Cryptocurrency, an encrypted, peer-to-peer network for facilitating digital barter system, was developed as a disruptive technology to supersede long standing and unchanged financial payment systems that have been in place for a long long time. While crypto currencies would not be able to replace traditional fiat currencies any time soon, they could however clear away many barriers surrounding normative national currencies and exchange rates and change the way Internet-connected global markets interact with each other.
In their latest avatar crypto currencies christened as investment vehicles have hit the psyche of the world investment community. They offer complexities both technical and in their constitution that are much different in character than other conventional currencies and investment vehicle types which makes them highly risky even higher than most other known financial assets classes. Though a host of various such currencies such as Bitcoin and Libra have even started to trade as investment products inviting conventional investments in them, but a study of their price performance against the promised good returns reveals the volatility associated with these currencies and makes them unsuitable as investment avenues. Many investors have lost their hard-earned money in them. Of the many investment vehicles available then, there is Bitcoin, the crypto currency that caught the world’s attention in 2011 and is not affected by any of the economic parameters impacting traditional investment vehicles. When bitcoin first started transacting as a currency, the interest among the general public about this new investment avenue started to rise when its price against most of the major physical currencies started to move up sharply. However, the price movement of this electronic cryptographic instrument have over the years been extremely volatile forcing many people to stop trading in this currency and switch over to more traditional options. Several finance and economics experts however have warned that cryptocurrency is no more than a Ponzi scheme or a pyramid scheme which in due time will burst and will take down with It many an investor’s hard earned money.
The prices of this crypto currency have also been falling sharply over the past one year and only recently fell by 17 percent between the high of 24 September 2019 and low of 30 September 2019. The mood among the investors in this currency has been sombre after this event. Crypto currencies for one are not affected by economic upswings and downturns or central bank rate revisions nor their values are derived out of any other underlying asset class. However, the risks associated with this type of currency is high due to lack of any guarantees and asset backings and competition from other crypto currencies like Libra promoted by Facebook. It is because of these very risks and complexities associated with this currency type that makes it a highly volatile more than any other known asset class. However, despite the high risks involved, the gloomy state of the rest of the marketplace on account of Brexit, Trade war situation between United states and China and an overall downbeat world business outlook has inspired many an investor to look towards this avenue as well.
One of the primary features or characteristics of a currency or any financial instrument for that matter is the assets backing for such security which gives it its value. A country provides guarantee to its currency which again takes strength form its economy and its relative economic standing in the world economy. A crypto currency however suffers from the lack of backing of an underlying, or if there is, it lacks a legal or statutory backing that would ensure its enforceability. Exacerbated is the fact that many central banks and countries have refused to back these currencies and have issued advisories to their citizens against trading or investing in these currencies, leading ones among them being United States of America and China. The maximum risks that these currencies face have transformed them into becoming a purely speculative instrument in the absence of any backing.
Much experience has been gained in the operation of crypto currencies since their advent in 2011. The high volatility in pricing and trading in these currencies as well as absence of asset backing, and regulatory support suggest that the idea is not yet mature enough to replace a system that has evolved since the beginning of mankind. The idea that so many of the features of a conventional currency can be done away with was faulty in the first place, a currency is nothing but an instrument of a legal obligation, which aids transfer and storage of value. Speculative value in a currency is a derived one which, in the larger scheme of things, only acts to iron out inefficiencies in exchange rates and trading time lags among different markets. Looking at it from a different angle, should cryptocurrencies be implemented around the world, many of the worlds existing trading and business systems would have to be completely replaced, which even in the long run doesn’t seem to be even remotely possible or viable.
Excepting for a few quarters in the high technology computing circles and a few countries, the interests in crypto currencies have ween waning. Its biggest weakness however is its complexity, making it difficult to be adopted by less technologically inclined people, whereas conventional currencies offer complexities no more than one step above that of barter. Crypto currencies require massive computing power and complex programming, leave alone the energy that will be consumed in running these systems, added to it will be the high security that will be required to protect these systems from entities intending to make some quick money by unscrupulous means or someone who is trying the cripple the system altogether.
Taking a step back and taking a birds eye view, conventional currencies traded through electronic means are not much different from cryptocurrencies, while offering the features of asset backing and regulatory control. Consider the example of gambling chips, while they do have a value for the holder but contingent on the honor of the gambling house who owns those chips. In the case of crypto currencies the value of is not contingent on anything not even the company or organization backing it. Year 2020 onwards these currencies will see a decline in popularity and usage, mostly on account of denouncement of major economies like China and United States among other things.
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