Thought of the Week / May 27, 2021
What is cryptocurrency?
On May 23, Bitcoin was down more than 50% from it’s all-time high of $64,824 in mid-April and Dogecoin fell to 29 cents, down 60% from its peak earlier this month. Because of these all-time highs and lows, cryptocurrency has been in the headlines a lot. So what exactly is cryptocurrency? Let’s discuss.
Cryptocurrency is a digital asset that is distributed across a large number of computers. It can be used to buy goods and services, and is secured in a way that makes it practically impossible to counterfeit. This currency is decentralized, which means it exists outside the control of governments and central authorities. It also is not associated with anyone’s identity and cannot be easily traced. As of May 27, 2021, the total value of cryptocurrency globally is $1.73T, and Bitcoin and Ethereum account for over 50% of all cryptocurrency.
One of the pros that comes along with cryptocurrency includes the elimination of the third party in monetary transactions, such as banks or credit cards. Also, crypto transactions are almost instant, no matter the distance, while wiring money internationally can take multiple days to settle. Another aspect of crypto that people like is that it is decentralized and not correlated with the USD. The USD has declined in recent years, which could signify a strong hedge against the USD.
On the other hand, the anonymity of cryptos has been linked to money laundering and illegal activities. One example is the Colonial Pipeline ransom was paid in $4.4M of bitcoin. Cryptocurrency is also known for extreme volatility. In 2018, Bitcoin lost over 70% of its value, in 2019 it doubled in price, and 2020 it quadrupled in price. Overall, cryptocurrency has not held up well in the market crisis. February 19, 2020 – March 23, 2020, Bitcoin lost approximately 38% compared with 34.5% from the Morningstar U.S. Market Index… so much for diversification! With cryptos popularity on the rise, correlation with the SP 500 has also risen in recent years.
In summary, Bitcoin and other cryptos have gained popularity in recent years and have potential to provide meaningful solutions to the financial industry. However, it should be noted that there is a very high degree of uncertainty regarding the future for cryptocurrency and how it will be used. Investors should factor in this uncertainty when making their investment decisions, and purchase accordingly.
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