The divergent views on cryptocurrencies

Financial regulators are expressing concerns
Cryptocurrencies are the next big thing in finance
July 4, 2021
Oluwatobi Olaniran

A crypto millionaire by accident...

In 2009, an unsuspecting masters student, Kristoffer Koch, was researching the latest encryption technologies for his masters thesis when he discovered Bitcoin and its proprietary blockchain technology. He invested a meagre US$27 to purchase 5000 Bitcoins. He went about his daily life until 2013 when Bitcoin started making the news rounds.

He remembered his impulsive 2009 investment, sought for his wallet’s encryption key and changed 20% of his early investment for a whooping US$886,000.

Today, there are many other success stories like Kristoffer’s. At press time, the value of a Bitcoin is over US$50,000. So let’s not bother calculating how much Kristoffer may be worth had he held on to those coins till date.

Bitcoin, Ethereum, and Ripple are familiar names in today’s media... but what are they?

Since Bitcoin’s introduction, other cryptocurrencies have been introduced including Ethereum, Ripple, and 4000+ other coins. Bitcoin, Ethereum, and Ripple are the three biggest cryptocurrencies by market capitalisation. They are digital currencies that are distinguished by their underlying blockchain technologies.

Blockchain technology in simple terms is a type of database that is distributed across multiple computers around the world. This feature eliminates the need for a central authority or bank for its issuance and supply, and promotes transparency by keeping a record on all computers in the blockchain network for each transaction made.

The contention...

Early adopters including investors and stakeholders view cryptocurrencies as the future of currencies and a viable store of value while most financial regulators consider it a financial bubble and wouldn’t classify it as a financial instrument due to its high volatility. Why do these divergent views exist?

1. Cryptocurrencies are the future of fiat currencies

Cryptocurrencies were designed for autonomous operations outside of the oversight of state central banks guaranteed by blockchain technology. Decentralisation from central banks ensures a trustless system where no single government entity can increase its supply to influence its perceived value as is the case with fiat currencies.

What else can cryptocurrencies do?

Cryptocurrencies can further prevent systemic economic failures due to central bank directives as seen in hyperinflationary economies such as Zimbabwe’s. Such economies were victims of the central bank’s directive to print more money as a response to a poorer economy, thereby making the currency much less valuable than planned because of inflation. Cryptocurrencies mitigate against such negative impact because they are not under the control of central authorities.

Will cryptocurrencies achieve global use?

The weakness of national currencies have been outlined for years. While there is a push back on the adoption of cryptocurrencies globally, there are projections that there will be creation of digital versions of existing national currencies through central banks. These projections position cryptocurrencies for global adoption as they become interoperable with central bank issued currencies.

2. Cryptocurrencies are a protection against inflation

Big corporations including Tesla, Square Inc., and Microstrategy seek to diversify their portfolios through cryptocurrency investments as they hope to protect themselves against future inflation.

This comes against the backdrop of countries handing out stimulus as a response to the negative economic impact of the COVID-19 pandemic – a move financial experts say will cause a spike in inflation rates.

The whopping amount of potential investment returns!

There is a potential for huge returns on cryptocurrencies for individual investors especially early adopters like Kristoffer. For instance, bitcoin started the year 2020 at US$9,545.08 and rose to US$57,636.76 in March 2021.

What says the Wall Street?

Analysts at JP Morgan say bitcoins can be worth more than US$146,000 if it becomes as established as gold.

Bitcoin is currently less than 10% of the market capitalisation of gold and the stock market.  Bitcoin supply is capped at 21 million units worldwide, meaning that the per unit appreciation of Bitcoins will be more significant than that of gold because of its limited supply. This huge potential to appreciate in value establishes Bitcoin as a viable store of value.

1. Governments are wary of the volatility of cryptocurrencies

Governments and financial regulators are concerned about the sustainability of a cryptocurrency dependent economy because cryptocurrencies are speculative assets as they lack intrinsic value.

According to BBC, bitcoin’s value is driven by three speculative factors namely, media hype, the involvement of traditional money managers, and the views of big industry players on bitcoin as a protection against inflation. These make cryptocurrencies highly volatile experiencing huge shocks within a short time.

Is volatility a real issue?

The 2017 spike in bitcoin’s value saw it rise to around US$20,000 in just 12 months and plunged back to just above US$3,000 in early 2018. A similar spike was witnessed in 2020 and the bitcoin’s value is now maintained above US$50,000. 

It is also possible to witness multiple price swings, sometimes losing billions of dollars in market cap in a day. This poses high risks to investors who are either ignorant or downplaying it.

2. Financial institutions can’t decide on the classification of cryptocurrencies

The financial community’s skepticism on cryptocurrencies further extends to the classification of these currencies as a commodity, currency, or security like stocks. This lack of clarity according to experts may have an impact on the future of cryptocurrencies because it would define how they will be subsequently regulated. For example, currencies are more subject to regulation than commodities such as gold.

Cryptos are under watch...

The current lack of regulation on cryptocurrencies is a major source of concern because it means fraudulent transactions cannot be reported to a central body. The United States, Australia, and the European Union continue to allow transactions in cryptocurrencies while working to prevent their use for fraudulent transactions.

While some countries have issued warnings and bans...

Countries including India and Nigeria took a different stance by issuing earlier warnings before banning cryptocurrencies. Both countries are part of the long list of countries that have either banned or censored the use and trading of cryptocurrencies in their country.

Those who perceive cryptocurrency as the next currency and a store of value celebrate it as an integral part of their lives and are very vocal about the need for widespread adoption. Yet, detractors and financial regulators continue to warn against future investments in bitcoin and other cryptocurrencies citing the huge risk exposures.

With all the buzz around cryptocurrencies, will you ever consider investing in bitcoin?

Disclaimer: We are by no means supporting one side of the argument over the other. We collate different views and expand on them to give you a better understanding of the motivation behind these views.
Photo credit: Alesia Kozik (Pexels)
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