3 Myths about Cryptocurrency – How Some Investors Got It Wrong

Smart investors know when it comes to nascent, disruptive technologies like tech startups, cryptocurrency and blockchain, their potential value goes beyond income generation and market analysis. Investors need to look at the bigger picture and understand the role of disruptive innovation in changing the way our industries work.

 

Investors Missing out on Tech Stocks

Tech stocks and startups were mostly underrated in the late 90s. Google’s share price was a little less than a hundred dollars in 2004; Amazon’s stock price was less than forty. But after more than a decade, their total market cap surpassed the $800 billion mark – a far cry from what they’re used to be worth.

Some investors have missed out on a good investment opportunity because they didn’t understand how an abstract concept of a digital space can be put to good use with its limitations in user base, hardware, and IT. But it’s only a matter of time before the online and e-commerce industry took off with more efficient and robust connectivity, cloud computing, and mobile access.

Even world-renowned investor and CEO of Berkshire Hathaway, Warren Buffet, admits missing out on Google and Amazon because he didn’t understand many of their business models and that he should have had a better sense of the company’s outlook over the long term.

Is it possible for investors repeating the same mistake over cryptocurrency because they didn’t understand decentralized currency, or the “Internet of money?”

 

What Some Investors Are Wrong about Cryptocurrency

Prominent investors, CEOs, and financial institutions have had some negative views about cryptocurrency, comparing Bitcoin’s rise to the tulip bubble, an artificial gold, or even rat poison. Others are neutral, describing it as a collectible material like artwork or baseball cards.

While some of these views are not entirely wrong (but rat poison, seriously??) it’s important not to make sweeping generalizations about cryptocurrency. Business Insider estimates the cryptocurrency market to be roughly $700 Billion and about to get bigger. Seventy billion dollars is a fair amount of change and nothing to sneeze at. Here are some claims about cryptocurrency which are not accurate.

 

  1. “Cryptocurrency is worthless as an investment.”

Investors have plenty of reasons to believe cryptocurrency is a useless form of investment – from not having a physical form like gold, to not having an underlying asset, or the ability to create value. The fact is, many of our online businesses are extremely valuable despite not having a physical form. Digital assets like online content, research material, customer database, and software applications can be worth millions of dollars. Brands can be worth a lot of money. For example, Amazon’s brand is estimated to be worth $150 billion. Not bad for something that is just a combination of logos, corporate identity, colours, and systems is it?

But how can cryptocurrency be worth anything? With the internet age and social media, it gave us a new concept of ascribing value to something other than pure monetary value.   A phenomenon known as the “network effect” which is when more people use a particular good or service the more valuable it becomes. Facebook and other social media companies are a good example of this.  Facebook is valuable because more than 100 million people use the platform monthly. Cryptocurrency will grow in value, not because it’s a money-making asset like a stock, but because more and more people will have access to it.

To offer us some perspective, the total supply of fiat being used in online retail is around $2.4 trillion, and is projected to double by 2021 (Statista). It is possible, after dealing with issues on government regulation, scalability, and ease of transaction, that most, if not all of our online transactions over the Internet will be using a singular currency. Could it be cryptocurrency? If it turns out to be the case, then we would understand what $4.8 trillion mean on cryptocurrency’s worth.

 

 

  1. “Cryptocurrency doesn’t give anything of value.”

Some investors hold on to the notion that all good investments give value – but cryptocurrency is not one of them. They believe for something to have value, it should be useful and be able to solve people’s problems.

Unfortunately, defining value solely from the standpoint of money-making misses the point of why people value certain things. Vincent Van Gogh’s “Starry Night” is nothing more than oil painting on canvas, yet sold for more than $80 million at an auction. Gold serve no practical use aside from jewelry and store of value, yet people spend hundreds of thousands in mining operations.

On the most basic level, cryptocurrency is just a bunch of ones and zeros; a computer program and network protocol for keeping track of everybody else’s transactions in an open and transparent manner, yet it provides one of the most fundamental human need – security. People who lived through the financial crisis of 2008, or suffering the effects of hyperinflation in Venezuela knows what it means to have most of their savings and retirements wiped out due to economic instability. Was it a coincidence that the first cryptocurrency, Bitcoin, came out during the aftermath of the Great Recession?

Suffice to say, people will turn to a more secure method of storing wealth like precious metals or cryptocurrency, so long as the current financial system remains flawed and susceptible to misuse.

 

  1. “Cryptocurrency cannot function as a normal currency.”

Fiat became the standard currency since the abolition of the gold standard, beginning with UK in 1931, and the US in 1933. But for thousands of years, gold and silver had been the currency of choice in many civilizations. China was among the first to deviate and introduced the concept of paper money in 10th century AD.

Cryptocurrency, particularly bitcoin, is often compared to “digital gold” because, like gold, it has a finite supply and has already been used as a medium of exchange; it is durable, i.e., virtually resistant to hacking and has no single point of failure; it is divisible, fungible, and a store of value. However, because it is highly volatile, it is not yet suitable as a unit of account. In fact, it’s one of the main reasons aside from scalability why some investors believe cryptocurrency cannot function as a normal currency.

But looking at bitcoin’s price since 2013, we see that its value has been going up, with some few spikes and price drops along the way. Gold follows a similar trend, going from $20 in 1901, to $1,060 in 2015. In contrast, fiat’s value has always been declining and is bound to lose its value at some point.

Historically, one of the reasons why governments left the gold standard is that people chose to store their wealth in gold when they felt their currencies are losing value. This in turn, severely limits governments’ ability to control the money supply. Cutting ties between gold and fiat currency was seen as the most logical solution.

Smart investors who understood macroeconomic trends buy portions of gold and silver to hedge against the rapid decline of fiat currencies. Won’t it make perfect sense if people in the future will start buying cryptocurrencies for the very same reason?

 

Conclusion

Cryptocurrency’s value as an investment largely depends on the majority of people choosing to support a currency or a store of value that cannot be controlled by a few individuals. It may not entirely replace fiat as a medium of exchange, but the fact that people have been afforded with this freedom creates checks and balances in our financial system. That alone makes cryptocurrency a valuable asset, not just for investors, but for the common user.

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