Cryptocurrencies: they’re the hot topic on news sites and blogs, where investors from students to grandparents are looking for this century’s “Gold Rush”. Online platforms are seeing thousands of people sign up for cryptocurrency trading accounts. Its been called the “wild west” of investments where prices move up or down on little more than a tweet, and regulation is little or non-existent. All the while, financial regulators are trying to keep up with the cryptocurrency wagon train.
Gold has long been an investment of choice for thousands of years. Why? Its real, it shines, its limited, its a currency of choice in countries where governments change polices and liberties in troubled times, and its long term been a hedge against inflation.
Now in 2021 we have the new kids on the block, literally. Blockchain is defining change in how we will go forward interacting in the financial and tokenised markets. But while the foundations of Blockchain are built on solid ground, its the cryptocurrencies that everyone talks about such as Bitcoin we should keep a close eye on.
Just this week Andrew Bailey, the governor of the Bank of England has said that cryptocurrencies have “no intrinsic value” and people who invest in them should be “prepared to lose all [their] money”.
Hang on…“prepared to lose all their money”? Andrew Baily goes on to say:
“[Cryptocurrencies] have no intrinsic value. That doesn’t mean to say people don’t put value on them, because they can have extrinsic value. But they have no intrinsic value.
“I’m going to say this very bluntly again – buy them only if you’re prepared to lose all your money.”
Wow! That’s a statement that should get all Bitcoin investors sit up. But what about all the other Fiat currencies?
Sterling, US Dollars and most others are known as “Fiat money”. It is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The supply and demand is monitored and governed by the county. So why is that different from Bitcoin? The difference is: with Fiat money, you have a promise from the government. Its there printed on your banknotes: “I promise to pay the bearer on demand the sum of ten pounds”. Still, its only a promise, but at least you know who made it.
I’m looking at Bitcoin – who’s going to promise to pay back my Bitcoin? And that’s the crux of the matter.
Mr Bailey’s comments come as Dogecoin, a cryptocurrency styled after on the Shiba Inu breed of Japanese dog, has risen more than 100 times faster than Bitcoin, while another cryptocurrency Ethereum recently hit record highs.
Many of these cryptocurrencies are promoted by celebrities, including SpaceX and Tesla CEO Elon Musk who recently bought $1.5 Billion of Bitcoin, telling one and all that Tesla will accept Bitcoin at any of their outlets to purchase one of his cars. Boom! Bitcoin is real. I know if I have enough Bitcoins, Elon will give me a car in exchange for it. If Elon wants it, I want it.
Mr Musk’s controversial tweets regularly push the price of the cryptocurrency higher, as he shares memes about the asset ahead of his appearance as a “dogefather” on the sketch show Saturday Night Live. But now that’s not the case.
In writing this article today with BBC news on in the background, the news broke that Tesla has suspended vehicle purchases using Bitcoin due to climate change concerns.Bitcoin fell by more than 10% after the tweet, while Tesla shares also dipped.
Oh, it looks like my “boom!” might have been a little early. Tesla’s announcement when they bought their $1.5B cryptocurrency was met with an outcry from some environmentalists and investors. Overnight that promise to exchange Bitcoin for Tesla has gone. And that it there is, no intrinsic value to Bitcoin, no one standing behind it, its being bought and sold on emotion. There are very few places where you can shop with it, there’s no government backing behind it, and when it rises or, more importantly, drops for no real reason, who’s going to be holding that promise to pay you? In a game of pass the parcel the strategy of holding the parcel at the end just might not be ideal.
But there is a silver lining. Blockchain technology is a robust system for asset or promise-backed investments. Worldwide Central Banks, such as the Bank of England, are all exploring a cryptocurrency solution backed as just as your £10 note is, by a promise to pay the bearer. And it’s expected that by the end of the decade only 1 in 10 transactions will be done with physical notes and coins. Until then, you are just going to have to roll the dice and take your chances with cryptocurrencies. But watch this space! With a portfolio of assets Propiteer Capital are exploring how to tokenise our investments with an asset sitting behind them. And there it is: a tokenised investment with the asset backing the investment and your promise.
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