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Bitcoin (CURRENCY:BTC)is increasingly finding itself accepted as “currency” by entities like Overstock.com Inc (NASDAQ:OSTK), and is revered and promoted by protagonists as inflation-proof. Yet the sheer number of “forks” – parallel iterations starting at the block at which the fork is implemented – have made Bitcoin the most rapidly inflating currency class in history. This is the fourth fork of Bitcoin. Whereas with only Bitcoin, the maximum number of “coins” was terminated at 21 million, each now has the capacity to produce 21 million. That means the rate of inflation in nominal terms since the launch of Bitcoin in 2009 is 400%, over 9 years, or 44% per year.

While this is nothing compared to the largest hyper-inflationary currencies in history (post-WW2 Hungary clocks in at all-time worst having achieved 13.6 quadrillion percent per month with prices doubling every 15 hours.) This comparison is not direct because in the Hungarian example, we are talking about price inflation, which is an indirect correlation to nominal [unit] inflation.

But a quadrupling of the number of units under the Bitcoin banner certainly destabilizes any claim to being inflation-proof. Especially when considered in the context of all crypto currencies. There are now three new iterations of Bitcoin, each of which pales in comparison to that of the original currently, but still – the entire inventory has now replicated itself three times in three years. There are over 1,000 cryptocurrencies, however, making crypto the most rapidly inflating currency class in history.

Bitcoin tops out at 21 million coins, which is interesting, because it has always been stated by monetarists that gold could never underly a currency because there just wasn’t enough of it. How utterly facile that argument now seems.

Bitcoin itself has a total market capitalization of just under $200 billion. The next 24 cryptocurrencies with market caps over $1 billion are collectively worth $224 billion.

The rest of the 1,067 cryptos tracked at Coincap.io share a combined market cap of ~$44 billion. These same promoters like to point to this growing market cap as evidence of a broader acceptance in progress.

That may be, but as I’ve always maintained, every cryptocurrency ever created is, and can only ever be, a proxy for the central bank-issued, government-backed fiat currency that is used to purchase crypto and into which it must ultimately re-converted to be broadly useable.

That is because, despite the floating exchange rate of currencies today, money, as a store of value, originates against the combined assets and future productivity of nations. Bitcoin, and cryptocurrencies, while indeed a cool transactional tool, is nothing more than that. They will never replace fiat central bank issued currency, unless the governments of nations elect to do that.

Among the glaring oversights by crypto promulgators, who are typically very young and therefore less generally cognizant of history repeating, is this idea that increased privacy in transactions is somehow a way forward in an increasingly adversarial geo-political landscape.

Bitcoin Private is touted as the first cryptocurrency to effectively anonymize transactions and transactors through the implementation of “zero-knowledge non-interactive arguments of knowledge”, or zk-SNARKs.” This is a protocol that shields transactions — funds are completely anonymous with no transaction or address balance appearing on the ledger.

When considered against the global financial governance trend that stipulates both KYC (Know your client) obligations on financial nodes in the global financial system, and Anti-Money Laundering requirements, two of the cornerstone policies of anti-criminal and terrorism financing.

Under what circumstances crypto developers envision a world where these major roadblocks to anonymous transacting do not exist is unfathomable, and goes a long way toward explaining the stagnation of uptake of cryptocurrencies by a larger economic swath.

There are ever-increasing instances of merchants who have started to accept cryptocurrency. On Overstock.com, for example, you can buy everything from socks to a luxury watch using just bitcoin, or any of a handful of the other most recognized cryptos out there. Protagonists point to this is proof positive that cryptocurrency is slowly taking over from traditional fiat currency, but I would argue that is not the case.

If we look at the rate of adoption of cryptocurrencies relative to other financial technology innovations – like debit cards, for example – we see that the adoption rate at this point remains sporadic and really anomalous.

We see banks and credit card companies and even Amazon.com making moves to accept cryptocurrencies, but they appear to be doing so reluctantly and opportunistically, meaning they are only trying to prevent lost sales opportunities by catering to the crypto-mob.

But there are is still nothing to suggest that cryptocurrencies will become standardized, except as proxies for fiat, central bank-backed currency.

Proponents insist that the cryptocurrencies are superior because they eliminate the need for trusted intermediaries. But how does one trust something representing itself to be money that is backed by nothing?

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets... More Info...

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