The first consideration is easy: traditional currencies are a tool for controlling financial policies: + it is very difficult to think that institutions will give up this power.
However, let’s try to deepen, starting with characters such as Snoop Dogg, Ashton Kutcher and Mike Tyson: well, do you know what they have in common? They are all admirers of cryptocurrencies.
And, as we know, they are not alone.
In recent weeks, Bitcoin has made a rollercoaster ride on the markets: new records, sensational collapses and controversies. The debate is heated because Bitcoin, together with other digital currencies such as Ethereum and Ripple, has enthusiastic fans who love its anarchist aspects and as many detractors who hate its secrecy and the ease with which it is used by criminals and money launderers.
The question posed by investors large and small is whether Bitcoin and its sisters can be legitimate financial assets to put in portfolios or whether they are part of a speculative bubble that will make all those who invest in it much poorer.
The most daring fans then cherish the idea that cryptocurrencies can, in the not too distant future, supplant legal tender currencies issued and controlled by governments and central banks.
The first is a valid question. The second is a most likely impossible dream.
Let’s start with the investment issue.
The origins of Bitcoin are shrouded in mystery: an unknown founder (with the pseudonym Satoshi Nakamoto) launched the idea in 2008 on the web.
The infrastructure that supports it is now known: unlike traditional coins, Bitcoin (and other cryptocurrencies) are not issued by an official body, such as a central bank, but “created” through mathematical calculations.
The coins are then exchanged on a distributed database that uses cryptography to maintain the anonymity of the owners, and hence the false idea that for this reason it is much loved by criminal organizations (personally I see much better a drug trafficker with a flat suitcase than dollars).
In this sense, cryptocurrencies are not “coins” in the sense of a widespread payment method, but financial assets with no intrinsic value.
The fundamental characteristic of these instruments is that their value is determined exclusively by the interaction of supply and demand.
With stocks, bonds and other investments, buyers and sellers have the opportunity to study fundamental data (the turnover of a company, the level of debt of a government, the growth of an economy, etc.).
This does not happen with Bitcoin: the price goes up if there is more demand than supply and vice versa.
And this is what determines its extreme volatility in the price.
The cryptocurrency hit a new high of more than $ 19,000, and the price has nearly tripled since the start of the year. But it is certainly not an investment for “widows and orphans” as they say on Wall Street.
The Bitcoin price chart looks like a crazed electrocardiogram: up and then down dramatically in 2013, then a long rise to the 2017 record, followed by a 70% slump the following year, and much suffering until the return of flame of 2020.
Proponents, such as billionaire investor Mike Novogratz, love the fact that there is limited supply because it makes price increases more likely.
The ability to produce Bitcoin is confined to the skill and speed of computers in solving the mathematical questions necessary to create the cryptocurrency, unlike traditional currencies printed by central banks when they want and like.
Novogratz, who became famous at the hedge fund Fortress, also thinks that Bitcoin is useful as a hedge against the devaluation of currencies caused by the enormous public stimulus of recent years, and also as a “hedge” against inflation (but for the moment there is no trace of this). It is true that in the last decade there have been few investments that have grown as much as Bitcoin.
And it is equally true that this success convinced Wall Street to participate in a party that, for many years, was reserved for small investors, Sunday speculators and criminals. Today, historic banks and funds such as JpMorgan, Guggenheim and Fidelity offer customers the purchase and sale of cryptocurrencies. The emergence of “exchanges” regulated by industry authorities, such as Coinbase, has increased transparency in exchanges and made trading easier.
But risks abound and many are concerned. In the US, the SEC has firmly banned the creation of an exchange-traded fund indexed to cryptocurrencies for fear of inexperienced investors being burned. And many central banks have decided to intervene with studies and pilot projects on “official” versions of cryptocurrencies.
It’s a compliment to Bitcoin but also a signal that institutions will not tolerate a digital invasion of the world of coins. The currency is a fundamental tool for controlling the monetary and financial policies of a country, or of an economic bloc, and it is clear that governments will never give up these powers. Those who predict that Bitcoin will replace cash as a payment method must remember this incontrovertible fact, even if platforms like Paypal today accept crypto-money.
Snoop, Ashton and Mike may be (even) richer thanks to their interest in crypto-money but, like everyone, they’ll do well to hold on to “old-fashioned” currencies.