of those end up probably ending up worthless — with a handful of survivors and a lot that fall by the wayside, kind of like we had with the whole Internet build out 20 years ago. So there’s a lot of risk in trying to pick particular winners as opposed to kind of thinking of the whole space advance thing over the next several years as a group.

And then the last risk that I think is really a big one, Rob, is I think we’ve reached the point in crypto’s development where governments are beginning to pay attention. For most of cryptos’ life, it’s kind of flown under the government radar. And the fact that this competing currency was just kind of building a following and becoming popular, kind of off in a corner of the internet, was kind of ignored. And it’s gotten to the point now where the governments are no longer ignoring it.

And I have thought all along that the biggest risk to crypto is governments saying, "We get too much value out of controlling our currencies to allow this competitor to chip away at any of those advantages that we get from that." And so I think we’re at the regulation stage where — not necessarily saying that governments are gonna ban it, although some have done that — but I think that governments may start to make it more difficult, more regulation, more control over the on- and off-ramps to get in and out of crypto. So I think we’re gonna have a few years here where a lot of this is being sorted out and that is definitely a risk to the crypto space.

Rob West:
Well, and I think the big idea here, Mark, is that we just don’t need it as we think about our portfolio and what we’re trying to accomplish with our long-term investing, right?

Mark Biller:
Yeah. That really is the bottom line, Rob. I mean, in the same way that most investors don’t need other speculative investments, crypto falls into that same bucket. So if you don’t understand this, you’re not intrigued and interested in learning about it, don’t feel like you’re missing out here.

You know, if crypto really does hold all the promise that the optimists think it does, we’re gonna have chances over the next several years to participate in this with less risk as this industry matures. Now, on the flip side of that, if you are somebody who’s intrigued by this, I wouldn’t wave my arms and say, "Absolutely not!" But what I would tell somebody like that is rather than putting their focus on getting a lot of money into this space right now, put the focus on really learning and understanding this space before you put a lot of money at risk. Go slow, keep the sizing small, because like we’ve said, a couple of times, crypto really is a speculation more than an investment at this stage in its development. So you really need to treat it just like you would any other really risky piece in a portfolio.

Rob West:
Yeah, no question. Quick question before we wrap up today: how did Bitcoin initially get valued? We have just a few seconds left.

Mark Biller:
Supply and demand. As more people have wanted it — limited supply, more demand — the price goes up!

Rob West:
Mark, this has been really helpful. We appreciate you stopping by today and your great insights.

Mark Biller:
Thanks so much, Rob.

Rob West:
You can find this article at soundmindinvesting.org. It’s called Intro to Crypto. We’ll be right back. Stick around.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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