Are Cryptocurrencies Speculative Assets?
There is still debate among experts whether cryptocurrencies serve the purpose of speculative assets, which means they carry greater risk than most other investments. As a matter of fact, Satoshi Nakamoto did not intend Bitcoin to be a speculative investment when he created the project. Bitcoin was envisioned by its creator as an alternative to traditional fiat currencies.
However, more than a decade after Bitcoin’s inception, there is still debate as to whether Bitcoin has fulfilled Nakamoto’s original, bold vision. Since Bitcoin is not an alternative form of cash, it is viewed as a store of value rather than a means of payment. Although Bitcoin has surpassed competitors like gold (a commodity) in terms of price, Satoshi’s vision for Bitcoin’s use as alternate cash is still largely unfulfilled. During periods of network congestion, Bitcoin struggles to process more than seven transactions per second (TPS).
Cryptocurrencies have been around for over 13 years, but still lack a substantial daily transaction value, which leads many to argue that cryptocurrencies are a store of value rather than an alternative to fiat currencies. Despite cryptocurrency’s similarities to a currency, such as the ability to act as a medium of exchange, scalability issues, among other problems, keep cryptocurrencies from achieving their full potential as an alternative currency.
According to Jim O’Neill, President of the British “think tank” Chatham House, the value of cryptocurrencies like bitcoin correspondingly responds strongly to speculation, especially in light of the fact that:
- The price of bitcoin and other cryptocurrencies is extremely volatile in comparison to the usual stock market investment. He believes that “it does not seem to reflect their strengths, but rather the hype of the moment”.
- There is no legal tender status for them. His view is that “to be credible, a currency must function as a medium of exchange, a store of value, and a unit of account”. In this sense, bitcoin’s high volatility makes it “almost impossible to imagine it becoming a reliable medium of exchange or a store of value”.
Should you invest in cryptocurrency?
Bitcoin and other cryptocurrencies have historically shown little correlation with the U.S. stock market, which makes them an excellent choice for portfolio diversification. A diversified portfolio could be a good way to invest in crypto directly if you believe cryptocurrency usage will grow over time.Every cryptocurrency that you invest in should have a sound investment thesis that explains why it will endure. Researching and learning as much as possible about cryptocurrency investment will help you manage investment risk as part of your overall portfolio.
There are other ways you can profit from the rise of cryptocurrencies if buying cryptocurrency seems too risky. You can invest in the stocks of companies such as Coinbase (COIN.ax) and PayPal (PYPL.ax), which may be a great option. You can trade stocks online either by purchasing real shares or by trading the derivatives of stocks, for example, stock contracts for difference (CFDs).
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Source: Cryptocurrencies — Store of Value or Speculative Investment?
