Crypto: Is it hype or help?
- Even though Bitcoin reached an all-time high in 2021, its value dropped in the following year.
- Crypto could be a hedge against inflation.
- Carbon emissions or crypto mining equalled the amount of several countries.
- The world of cryptocurrency is a rapidly evolving space.
Cryptocurrency, particularly Bitcoin, has been a topic of debate for several years now. While some see it as the future of money and a viable investment option, others remain sceptical about its potential and longevity. A few days ago, Warren Buffet mentioned he does not own Bitcoin because “it is a gambling token, and it does not have any intrinsic value”.
Buffet's statement reflects his belief that Bitcoin and other cryptocurrencies lack value, making them akin to speculative investments like stocks and commodities. Buffet has long been a proponent of investing in companies with strong fundamentals and predictable earnings growth, which cryptocurrencies simply do not possess.
However, Buffet's views are not shared by everyone, and the cryptocurrency market has continued to grow despite scepticism from traditional investors. In fact, Bitcoin reached an all-time high in 2021, surpassing $60,000 per coin, as shown in Figure 1.
Figure 1: Bitcoin price
However, after reaching the all-time high value, it can be seen that its value plunged significantly, especially alongside rising inflation, with bitcoin losing half of its value since January. As of Monday, the price of Bitcoin is $26.893. Is the “hype” over?
Why (not) crypto?
As of 2023, there are about 420 million crypto users worldwide. One of the reasons why certain investors favour cryptocurrencies is their decentralized nature. Unlike traditional currencies, which are controlled by central banks and governments, cryptocurrencies operate on a distributed ledger technology called a blockchain. This means that transactions are verified and recorded by a network of users rather than a central authority. Decentralization allows for greater security, transparency, and autonomy in financial transactions. They help combat the monopoly of a currency and avoid control of money, and no government body can set the worthiness of the coin.
Normally, the value of many currencies declines in times like these due to inflation. Crypto, including Bitcoin, on the other hand, has a hard cap on the whole number of coins that will ever be minted. This scarcity, along with its decentralized design, might protect it from inflation. While it has been called an ‘inflation-proof’ investment, it does not seem to be a hedge against inflation – just yet. According to an interview conducted by CNBC, crypto is a new type of asset that does not function as a demanded commodity yet, like gold or even currency, since it is not simply exchanged for a good or service. Thus, although it is scarce, the price of crypto is still very dependent on consumer sentiment. Moreover, it has not been around for very long – just over a decade. There simply is not much historical data to understand the currency and its purpose. Due to these reasons, it can encounter a tough time dealing with market volatility for now.
However, there are also concerns about the lack of regulation. This can make cryptocurrencies vulnerable to fraud and money laundering. Additionally, the volatility of the cryptocurrency market has led to concerns about its stability and suitability as a long-term investment.
Furthermore, the environmental impact is called into question. The process of mining cryptocurrencies requires significant amounts of energy, which has led to criticism from environmental groups. The crypto industry in the US was responsible for nearly an excess of 28 million tons of carbon dioxide between 2021 and 2022. As the value of cryptocurrencies continues to rise, the demand for energy-intensive mining operations is likely to increase as well. As per annual data, Bitcoin consumption is similar to amount of power used in the Netherlands, shown in Figure 2 below.
Figure 2: Bitcoin annual energy consumption compared to some countries
Source: CBECI, BP Statistical Review
Despite these challenges, the cryptocurrency market continues to attract investors and enthusiasts. In addition to Bitcoin, there are now thousands of other cryptocurrencies available, each with its own unique features and potential applications.
One area of growth currently in the cryptocurrency space is decentralized finance (DeFi). DeFi refers to a range of financial applications built on blockchain technology that allows for peer-to-peer transactions without the need for intermediaries such as banks. For example, with DeFi, owners of crypto could lend their coins with an interest rate. DeFi has the potential to disrupt traditional financial systems by providing greater access to financial services and reducing costs.
Another recent development which you might have heard of is the emergence of non-fungible tokens (NFTs). NFTs are unique digital assets that can represent anything from artwork to sports memorabilia. They are tokenized via a blockchain and can be traded and exchanged for money, cryptocurrencies, or other NFTs. Cryptocurrencies are also tokens; currencies from the same blockchain are interchangeable; however, for NFTs, they are not. NFTs have exploded in popularity in recent months, with several high-profile sales making headlines. In March 2021, a digital artwork by artist Beeple sold for $69 million at a Christie's auction, making it the most expensive NFT ever sold. Other notable NFT sales include a LeBron James highlight reel that sold for $200,000 and a tweet by Twitter CEO Jack Dorsey that sold for $2.9 million. The rise of NFTs has led to speculation about the potential for these digital assets to revolutionize the art world and other industries, despite its downsides, including energy consumption.
So, was it just a hype, or could it be of help? Overall, the world of cryptocurrency is a rapidly evolving space, with new technologies and advancements emerging on a regular basis. While there are certain risks and challenges associated with investing in cryptocurrencies, there are also potential benefits to be gained from this market.
“Once volatility smooths out, we will have a better picture of how it responds to macro developments.”
As with any investment, it is important to carefully consider the risks and benefits and to do your own research before making a decision. Whether or not cryptocurrencies will ultimately prove to be a viable and sustainable financial system remains to be seen, but their impact on the world of finance might be felt for many years to come.