Crypto currencies have mesmerized investors across the globe. The price action of Bitcoin has been grabbing more media attention than a celebrity would—after all, celebrated business tycoons have endorsed it publicly. Cryptos are being portrayed as an emerging (digital) asset class even in the mainstream media. Amusingly, all this happens when RBI has expressed its concerns about the growing popularity of crypto currencies in India.
We believe, crypto currencies, at least in their current unregulated avatar, can’t be an asset class for retail investors. Rather than a safe-haven asset free of any government control (as being portrayed), its role has reduced purely to a speculative asset which is used for illegal activities.
Data as on as on May 26, 2021
The most common argument you may hear from the proponents of cryptos is—fiat currencies are losing their relevance.
At present, all assets that you can think of are either denominated in local currencies issued by various governments or valued in the global reserve currency, i.e., the US Dollar. Thus, if a currency topples for any reason, it can have cascading effects on other asset classes.
Diminishing confidence in paper-currencies can largely be ascribed to endless money printing, mounting debt and fragile economic growth, amongst others. Moreover, the growing resentment among masses against governments in several regions of the world has been a sentiment dampener for fiat currencies. The collapse of financial systems in a few countries, such as Venezuela and Zimbabwe, has offered anecdotal ‘use cases’ for cryptos in averting greater economic and political fiascos.
You see, the emergence of crypto currencies has a backdrop which is reasonable and relevant. But does that mean, you should jump out of the frying pan into the fire?
At present, there isn’t any globally accepted asset class besides gold which has a universal appeal, acceptance and relevance in the financial economy. Gold has survived centuries and has held its purchase value. That said, it has its own limitations too. For instance, it can’t earn you any rent, dividend or pay interest. It can’t readily buy you things that you need in daily life—you can’t exchange gold to buy an air conditioner.
Your discussion with an ardent fan of Bitcoin on the subject of cryptos can’t end without you being reminded of the maximum number of Bitcoins that can be mined ever (21 million). As of now, 18.5 million Bitcoins have been mined. Well, did you know, there exist 5,360 crypto currencies? Out of these the top-10 make up 80% of the existing market cap of cryptos.
In other words, while the supply of Bitcoins might be capped, there is no restriction on the supply of other crypto currencies. And in the recent past, we have seen how violently crypto currencies fluctuate. Can any alternative asset which aims to shun government controlled fiat currencies fluctuate 25%-30% within a few days?
According to the World Gold Council, the above ground stocks of gold at the end of 2019 were 1,97, 576 tonnes and 54,000 tonnes were the below-ground reserves. But no metal threatens to replace gold as a safe-haven asset. As ESG compliances are tightening up, it’s getting increasingly difficult to ramp up mining production. There are other factors too. Unless, prevailing gold prices are remunerative enough, miners can be reluctant to ramp up the production.
If you want to understand cryptos at even a deeper level, you must use an accurate weighing scale.
At core any currency is a store of value. But we believe it’s a store of efforts too.
If any currency endevours to replace the present reserve currency it must tick the following checkboxes:
The trickiest aspect is the ability to lubricate global trade.
GDP and Debt data is for 2020
Gold reserve estimates at the end of 2019
Crypto currency data including that of Bitcoin is as on May 26, 2021
(Source: IIF, Coinmarketcap, BIS, World Gold Council)
It’s a no brainer that only a few cryptos might survive. The present market cap of cryptos suggests that supporting global trade and transactional needs of the global economy is a herculean task for them. Does that mean we might experience a parabolic rise in the valueof crypto assets? That seems to be an assumption with which the proponents of crypto currencies are going all-out on promoting them.
But wouldn’t rising prices make cryptos a hoarder’s haven? Who would sell/exchange cryptos if the asset prices are rising vertically? And then what will happen to the transactional aspect of the currency?
Moreover, regulating cryptos might violate their most primary attribute—no government control. Because, once the regulatory controls are imposed, it would be relatively easy to decide what can be and what can’t be done with a crypto currency.
You see, the real issues are screamingly loud. We, as a global economy, have borrowed too much from the future. The effects of additional debt on global growth are diminishing i.e. extra debt isn’t resulting in incremental growth. And that’s perhaps leading us to scout for alternative currencies and assets.
Can crypto currencies come up with a mechanism of directly valuing the effort (output) without first pricing it in a fiat currency, say USD? Until then they are likely to remain a highly speculative asset unfit for majority of Indian investors.
Redistribution of wealth and debt reduction are the two real issues. Will cryptos hold the key to resolve them?
It would be crucial to keep track of the gold to crypto market cap ratio, which is 7 times at present.
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Disclaimer: The blog is for information purposes only. Asset allocation is an extremely important decision. We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances.
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