With the advent of Blockchain and its extensive use in cryptocurrencies, it is not surprising that there have been some bumps along the way. Cryptocurrency is a digital currency which has no physical presence like traditional currencies such as the US Dollar or Canadian Dollar.
The coins are virtual tokens that only exist on distributed ledgers known as blockchains; this means people can send them to each other online without going through a bank or other financial institution. The initial adoption of cryptocurrency has been mainly in the tech industry, with Bitcoin the first and most popular cryptocurrency used as a digital form of payment by many companies. However, it has become a global commodity traded on platforms such as Bitstamp and Kraken. So, if you are planning to trade crypto, you may use a reliable trading platform like Bitcoin 360 Ai.
At its core, cryptocurrency serves two primary purposes: to store value safely or to be used as payment for goods or services. As current financial systems are built upon these basic premises, the use of cryptocurrency seems to make sense. It is similar to traditional currencies, with the value stored within a decentralized network and can be exchanged at any time for goods or services from sellers worldwide. The below-mentioned section will outline what cryptocurrency is and how it impacts our current system and examine some of the challenges currently facing the market.
1. Bitcoin’s risk-adjusted return has been ‘unremarkable’:
Bitcoin was a response to the subprime mortgage crisis that occurred in 2007-2008, with an intent to remove financial intermediaries such as banks from transactions. In addition, transactions are single when they are carried out, so there are no transaction fees – another reason cryptocurrency can appeal for its user-friendliness.
The value of Bitcoin has fluctuated widely over the years, but in 2017 its value skyrocketed, increasing twenty times over twelve months and continuing to rise even in 2022. As a result, it created what is known as a “bubble” – where investors look at the potential gains from their investment and are willing to ignore warning signs that it could destabilize or completely collapse.
The price of Bitcoin is entirely speculative and cannot be linked to any economic metric. Many investors have considered cryptocurrency’s price a new form of digital gold, which is more stable than other fiat currencies like the US Dollar or Canadian Dollar. While it is true that investment in Bitcoin can turn a profit within a few days or weeks, its risk-adjusted return has been “unremarkable”, according to an article on Bloomberg.
Crypto ‘ haven’ properties remain unproven:
Cryptocurrency has been called a ‘haven asset’ as it is a decentralized digital currency that people can use to conduct transactions 24 hours a day, 7 days a week. As a result, investors migrate to safer assets such as gold or cryptocurrency during financial uncertainty. However, because there is no debasing of a cryptocurrency supply, its value seems stable over time.
While this may seem appealing in the future, most economists are concerned that cryptocurrency has not yet proven its “haven” status. Furthermore, because there is limited economic data on cryptocurrencies, it is difficult to predict if cryptocurrency will indeed be used as an alternative for fiat currency and other commodities during periods of volatility/uncertainty.
Cryptocurrencies conflict with ESG goals:
As more and more investors are looking at ways to make their portfolios more sustainable, cryptocurrency has been viewed as a potential positive addition. However, cryptocurrencies have a much higher carbon footprint than traditional fiat currencies because of the energy required for mining. Additionally, cryptocurrencies are not connected to any underlying asset and rely on faith in their ability to serve as a ‘haven’ investment during periods of crisis. As more investors realize the unsustainable nature of cryptocurrencies, they may start to consider investing in sustainable products instead.
Stablecoins could well be made redundant:
The growth of cryptocurrency has created a wide range of offerings which allow investors to gain exposure to traditional asset classes without the high risk of investing in cryptocurrency. These stablecoins are created using hard forks of other cryptocurrencies and can be used to make and receive payments. Even though there are not many cryptocurrencies currently based on the Bitcoin blockchain, approximately 20 stablecoins are listed on Coinbase; Stablecoins have been seen to reduce volatility and risk while still getting exposure to crypto – very similar to an ETF in stocks. However, investors have become concerned that the growing number of stablecoins could be made redundant.
