One of the biggest questions for many investors this year is whether or not Bitcoin and other cryptocurrency will “go to the moon,” whether or not we should start taking investments in non-fungible tokens (NFTs) and Web3 seriously. Will Bitcoin go to $100,000 or will it fall steeply?
Cryptocurrencies, like stocks, are assets and have been treated as diversification plays in multiple investment portfolios — ranging from retail to institutional investors. People buy different assets in their portfolio, usually as a hedge to excessive market volatility. It’s why individuals may have a 20/80 or 35/65 weight on bonds and stocks respectively.
But what about an asset that is not quite a hedge to anything in the economy or index? Bitcoin lives in an ecosystem of its own, not correlated to gold prices or inflation.
Bitcoin, including other cryptocurrencies, was not brought into this world originally as an investment asset. Rather, Satoshi Nakamoto published his famous paper on Bitcoin as a model for a peer-to-peer electronic cash system that would remove the middle man in many of our secure financial transactions today. The infamous “Pizza for Bitcoin” request in 2010 showed the first practical use of this blockchain technology application. It brought hope for many nations who were struggling with garnering trust in their own fiat currencies.
Early September last year, news came out with El Salvador building its first “bitcoin city” powered by a volcano, allowing locals to use the currency for their day to day transactions. To support this ‘Alexandria,’ they will be issuing nearly $1B in sovereign bonds backed by Bitcoin.
Despite the enthusiasm from President Bukele on its success, more than 66% of locals surveyed by Central American University refused to download the Chivo wallet, a wallet where the holder can “can use it to pay for services, to buy and sell products, and to make transfers to bank accounts without paying commission fees, among other benefits.” Not only are the locals wary, but investors as well. A sell-off occurred in the Salvadoran bond market after news of the issue went public, concerned about the lack of support and funding from the IMF in the future as a result of this shift into digital currency. Their international dollar bonds consist of “30 percent of its gross domestic product and about a third of its overall government debt,” emphasizing heightened concerns with El Salvador being able to repay its debt.
Now, with the currency down nearly 30% since November 2021, heightened anxiety regarding the future of Bitcoin permeates discussions from boardrooms to living rooms. The SEC’s main concern with crypto is being able to have a way to protect the investors from scams that can (and unfortunately have) occur in the future. Current SEC Chairman, Gary Gensler, supports the cryptocurrency and the benefits it can have on our current financial markets. However, Gensler believes it’s crucial to understand the security and financial risks underlying the technology before investors and institutions dive head first into it. More than $14B, a record 79% rise in crypto-related crime in 2021, was lost in the market from scammers. However, such a rise is a small fraction of the growing transparency and verification that results from double ledger systems in blockchain. While it does not fully get the responsibility off the shoulders of DeFi protocols, recent wins in preventing and punishing fraudsters is paving hope for more wider adoption.
The sell off in Bitcoin could signify the bubbly nature of the current crypto environment, and possibly a much needed correction in the market. For NYT columnist Paul Krugman, it seems to be playing out the beginnings of an asset crash. Many undereducated homebuyers bought homes during the financial crisis, unaware of the synthetic securities based on these mortgages. Eventually, these banks were saved, but millions of homeowners are still facing the consequences to this day. Krugman emphasized in his column how crypto isn’t something so huge that its crash would make an economic dent, but it is wide enough to make a social impact.
With how convoluted the blockchain technology platform is growing, there is an urgency for regulators to get up to speed. There are feasible concerns about the impact crypto can have on the undereducated investor. While we may fear the uncertainty, there is progress that this technology has brought to individuals, which to me, is a journey worth celebrating.
Not Financial Times (NFT) is an Opinion column created by Roshni Revankar ‘22 to share insights and research into students’ favorite companies, industry trends, and anything in financial markets that really irks their curiosity.
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