The US Dollar vs Crypto: Understanding the Key Differences
- Jonathan Harner, CFP®
- Apr 3
- 3 min read
A frequent question I have heard in the last 12 months is some version of: Is the almighty dollar going to be brought down by the shooting star known as crypto currency (crypto actually could be many things, but for the sake of this post I'm lumping them together). Neither currency is backed by a hard asset like gold or silver. Instead, they rely on reputation and trust. This is known as a fiat currency. Here is my response.
First just a little bit of background...
What Backs the US Dollar?
As I said the US Dollar is not backed by a physical commodity, but by the 'full faith and credit' of the United States government. Put another way, people trust the US government so they trust the US dollar. Yes, you may way that the government is not trustworthy. But consider the historical resilience of the US government. Here is a short list...
• Survived 230 years.
• Depression of 1830.
• Civil War
• Panic of 1890
• Panic of 1907
• Spanish Flu and Panic of 1920
• Great Depression
• World War II
• Great Financial Crisis
• COVID-19
It is difficult to overrate the weight of this historical track record.
What Backs Cryptocurrencies?
Unlike the Dollar, cryptocurrencies are backed by the full faith and credit of the individuals or communities that issue them. When a politician, influencer, or blogger promotes a meme coin, the value hinges on the trust investors have in that person. This makes cryptocurrencies inherently volatile. A prime example of this volatility was a recent cryptocurrency scam involving the president of Argentina.
Here is a short list..
• FTX. Embezzled $11.3 billion in client funds.
• Terra USD. Supposed to always be worth $1. Became virtually worthless in days.
• Squid Game coin. Days after launch, the founders withdrew millions and left investors holding worthless coins.
• LIBRA. Argentina's president convinced investors to put millions into the coin. Sold his stake for a quarter billion. Left investors holding worthless coins.
It is difficult to overrate the weight of this historical track record.
Key Differences Between the US Dollar and Cryptocurrencies
So, we can summarize the key differences as follows...
Backing and Stability:
US Dollar: Government-backed, historically stable.
Cryptocurrencies: Community-backed, prone to volatility and scams.
Regulation:
US Dollar: Heavily regulated by the Federal Reserve and government institutions.
Cryptocurrencies: Decentralized, limited regulation, high risk of scams.
Trust and Usage:
US Dollar: Universally accepted, used for global transactions.
Cryptocurrencies: Variable acceptance, primarily speculative.
The Role of Trust and Reputation in Currency Value
Trust is crucial in both systems, but it is only present in one. The US Dollar’s stability is rooted in the weight of its long-standing reputation. Specifically the governments ability to generate tax revenue and project power. Cryptocurrency values can spike or plummet based on the actions or credibility of a single person. For aviation professionals looking to secure their financial future, relying on a well-established and regulated investments counted in US Dollar is far more prudent than gambling on crypto.
Why I Don’t Recommend Cryptocurrencies for Retirement Portfolios
For aviation professionals who are mid-career or nearing retirement, the stakes are high when it comes to investing. Including cryptocurrencies in a retirement portfolio introduces significant risk due to their unpredictable nature. The primary goal of retirement planning is to preserve wealth and ensure reliable income. Crypto does not do either of these.
While both the US Dollar and cryptocurrencies operate on the same fundamental principles of trust and regulation. These principles are only present in one of these. The Dollar’s long-standing stability and global acceptance make it a reliable choice for transactions, while cryptocurrencies offer speculative investment opportunities akin to gambling. Aviation professionals should focus on building a robust, stable financial plan rather than chasing the volatility of cryptocurrencies. Before making investment decisions, consult a financial advisor to navigate these complexities and make choices that align with your long-term goals.
