Donald Trump still has six weeks to go before he returns to the White House, but the expectations on what he is going to accomplish are already breaking the dam. Among other things, he is widely expected to be a big friend of the crypto asset community. According to Andy Serwer with Barrons.com, since Trump’s election victory,
the price of Bitcoin has smashed through the $100,000 barrier … in large part because of the president-elect’s perceived cryptophilia. That’s notable enough on its own, but I think this is just the beginning of a broader, more momentous trend.
There is no doubt about the incoming 47th president’s popularity in the crypto community, where he has gained almost heroic status. Andy Serwer predicts:
Instead of being stymied by the federal government, the crypto cosmos will soon be enabled—nay, driven—by Trump and his team, whose connections to and predilections for crypto are strong and deep.
Looking at all this through the lens of economics, the crypto-phoria is more than a little puzzling. That is not to say it is without merit; the question that still begs for an answer is: to what extent do crypto assets add value to the economy as a whole?
Let us not get off on the wrong foot here. Trump has taken a good general approach to crypto assets: the basic tenet of his policy appears to be deregulation, and that is in itself laudable. Whenever government yields to the forces of the free market, businesses, households, workers, and consumers are allowed to determine the boundaries of our future. By giving crypto assets the same conditions as other assets and products in our economy, a deregulation-friendly federal government could help technological innovation.
Generally speaking, the incoming Trump administration appears to be determined to solidify America’s global technology leadership. This ambition to put the U.S. ahead of the rest of the world is not limiting in its scope, but wants to span crypto technology and artificial intelligence as well as more ‘traditional’ forms of technology.
It is easy to understand how a tech-friendly Trump can attract support from tech-savvy entrepreneurs like Elon Musk and Vivek Ramaswamy. At the same time, we should also not get carried away by technological optimism. Those of us who are old enough to remember the beginning of the personal computer, the cell phone, and the internet can still reflect upon how we still go to the grocery store, work for a living, do laundry, wipe the noses of sneezing kids, and fly halfway across the country to see Aunt Mabel on Thanksgiving.
Modern technology has no doubt added quality to our lives, but the existential revolution that tech optimists of 40 years ago were hoping for simply has not materialized. We may still yet experience that revolution; for one, artificial intelligence may still only be in its infancy.
However, there is a natural limitation to what some technological advancements can lead to; crypto belongs in this category.
To see the potential and limitations of crypto assets, let us take a look at what those assets are not. First and foremost: as a general rule, they are not currency. This seems to have dawned on crypto fans, who increasingly refer to cryptos as ‘assets’ instead of ‘currencies.’ This shift is good; while cryptos are legal assets in a large number of countries, to date, only two countries have adopted cryptos as legal tender.
That does not mean it is explicitly illegal to use cryptos as a means of payment between individuals; it is de facto globally accepted to pay for a service with a piece of property instead of cash. Suppose I have an old motorcycle in my garage and my neighbor’s son wants to buy it from me. Since he does not have enough money, I ask him to work so and so many hours in my backyard.
By the same token, my neighbor’s son could be interested in crypto assets, and I could therefore pay him in ethereum or solana. Since neither is legal tender in the United States, he cannot expect to use them as a general means of payment; again, with the exception of El Salvador and the Central African Republic, cryptos do not have legal tender status.
This is noteworthy since fans of bitcoin—the most reputable of the cryptos—in its infancy talked about it as a new form of currency. The fact that it never achieved that status is in itself not a reason that cryptos will never become currencies, but for reasons I discussed back in 2023, it is highly unlikely to happen.
Being assets rather than currency, cryptos are assets in the legal sense of being pieces of personal property, but they are not assets in the same economic sense as income-yielding assets. Owners of government bonds or corporate shares receive regular interest or dividends; cryptos do not produce any income for their proprietors.
The reason is obvious: when you buy a unit of a crypto, you do not buy some other property. One corporate share in Boeing is a piece of paper (or digital certificate) that makes me the owner of a small sliver of the Boeing company. Cryptos do not come with any similar underlying asset.
One bitcoin is one bitcoin, end of story.
It is noteworthy that cryptos are no longer commonly referred to as ‘currencies’ but instead as ‘crypto assets.’ They are indeed assets, but with no intrinsic value; while a car produces utility in the form of transportation, and a corporate share yields income, the crypto asset does neither.
The best way to think of cryptos is to compare them to investment-grade gold. Some people buy gold when they are active in the workforce and keep it with the intent to sell it as a means to finance retirement. Since the intrinsic value of gold is low, it compares well to crypto assets in this regard.
As a general rule, the only value of a crypto asset is the resale value it has on the day we intend to trade it for cash. That does not mean there could not be crypto currencies with broader use, but for that to happen the crypto currency would have to be as liquid as the dollar—in other words, as widely accepted as a means of payment.
Maybe as a start on that process, the federal government could accept cryptos for tax payments?
