A currency is just a place to park money, it itself is not an investment. So, what should you do?
Is cryptocurrency safe? The most important thing to understand here is that a currency is just a place to park money. The currency itself is not an investment. When was the last time you bought loads of dollar, yen or even Indian rupee, kept it in your locker (within permissible limits) and told your friends that you have invested in dollar, yen, or Indian rupee? You don’t invest in a currency, you just park your money in it.
Now the question is: Is cryptocurrency safe? It depends upon who has issued it. There can broadly be three types of currencies.
One, a currency that has some intrinsic value like gold, silver etc. Two, a currency which has been issued against some commodity. For example, when the world followed a gold standard, the central banks used to hold gold and issue currencies against that gold. Third, fiat money, which is declared as legal tender by the government.
If the world someday decides to ban the use of gold as a currency, people still might be able to use gold for making jewellery, sheets, wires, etc. Though one might argue that the usage value of gold would be much lower than its market value, the point here is that it would be still of some use to the holder.
Now, do cryptocurrencies like Bitcoin have any intrinsic value? No. So, if tomorrow the central banks decide to ban Bitcoin, the owner would not be able to use it for any other purpose.
Though the fiat currency also does not have any intrinsic value but is backed by central banks. So tomorrow if the Rs 500 & Rs 2000 currency notes are not considered as a legal tender, you would still be able to take those currency notes to the central bank and get the new legal tender currency notes.
If in the near future cryptocurrencies like Bitcoin are banned, they would neither have any intrinsic value nor will they be backed by any central agency. So, there is a big risk of losing all your capital.
But in the future, if the cryptocurrency is issued by a central bank, I think they would be safe, but as an instrument to park money, not as a great investment.
Is crypto a decent long-term investment?
As we have already established, just like any other currency, cryptocurrency is simply a place to park money. It cannot be considered an investment.
I think it will be helpful for readers if we define investment. That is anything that you buy or hold today that has the ability to generate cash flows in the future, even if you don’t sell it in the market.
Few example: You buy a house, never sell it, but it keeps generating rental. You buy a farm, never sell it, but you keep generating cash by selling the farm produce. You buy a company, never sell it, but it keeps generating profits.
When you buy gold, fiat currency or cryptocurrency, their prices just fluctuate in the market. These fluctuations give an impression that they are good or bad investments. But they themselves do not produce anything.
Also, it is worth understanding that a currency should never be a good investment, else people would not use it for buying things. When you know that if you don’t use cryptocurrency (bitcoin) to buy a laptop and hold it with you, bitcoin will appreciate much more than what you could have made by using the laptop, you would never use bitcoin to buy anything.
For people to accept anything as a currency it should be very stable. Many argue that someday in the future bitcoin will be stable and would have the characteristics of a good currency.
Even if we assume that cryptocurrencies such as bitcoin will become stable, we are ignoring the fact that the central banks would not be able to control the supply of bitcoin in the market. Unless the central banks have control over the supply of a currency in the market, they would not be able to control inflation and deflation during an economic boom or burst which will be detrimental for the economy.
Central banks fight inflation by decreasing the supply of money in the market and overcome deflation by increasing the supply of money. Any alternative currency whose supply is not controlled by central banks would either lead to limiting its supply or be banned in the future by central banks.
Are there better investments than cryptocurrencies?
Investing in great companies (for the long term) with some durable competitive advantage trading at a discount to their fair value will always be one of the best investments. For a know nothing investor who does not understand the intricacies of investing, betting on the Indian economy through investing in benchmark indices like Sensex and Nifty is another great option.
There is, however, no doubt that the blockchain technology behind the many cryptocurrencies looks very promising. It is important to note that betting on blockchain technology is different from betting on cryptocurrencies like Bitcoin or Ethereum. So, another way to bet on Blockchain technology would be to shop for stocks of companies that are rapidly adopting this game-changing technology.
(By Varun Malhotra, Director & Founder, Edge Institute of Financial Services (EIFS)