Part 3: Current status of crypto currencies


Decoding Crypto currenciesThis post is in continuation of our series on crypto currencies.

Decoding Crypto currencies: (Part 1)

Types of Crypto Currencies (Part 2)

 In the earlier post, we talked about the types of major crypto currencies that rule the crypto world, covering their features and drawbacks. We discussed how they are created and in what ways are they different from each other. This post would focus on the aspects that influence investor’s opinion on crypto currencies.

Let us start with some features of crypto currencies that have made them unpopular with investors:

  1. Open records: Every transaction on the crypto platform is transformed into a block of data which is recorded in the block chain ledger after it is verified. It is then accessible to everyone in the network. The transaction records are in the form of encrypted data and though they do not include personal data, the increasing cyber-attacks on the crypto exchanges pose a big risk and make traders feel wary. In June’18, Bithumb, the major South Korea-based crypto currency exchange was hacked and reported theft of US $30 million worth of crypto currencies. Even in July’18, there were reports of US $13.5 million worth of digital tokens being stolen from the network that contains wallet of Israel startup Bancor.
  2. Speculative asset: Crypto currencies fall under the pricing game status where momentum and mood drive the prices and not under value game status, in which price is attached to an asset based on its fundamentals. This is where traders enter in the crypto markets with the intent to take advantage of price mismatch, forgetting the fundamentals. As NYU stern’s valuation Professor Aswath Damodaran once quoted that he would not consider investing in the crypto currencies because it is a currency that cannot be valued, but only traded in, hence his judgements would be susceptible for trading in them.

Bitcoin is also referred to as a currency for illegal goods and services by many after reports emerged indicating surge in its prices due to transactions taking place for illegal trading purposes. Warren Buffett in his interview in May’18 said that he does not consider Bitcoin or any crypto currency as an investment but rather a speculative asset.

  1. Price volatility: With wild swings in the prices of crypto currencies, it is tough for retailers to price their goods or services in them as it would impact the value of their goods frequently and ultimately affect their purchasing power. Till now the companies and economies have stayed away from digital currencies by not adopting them as a means of payment. China went to the extent to ban trading in crypto currencies in late 2017, citing enormous financial risks for Chinese investors due to their unstable behaviour witnessed in December 2017. People’s bank of China (PBoC) utilized the “Great Firewall of China” to block crypto exchanges, their services, ICO sites that are established overseas and blocked over 110 websites that held relations with the crypto currency industry. The Chinese government confirmed that the use of country’s currency has fallen to just 1% in the global Bitcoin market compared to 90% in early 2017.

It is widely believed that the crypto currencies would not be able to stand in line with the fiat currencies unless they are recognised as the official transaction medium and regulated by central banks. Till then, global retail investors would continue to stay away from them.

Even with so many flaws in them, there are many things that have kept the crypto currencies afloat since their launch in 2009:

  1. Immediate settlement: Perhaps this is one of the biggest attribute of crypto currencies. Bitcoin contracts have the advantage over others as they can be designed and enforced to eliminate third party approvals. They are one to one affairs, happening on a peer to peer network, cutting out the need for a middleman. These do not involve any mediators or brokers in between to facilitate a transaction which saves a lot of time, money and paperwork otherwise required when one wishes to trade in the share market.
  2. No risk of frauds: Crypto currencies created are digital and cannot be fabricated or reversed arbitrarily by the sender as what happens with the credit card charge-backs.
  3. Minimal transaction fees: Since the data miners or computer systems who generate crypto currencies get their compensation from the crypto network involved, transaction fees is not applicable. Though there might be some charges involved if one engages in the services of a third party to maintain the crypto currency wallet, but this is generally less than the transaction fees incurred by conventional financial systems.
  4. Introduction of Blockchain: Blockchain is the biggest outcome of crypto currencies. Blockchain is a digitized public ledger for all crypto currency transactions. One can keep a virtual record of not just their transactions, but also documents.

The Blockchain technology is a revolution in itself. We would discuss more about Blockchain and its utility in the next post.



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