It has become widely debated whether cryptocurrencies are part of the ‘get rich quick’ scheme or if they represent an emerging asset class with strong fundamentals to guide investors. Even twelve years after its inception, the world is still deciding what cryptocurrencies really are and how to categorize them in order to make sense. But what makes people think crypto is only about speculation? Will cryptocurrencies find a place alongside traditional assets, or will they compete with fiat currencies? Let’s take a closer look!
What is the Purpose of Cryptocurrencies?
In the first place, cryptocurrencies are merely digital currencies. As with physical dollars or other fiat currencies, cryptocurrencies can also be used for payments. However, unlike fiat currencies, cryptocurrencies do not exist in physical form. Furthermore, unlike fiat currency, which is controlled centrally by governments through central banks, cryptocurrencies are decentralized with no single control entity.
As a matter of fact, cryptocurrencies are also regarded as a kind of digital asset that some people consider to be ‘digital gold’. Cryptocurrencies are highly valued as investment assets because they are considered so valuable by the upcoming generation of investors. Crypto trading is also widely regarded as an incredibly lucrative business. In the same way, you can trade in various cryptocurrencies with AximTrade, you can also trade crypto on a variety of trading platforms.
Understanding the Economic Basis of Cryptocurrencies
A good place to begin understanding cryptocurrency economics is by looking at its value. Here are two questions to guide you. First, do cryptocurrencies have any value? Second, if cryptocurrencies have value, how do they acquire them? Here are the answers to each question.
The answer to the first question is yes. Cryptocurrencies have value. The value of a cryptocurrency is determined by its price. Despite the volatile price of cryptocurrencies, they still have value. Taking Bitcoin as an example, the cost of one Bitcoin on October 20, 2022, is around $19,000. Any minute, the price can rise or fall. However, a cryptocurrency has value just because they have a price.
To further explain, cryptocurrencies have value because they also act as a store of value. A cryptocurrency can be purchased and kept as a store of value using digital wallets. If you would rather not keep fiat money in the bank, you can decide to convert it to cryptocurrencies and store it in wallets instead. As a result, cryptocurrencies hold value. However, their value is highly volatile, which means it can fluctuate at any time.
On the second question, cryptocurrencies are valuable because of their scarcity and utility. For example, the maximum supply of Bitcoin is 21 million. There will be no more Bitcoin after that maximum limit has been reached. Over 90% of this has already been set aside in reserve. As Bitcoin’s supply continues to shrink, its demand continues to rise.
Furthermore, it is difficult to counterfeit cryptocurrencies due to their blockchain technology. As a result of blockchain technology, a decentralized and distributed digital ledger is created, with no central management or control. Every Bitcoin transaction can be seen and evidenced by everyone on the Bitcoin network. Therefore, it is realistically impossible to double-spend on the cryptocurrency network, as there are millions of miners.
Cryptocurrencies as a Payment Method
The use of cryptocurrency as a payment method is widespread. Many people are using it for purchasing goods or services in many retail outlets just like they can with the dollar or the euro. Payments made with cryptocurrency are also increasingly accepted by many retailers. Their actions are motivated by the fact that it has value. Unless it has value, a retailer would not accept it.
Unlike fiat money, cryptocurrencies are not accepted everywhere as payment, but that does not mean they lack value. In contrast to fiat money, cryptocurrencies have only been around for a few years. Therefore, it may not be well-known or understood by many people. As digital payments continue to grow, cryptocurrency will gain more acceptance as a means of payment and have already begun to do so.
Are Cryptocurrencies Speculative Assets?
There is still debate among experts whether cryptocurrencies serve the purpose of speculative assets, which means they carry greater risk than most other investments. As a matter of fact, Satoshi Nakamoto did not intend Bitcoin to be a speculative investment when he created the project. Bitcoin was envisioned by its creator as an alternative to traditional fiat currencies.
However, more than a decade after Bitcoin’s inception, there is still debate as to whether Bitcoin has fulfilled Nakamoto’s original, bold vision. Since Bitcoin is not an alternative form of cash, it is viewed as a store of value rather than a means of payment. Although Bitcoin has surpassed competitors like gold (a commodity) in terms of price, Satoshi’s vision for Bitcoin’s use as alternate cash is still largely unfulfilled. During periods of network congestion, Bitcoin struggles to process more than seven transactions per second (TPS).
Cryptocurrencies have been around for over 13 years, but still lack a substantial daily transaction value, which leads many to argue that cryptocurrencies are a store of value rather than an alternative to fiat currencies. Despite cryptocurrency’s similarities to a currency, such as the ability to act as a medium of exchange, scalability issues, among other problems, keep cryptocurrencies from achieving their full potential as an alternative currency.
According to Jim O’Neill, President of the British “think tank” Chatham House, the value of cryptocurrencies like bitcoin correspondingly responds strongly to speculation, especially in light of the fact that:
- The price of bitcoin and other cryptocurrencies is extremely volatile in comparison to the usual stock market investment. He believes that “it does not seem to reflect their strengths, but rather the hype of the moment”.
- There is no legal tender status for them. His view is that “to be credible, a currency must function as a medium of exchange, a store of value, and a unit of account”. In this sense, bitcoin’s high volatility makes it “almost impossible to imagine it becoming a reliable medium of exchange or a store of value”.
However, Jim O’Neill understands that bitcoin and other cryptocurrencies are popular when there is an alarming lack of trust in fiat currency. There are some developing or emerging economies where there is no trust in central banks or investments in foreign currencies are prohibited. As a result, he thinks that digital currency is a good way to store savings in such cases.
Holding Cryptocurrency vs. The US Dollar
Digital alternatives to traditional currencies, uncontrolled by governments or central parties, are controversial for a variety of reasons. One reason a merchant might not accept cryptocurrencies is that they are less convenient than fiat currency. It is possible for cryptocurrencies to suddenly plummet in value the very next day if a merchant accepts them for a good or service.
In contrast, fiat currencies like the US Dollar boast a rich history, and as one of the most widely used currencies in the world, the US dollar is used as a secondary currency in many countries in addition to its official status as a reserve currency. Businesses and retail traders facing difficulties are most likely to earn a steady stream of income from stable currencies like the USD. Among all currencies, the US dollar has also been deemed the most reliable in comparison with other digital currencies and cryptocurrencies.
Should you invest in cryptocurrency?
Bitcoin and other cryptocurrencies have historically shown little correlation with the U.S. stock market, which makes them an excellent choice for portfolio diversification. A diversified portfolio could be a good way to invest in crypto directly if you believe cryptocurrency usage will grow over time.
Every cryptocurrency that you invest in should have a sound investment thesis that explains why it will endure. Researching and learning as much as possible about cryptocurrency investment will help you manage investment risk as part of your overall portfolio.
There are other ways you can profit from the rise of cryptocurrencies if buying cryptocurrency seems too risky. You can invest in the stocks of companies such as Coinbase (COIN.ax) and PayPal (PYPL.ax), which may be a great option. You can trade stocks online either by purchasing real shares or by trading the derivatives of stocks, for example, stock contracts for difference (CFDs).
Trade Crypto with A Trusted Platform
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Disclaimer: The above information provided is for informational & educational purposes only. Crypto products and NFTs can be highly risky. There may be no regulatory recourse for any loss from such transactions. Trading can lead to losses, so please do so at your own risk.