Crypto currencies have been around for more than a decade now. Frequent fluctuations in their values during this time describe their nature – volatile, for sure. Crypto currency has always fascinated, especially Generation Z and beyond. Is it an investment option? Or is it here to replace dollar bills? Is it to help streamline remittances? Did the inventor aim at introducing decentralized currency? The most fundamental question remains unsettled: what is it actually?
Currencies have been in markets for several centuries. They were merely introduced to replace the barter system. Fiat money is the established norm today, evolving from commodity money to representative money to fiat money. So, does crypto qualify as a currency? To answer such critical questions, we must look at the intrinsic value of crypto tokens.
The value of a crypto token is determined by aggregate supply and demand, much like fiat money. The value of the dollar, pound, yen, rupee, etc., is determined based on aggregate supply and demand. Even the USD is printed in anticipation of the demand it has globally. It’s not backed by any gold reserves, but the US government has a monopoly, as only they can print the popular bills. It is centralized, whereas, in crypt’s case, it has not yet been established whether there is any authority with the prerogative to mine crypto tokens. Legality aside, people from developing, developed, and underdeveloped countries are, to some extent, mining these crypto tokens. However, it remains decentralized.
Fiat money and crypto are worlds apart. It will take time to embrace and adopt crypto currency. There exists a view that crypto is better than traditional fiat money because it is decentralized, offers fast transactions with lower transfer fees, is globally accessible, and has a transparent ledger of money supply. On the contrary, many scandals have emerged in which money launderers use crypto currencies to channel their funds. Moreover, the mining cost, especially in terms of energy, also needs reconsideration in light of the climate challenge. It’s the decision of time whether crypto is a good or bad alternative to our traditional fiat money. But the point is; can it be seen as an alternative? The growth seems to suggest ‘yes’. It can be a promising alternative.
Another important question that arises is whether crypto is a good investment option or not. Here lies the big illusion. For some people, crypto is just another speculative stock that can earn them hefty dollar bills. There is a stark difference between investing in currencies and investing in businesses. A business might be in demand because of its earning potential, but what makes a currency in demand? Its popularity derives its demand. Popularity can fade over time, but businesses tend to explore different avenues to grow.
When analyzing stocks, we try to evaluate the intrinsic value of the scrip. Whereas crypto currency, like traditional fiat currency, derives its value from its aggregate supply and demand. A pertinent question here is that the stock tickers fluctuate on the same principle, i.e., the aggregate supply and demand of stocks in the share market. One day, people are selling their, for instance, Tesla shares, resulting in nose-diving of its price, whereas on a lucky day, people buy more and more of Tesla scrip, resulting in a skyrocketing price.
Then why not see crypto as an investment option? Let’s dissect the matter. When we buy shares of, for instance, Tesla, we are not merely buying stocks; we are actually getting a share of the business (which the stocks represent). The business is the security behind the stocks. In the share market, you are not investing in stocks but in the businesses the stocks represent. Businesses are of value because the product they offer is of utility to the public. Businesses identify needs, capitalize on them, and stay in the market by creating value. On the contrary, if we are to see crypto as an investment option, then it must qualify as a business in one way or another. The crypto tokens are backed by code lines. Are you willing to pay, for instance, thousands of dollars for millions of lines of code? What is the utility of these code lines to the public?
One reason people buy crypto currencies is in the hope that, in the future, it will replace traditional fiat currency. In an ideal scenario, if crypto replaces the USD, the demand for the crypto currency will soar. These people hope to reap profits when the time comes.
To cap it off, the debate over crypto currency’s nature as either a secure investment or a viable currency remains intriguing. The crypto tokens can be seen as an alternative to traditional fiat currency, but they do not qualify as an investment product.
Copyright Business Recorder, 2024