Bitcoins or Stocks- Where does the Future Lie?

Bitcoins or Stocks- Where does the Future Lie?

Cryptocurrencies are the latest class of investment vehicle to hit the psyche of the world investment community. Much different in character than other conventional currencies and types of investment, they offer complexities both technical and in their constitution that make them highly risky, even higher than most other known financial assets classes. Bitcoin, Libra and a host of other such currencies have even started to transact as investment products inviting contribution through conventional channels with the  potential for good returns. However, a study of their price performance reveals the volatility associated with these currencies and the hard-earned money that many investors have lost investing in them, makes them unsuitable as investment avenues.

Amongst all the conventional financial securities, equities are considered by many as offering the highest risk reward potential. Equities, which have the performance of the representative companies as their underlying, increase or decrease in value as the fortunes of the companies go up or down. Its origin dates back to the periods when the need was felt to pool contribution in order to create businesses to exploit natural resources and provide employments at a time when individual resources were not sufficient to support such an endeavor. Most of the major non-governmental corporations that we know today are public companies and have contributed to the creation of immense wealth and employment for countries in the past like which have never been witnessed before in history. Equities thus hold a very important place not only among financial assets but as instruments that bring about social and economic developments both on an individual level as well as for the society and country at large. Governments world over work tirelessly to promote equity investments and take measures to protect the interests of investors. There are stock exchanges where equity investors can buy and sell shares at ease no matter what their financial status is and contribute to the economic development of their individual countries.

One of the primary features or characteristics of a financial instrument or a currency for that matter which derives it its value is the assets backing for such a security. For an equity security the asset backing is the nominal value of the share represented by a certain unit of capital which is again supported by the earnings performance of the company which represents those shares. Debt securities are backed by the units of capital that are represented by the face value of the instrument which is further backed by the financial standing of the company or the institution issuing the instrument. A currency is backed by the guarantee of a sovereign government which is further backed by the strength of the economy of the country and its relative financial standing among all other countries of the world. A crypto currency however suffers from the backing of an underlying, or if there exists; it lacks a legal or statutory backing that would ensure its enforceability. Even the corporations that are promoting such currencies are not willing to create legal claims on themselves for such currencies (doing so will make it a debt instrument).

Financial crises are commonplace in this world. More often than not as a result of not so honest and unscrupulous practices, it puts everybody’s interest into jeopardy. The volatility of the financial markets wanes the general public interest in capital and money markets, leading to contracted business spending and as a consequence, contracted business and economic growth. What needs to be emphasized here that financial assets exist so as to facilitate smooth and most efficient allocation of resources from where they are less required to where their deployment would be the most productive, currencies in particular are the most direct means to achieving such objectives. The governments of the world thus put their full weight behind their currencies, to ensure that their credibility never gets diminished and also remain in a constant state of vigil to ensure that the markets for all other financial assets within the country function smoothly without the scope for any misdeeds by entities who are a little short on their integrity.

Cryptocurrencies were not born to further any of the above objectives. They are not in principal backed by any country or a legal claim upon any corporation or organization. They were merely created as cyber currencies that would facilitate faster transactions across borders and while addressing certain deficiencies of conventional currencies. Form their very constitution they lack the basic tenets of a currency, most of the safety features of a conventional currency and the larger economic benefits they bring on. Moreover, such currencies, which to a great extent are driven by speculation, could also become fertile ground for serious criminal activities like terrorism, dealing in narcotics and gun-running, with no direct or indirect supervision. They could also become instruments for pure-play speculative activities like gambling and become a facilitator of unlawful and immoral activities that we as a society work so hard to prevent and discourage.

Cryptocurrencies and stocks or equities can never be put on the same pedestal of financial asset classes. Bitcoin and other such cryptocurrency types that have seen zealous promotion in the recent past but these have failed to conform to basic requirements to be called as a currency, while on the other hand stocks or equities have gone through generations of evolutionary development, and have proven themselves to be creators of wealth and prosperity in every part of the world. Equities have the support and backing of every government in the world; corporations working in foreign countries find support of their domestic governments who would go a long way to protect and promote their interests.

Cryptocurrencies still are a mystery and their establishment as a formal asset class is still in doubt as many of the governments of the world including that of developing countries like India and China have refused to support such currencies. Equity, on the other hand, have never seen a lack of interest from the investor classes in its history with the value that it has created in the past only making its importance to the economic development of our societies and countries deeper and more profound.

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