A digital currency is an interesting idea to replace fiat currencies that rely on the trust and supervision of financial institutions. However, since the start of bitcoin (COIN) in 2009, its progress has been very slow, and I still don’t believe that we have found a real solution for replacing the current currencies. In addition, there is already a dangerously large (and ever increasing) number of cryptocurrencies that take away much of the credibility they were slowly trying to build.
At the moment, there are 1,430 active cryptocurrencies, and more are being created almost every week. First of all, we must compare them based on their market capitalization. Although it is already a market that involves a few hundred billion dollars, it only corresponds to less than 0.1% of the total value of the world’s currencies today. On the other hand, the volatility of cryptocurrencies is extremely large, and actually, we are in the presence of a market still very far from stabilization. Therefore, one must closely follow the evolution of each one to assess its degree of consistency.
Currently, the top 3 ranking stands as follows:
Coins Market Cap Price Trend (last 7 days)
1. Bitcoin $226B $13,431 Down
2. Ethereum $126B $1,303 Mixed
3. Ripple $71B $1.82 Down
The top 3 combined correspond to more than 60% of the current value of the entire cryptocurrency market ($689B).
Bitcoin was the first to be created in 2009 with a structure that has slowly showed some kind of possible future. But a potential BTC investor should decide based on what? Given that the purpose of cryptocurrencies is to replace fiat money, they must satisfy the three main functions of money: widespread means of payment, fair measure of value, and a store of value. At this point, it is important to say that digital money has yet to prove its ability to satisfy those key points, not showing an efficient form of settlement where speed, general acceptance, and security are fundamental aspects.
But if you believe that I am wrong or if your goal is only to speculate, then take a fair amount of money that you have available and that you do not need either now or in the future. From there, you may have an investment position with many ups and downs. The normal volatility of a cryptocurrency may lead it to a strong appreciation, but it may happen that in the end, you are dealing with a handful of almost nothing. I don’t want to say that I have all the answers regarding this unproven investment. I can only state that in my opinion, the cryptocurrencies do not satisfy the objectives that are required for a currency.
The main problem is that there are many cryptocurrencies in the market, and nobody has enough data to know which one to choose. The future here is of enormous importance, because even though we know that none of these cryptocurrencies can still be accepted in all current-life transactions, innovative solutions can be created that surpass at least some of the current shortcomings.
As an example, the settlement time of transactions is a problem. For Bitcoin, it now takes around 10 minutes, and fees are relevant. In a not-so-distant future, we may have innovative solutions in order to solve problems related to mainstream adoption. In short, there will be perhaps many more off-chain transactions than the on-chain ones. All this illustrates the difficulties of deploying a cryptocurrency in a generalized way. At best, this will necessarily be a long process in which almost all of them will disappear or have a very residual or specific value.
Moreover, what we have is not the relative value of each cryptocurrency in relation to a fiat currency, comparing its intrinsic value, but rather its value as if it were a normal asset, although it is a digital creation. On the other hand, this value undergoes enormous variations, and it is important to realize which may have more value in the long run. We cannot forget that given its small supply, those digital currencies can be manipulated, and not only the smaller ones.
When choosing bitcoin, for example, this 3-month chart below raises a question about the possible advantages of having a coin supposedly freed from manipulative motions.
Bitcoin 3-Month Chart
A worrying aspect is precisely its market value. Taking the big fall since BTC was admitted to the futures market in late 2017, it shows a strong drop from ~$20,000 to ~$13,500 (around 33%). Looking closely at the price movement, it’s creepy to think that its price may still fall at least to the ~$8,000 support, which is an abysmal tumble but still a high value for Bitcoin’s supposedly intrinsic value.
My opinion is neither direct nor simple. The truth is that I have many doubts that this is the necessary way to build a currency with the proper aptitude to become really a valid and effective means of exchange and reserve of value.
I only see obvious disadvantages in relation to the gold standard, for example. A currency must have widespread acceptance and be an effective non-specific, non-special means of exchange for a mere product. Many cryptocurrencies have this configuration, and others miss features that the gold standard presents. Of course, the law of supply and demand made possible the exponential price increase of many of them. But this game will not be won by the highest price if, at the end of the day, it does not serve properly the purpose in view. We are many millions on this planet, and a very small minority is enough to sustain this illusion of a cryptomarket. I do not even want to explore the fact that some governments and/or central banks will not accept or hinder the existence of cryptocurrencies. I am referring exclusively to their inability to be an effective alternative to fiat currencies and to the already tried and tested gold standard forms.
Fiat currency works although it has shown some flaws along the way. We know that we could return to the gold standard even with many discordant voices. Gold has a long history of being trusted as money. This precious metal is not dependent on any kind of innovative digital algorithm and is tangible with no problems of fraud or internet breakdown. Why then think of an alternative system to the present one that probably will never have the potential to be accepted universally? Obviously, I am aware that cryptocurrencies may be used in some specific situations with secure transactions according to the owner’s interest. Anyway, I am comfortable with fiat money only because this system is the least problematic of the ones I have mentioned in this article. For me, it is not necessary to invent the wheel again.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author of this article is not an investment adviser and gives only his personal view and opinion, never making any investment advice or recommendation to buy or sell specific securities. Investors in financial assets must do so at their own responsibility and with due caution as they involve a significant degree of risk. Before investing in financial assets, investors should do their own research and consult a professional investment adviser.