As of last count there are more than 800 crypto-currencies and more are coming every few days. And unless you are hiding on another planet, you must have heard about BitCoin. Since then there are other "credible" (if you can call any of these) alternatives like Ethereum, LightCoin, Dash have come. Most of these are based on underlying technology called blockchain While the blockchain technology has tremendous potential and could at some point match buzz created by cloud, AI, VR, BigData, currently it is "(in)famous" for it's main application of digital currencies . So let's discuss if these crypto-currencies are Fad (aka bubble), Fraud (like Ponzi scheme) or New Frontier of Investing (like dot-com companies including Amazon in late 90s).
Let's understand basics of "money" or "currency". Why do humans need "currency"?
Currencies serve multiple purposes like:
Let's understand basics of "money" or "currency". Why do humans need "currency"?
Currencies serve multiple purposes like:
- Medium of exchange (makes bartering much easier and friction-less)
- Storage of value (one can't store farm-output like grains or fruits to be consumed few years later)
- Investment (GOLD as investment)
- To finance countries/governments (ever heard of "printing money" by Federal banks)
- Movement of wealth (e.g. convert pesos into US $)
History of currency has evolved from stones, grains, commodities (salt, gold, oil) to most widely used "paper" or "fiat" currency. Governments print these paper currencies, put a value on it ($1-$100) and put it in circulation. Before Nixon ended Bretton Woods International Monetary system in 1971, printing of money was tied to value of gold governments held. After this link was nixed, there is no reference to value of "paper" printed by any government other than what people believe it. This one move by Nixon helped US $ to become reserve currency of world since there was no other country which could match might of United State of America (which could change in second half of 21st century). Now that we understand basics of currency, let's look at crypto-currencies.
During financial crisis of 2008-2009, some people realized that money is not safe in hands of biggest (and supposedly safest) financial institutions of the world. And to save these banks from going under, governments would go to any distance and run printing presses to full capacity to flood the market with paper currencies. So some techies decided to come up with what they do best. Apply technology to create a solution. That's how BitCoin was created in 2009. Compared to gold which has been used as currency for more than 5000 years, BitCoin is only 8 years old.
Last few weeks BitCoin has been in discussions. First due to technology split (which created BitCoin Cash), then crackdown by Chinese authorities on digital currencies and now Jamie Dimon calling BitCoin as worst bubble than tulip mania.
So coming to my original question: What are these crypto-currencies? Fad, Fraud or New Frontier of Investing?
In my opinion, they are bit of all three.
Fad: Every few decades there have been new fad of investing. In 17th century, Dutch went crazy with their investing in tulip bulbs, In 18th century, genius like Newton lost significant savings in south sea bubble. Recently in 20th century, we saw dot-com bubble and 21st century started with housing bubble. This decade we are seeing bubble of "coins" with some of these gaining from 300% (bitcoin) to over 1000%.
Fraud: Out of 800+ crypto-currencies, very few would still be around 5-10 years from now. Some crooks are issuing "coins" and raising millions of $ without anything to support. These are equivalent of dot-com companies which raised billions just based on website. We all know how that ended. So be careful!
Frontier: Out of every bubble, some value gets created. From dot-com bubble, we saw survivors like Amazon, Netflix and few others. The investments also created massive fiber-optics infrastructure on which today's cloud movement is built. So there would be survivors coming out of crypto-currency bubble and surviving currencies could have multiples of value they are fetching today. Also block-chain technology would have lot more commercial applications.
So as I said it's mix of all three and that's what makes it interesting economic, technology and behavioural investing topic.
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