Over the past year you have probably heard a lot of buzz surrounding the world of cryptocurrency. Cryptocurrency is essentially a form of payment that can be exchanged online for goods and services. Cryptocurrencies operate using a technology called blockchain, which is a decentralized form of recording and managing transactions that is spread across many computers. One of the main advantages of using blockchain to manage cryptocurrency transactions is to increase security of these transactions. Cryptocurrencies are also increasingly being used as a speculative investment in addition to purchasing goods and services. While over 10,000 cryptocurrencies are traded publicly, the most valuable and most famous is Bitcoin. Bitcoin first rose to prominence in December 2017 when its value skyrocketed to almost $20,000, before falling down to $3200 just a year later. This extreme price volatility among bitcoin and other cryptocurrency has prompted debate among investors and analysts over whether bitcoin is a legitimate currency and the future of finance as we know it, or just another speculative investment.
Critics of bitcoin and other cryptocurrencies point to its volatility and extreme price swings as reasons that it is more of a gamble, and not a real investment. For example, Bitcoin hit its all time high of nearly $65,000 in mid-April, before falling to just above $30,000 in late May. Dave Quinn of Investwise Financial planning says the current price volatility could be driven by young investors seeking normal returns “which, historically is never that easy”. Speaking to the Irish Times, Quinn said “If your goal is to gamble and hope it pays off in a year, then bitcoin might be your answer, but if your goal is to retire in a certain number of years I would suggest the stock market is the way to go because you can value companies and make a call on whether they’ll make future cash flows.” His statement is echoed by analysts at Bank of America, who in a recent statement said that the main argument for holding bitcoin is sheer price appreciation, not diversification, stable returns, or inflation protection. Environmental concerns also hurt the argument for bitcoin, as the global bitcoin network currently emits as much CO2 per year as the country of Greece. These CO2 emissions will only increase in the future as bitcoin becomes harder and harder to mine- the supply is limited to 21 million coins.
However, if there is price stabilization, Quinn and other experts agree that a time may come when Bitcoin is a viable way to buy and sell things all around the globe. Using the current fiat money system, it can take days to transfer money across the world. In today’s increasingly globalized world, bitcoin could potentially be used to send payments instantaneously over the internet. Currently, however, unpredictable price fluctuations and high transaction fees complicate this. However, if institutional investors keep flooding in and bitcoin one day achieves price stability, it could become the global financial revolution that its supporters hope it to be. Quinn suspects that the banking industry may catch up to this development, but “if the banking system stays in the dark ages, then bitcoin has a place and it may take over”.
