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Cryptocurrency: Investment or useful currency

by John Saunders
11th Nov 21 10:43 am

Cryptocurrency today stands at a crossroads. In some parts of the world, cryptocurrencies are gaining legitimacy and regulation. Despite this, questions still remain. Are cryptocurrencies –  investment instrument like a stock or bond? Should they be vessels of storing wealth like a currency? Ask two cryptocurrency evangelists and two distinct answers will result. It seems that everyone has a different idea of the best use case for cryptocurrency. Economists, investors, entrepreneurs, sports personalities, and billionaires all have different ideas. All seem to be lending their voices to the discussion as well.

Today, cryptocurrency is still a somewhat divisive term. Despite this, Blockchain-powered payment (or investment) methods have entered a bullish market. This suggests that cryptocurrency is here to stay. There are compelling cases for cryptocurrency as a currency. Digital transaction to settle payments is a holy grail of tech innovation. Still, a case can also be made for cryptocurrency as an investment instrument. The category is seen by many investors as a hedge against inflation. We will explore both along with who backs cryptocurrencies and for what specific applications.

Cryptocurrency as a means of investment

Recently, there have been many examples of people successfully investing in cryptocurrency. Bitcoin and Ethereum are the two largest cryptocurrencies. A bulk of the recent successes have been with those coins with some notable exceptions. Dogecoin, which started as a prank, has seen significant investment and growth.

This presents investors with a bit of a conundrum. The price of the cryptocurrency is soaring and FIAT money is depreciating due to inflation. Is it safe to use Bitcoin as a hedge against inflation or, as it were, a vessel for storing wealth?

Billionaire Paul Tour Jones told CNBC in October that Bitcoin is his preferred way to mitigate inflation’s impact. He is hardly the only wealthy investor to think this way. Jamie Dimon, CEO of  JPMorgan Chase, has told investors that cryptocurrency is worthless in the past. Yet he issued a note to investors in October, advising that Bitcoin is a great way to offset the impact on inflation.

Duke University professor of finance, Cam Harvey, argues cryptocurrency is an investment mechanism like gold. Harvey argues that it’s likely to see Bitcoin continue to remain a vibrant source of investment opportunity in the near term.

Yet, there are some pitfalls and bumps on the road to progress. Harvey’s team has established that Bitcoin is prone to sudden price fluctuations. These swings triggered by manias and crashes stem from Bitcoin’s lack of centralised backing.

Cryptocurrency’s decentralisation is a key principle. Yet, recent studies cited by Bloomberg revealed that Bitcoin is still controlled by just 1,000 investors. Investors in this category are known as ‘whales’ in cryptocurrency vernacular. These 1,000 investors hold over three-third of the entire Bitcoin supply.

Scepticism of cryptocurrency as a means of transaction by Dimon and Warren Buffet still persists. As two of the world’s most accomplished investors, it is hard not to notice their opinion. Despite this, there have been many compelling cases for investing in cryptocurrency as an investment instrument. Dimon dismisses Bitcoin entirely. Yet, the company he manages advises its clients to consider Bitcoin and other cryptocurrencies. Their reasoning is that diversity of investment instruments will develop portfolios further.

Cryptocurrency as a means of settling payments

Back in 2017, Didi Taihuttu and his family sold all their belongings and invested in Bitcoin. They decided to start traveling the world using only Bitcoin. The rule was simple. They would only buy and trade Bitcoin for goods and services.

It was not an easy experiment. The crash of Bitcoin’s price in 2017 was not a welcome moment for Taihuttu’s family. Yet, Bitcoin has been positioning itself as a viable payment method. There are 14,000 Bitcoin ATMs in the world today.

Cryptocurrency payments are not an eccentricity anymore. They are a valid way to settle a transaction in an online casino or make a legal purchase in El Salvador. In fact, El Salvador is a great test case in progress.

The country introduced Bitcoin as a legal tender in September. Switching to a full Bitcoin based economy. It has been one of the most compelling cases for the use of crypto as payments. The rest of the world seems hesitant to jump in as fully.  Some progress is being made in stable coins or CBDCs. There are many ways for cryptocurrency to become leveraged as a true digital currency.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.

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