Money & Politics

The 3 Most Burning Questions About Cryptocurrency

Bitcoin, Ethereum and other  cryptocurrencies (also known as blockchain protocols) have been the talk of the town in recent months, primarily due to their usage of the revolutionary blockchain technology and their stratospheric price increase. [ipm_caption id="1045950" align="right" width="300"]The 3 Most Burning Questions About Cryptocurrency
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[/ipm_caption] As a millennial value investor, we are always on the lookout for the next 100-bagger. With the prices of bitcoin surging over 300x since the beginning of 2013, it is hard to ignore the cryptocurrencies phenomenon. Below is our take on the three most burning questions that investors have on cryptocurrencies.

Are cryptocurrencies a currency or an asset?

This topic has been generating a lot of debate lately so let’s dive right into what makes a currency a currency. There are two primary features of a currency: (i) generally accepted as medium of exchange and (ii) store of value. So how do cryptocurrencies fare in these two criteria? (i) Generally accepted as medium of exchange – It is clear that cryptocurrenciess today are not generally accepted as a medium of exchange. There isn’t much you can buy with cryptocurrencies at the moment. While there are increasing number of individuals and businesses accept cryptocurrencies as a form of payment in exchange for services or products, the usage of these cryptocurrencies is still highly dependent on its relationship with fiat currencies. What this means is that for example when an individual or business charge their customers in bitcoins, the amount of bitcoin they charge fluctuates significantly based on recent bitcoin-to-USD exchange rate. [ipm_internal_ad_list ipm_ad__post_id_1="1045713" ipm_ad_copy_1="3%20ETFs%20Riding%20High%20on%20Bitcoin%20Surge" ipm_ad_url_1="https://investorplace.com/2017/10/3-etf-riding-high-bitcoin-surge-ggsyn/" /] Now then the question is will cryptocurrencies be generally accepted in the future when and if they become more widely adopted? At their current forms, we believe it will be difficult for cryptocurrencies to be widely adopted and here’s why. Cryptocurrencies are essentially unique due to their anonymity, irreversibility and decentralization. However, it is precisely these features that would prevent the wide adoption of cryptocurrencies. These features would create significant problems for sovereign states in areas of taxation, money laundering, fraudulent activities, and implementation of monetary policies. It is our view that governments around the world would eventually either outright ban or heavily regulate the use of cryptocurrencies. In the latter case, cryptocurrency exchanges would likely be required to perform standard KYCs (know-your-customer) similar to what existing financial institutions do, and cryptocurrency addresses would need to be tied to real world identities. The goal would be to ensure all transactions are fully transparent, traceable and permissible. Other intermediaries like wallet providers would be required to be registered with governments and would need to adhere stringent cybersecurity and anti money laundering rules. These are just a few examples of what regulations on cryptocurrency would look like. With that said, this begs the question, if cryptocurrencies were to be regulated to a point that they provide no real advantages over existing currencies, then why do we need them? As such, it is our view that  cryptocurrencies, at least at their current forms, are unlikely to be generally accepted as a medium of exchange in the future. (ii) Store of value – To evaluate whether cryptocurrencies are a good store of value, we can take look at whether they are stable in value, durable, divisible, transportable and difficult to counterfeit. While cryptocurrencies fare well in most of these criteria, pricing of cryptocurrencies lacks stability and has been volatile and erratic since conception. As the supply of cryptocurrencies is typically limited and controlled by a schedule written in the code, their pricing is solely a function of demand. Central banks around the world utilize monetary policies to increase or decrease the supply of fiat currencies in response to large sudden fluctuations. This is to promote stability and avoid disruptions in economic activities. Without the ability to control the supply side of the equation, it is unlikely that the pricing of cryptocurrencies would ever be stable. To sum up, it is clear that cryptocurrencies, despite the misleading name, are not actually currencies and would not replace fiat currencies. In that case, then what are they? While we believe the blockchain technology will eventually bring substantial fundamental changes to our society, cryptocurrencies today are simply vehicles for pure speculation of future demand in the different blockchain protocols. Next Page Read Article

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