Is cash still king? Probably. However, recent whisperings in the news certainly put this old truism up for debate. As the likes of bitcoin and non-fungible tokens (NFTs) have grown in prominence in recent years, traders and investors have witnessed everything from market crashes to bounce-backs.
Most recently, the use of bitcoin in Russia has surged, presumably as a means to maintain buying power as many mainstream banks and payment services have halted their operations since the beginning of the offensive against Ukraine. That said, there are some fears that oligarchs and the Kremlin’s elite may be using cryptocurrency to dodge the sanctions placed on them by Governments across the globe.
Such a scenario clearly underpins the benefits, and indeed the weaknesses, that nascent currencies offer to traders, investors and consumers. The very nature of cryptocurrency, which exists in a closed system of its own, means that it is not regulated by central banks. Of course, this means that normal Russians can continue to make transactions and act as consumers with some semblance of normality, as the West acts to condemn the actions of the Kremlin. However, as cryptocurrency movements are not tied to an individual’s identity, the anonymity that such a system enables is a potential cause for concern.
Whatever your stance, it is clear that the world of crypto is incredibly complex and multifaceted, and in comparison, the dollar or sterling might seem like a ‘safer’ option when it comes to trading or investing – USD in particular is still perceived as ‘the king of currencies’. But has it always been this way?
Tracing the history of currency
Money, in some way, shape or form, has been part of human history for the last 5,000 years – but that’s not to say that it hasn’t changed substantially throughout this period. Before currency, we had bartering. After that came physical items and belongings such as animal skins and weapons until around 600BCE, when it is believed that the Lydians minted the first gold coin. We can thank China for the invention of paper money back in 700CE – but this didn’t make its way across the globe until 1684, when soldiers in Canada (which was then a French colony) were issued playing cards to use as cash.
Although cash is still generally used by many people around the world, in recent years we have seen the dawn of cashless payments like Apple Pay and Google Pay, and to some extent cryptocurrencies. Newer traders and investors would be forgiven for thinking that they would be turned away from the bank for even contemplating handing over a playing card as payment, but in reality, this isn’t too far from the truth.Nowadays, many people are investing in digital ledgers and NFTs, which are typically associated with digital files, images, and even art – perhaps playing cards aren’t so far-fetched after all.
Weighing the risks
As things currently stand, it isn’t common for people to use the likes of bitcoin as a currency – although cryptocurrency is legal tender in El Salvador, it has yet to be widely accepted and regulated. As such, individuals typically purchase crypto for use as an investment instrument – that said, this can come with some significant risks attached.
As it is a nascent currency, it is difficult to predict exactly how the market will mature over time. Given that cryptocurrencies are speculative risk assets, investors will always run the risk that their investments may not appreciate in value. Likewise, with CFD trading, traders need only deposit a percentage of the value of a trade to open a position – profits and losses will then be based on the full value of the trade. In short, investors should be wary of the high volatility of crypto – this, combined with trading on the margin, means that they could be up against some substantial losses. And it has certainly been a volatile 18 months or so – after surging to a price of almost $70,000 last year, right now, bitcoin has crashed back to around $40,000, so this is certainly something to be aware of.
Another risk that investors should keep in mind is the potential for technical hitches, cyberattacks and more generally, the propensity for human error where tech is concerned. First thing’s first, it is important to recognise that once a Bitcoin or digital asset has been stolen or lost, it is impossible to get it back. Even with the protection of a smart wallet, it is not unheard of for people to lose track of their investments. Over the years, between 2.78 to 3.79 million bitcoins have been lost according to research from Chainalysis, so those investing in crypto should be cautious when it comes to keeping the key to their wallet safe to avoid any accidents. Perhaps more worrying, however, is the fact that fake exchanges are on the rise – so investors should ensure that they are aware of the latest scams, unsolicited offers, and any unrealistic claims about guaranteed returns. If it sounds too good to be true, then it probably is.
To underscore my earlier point – cryptocurrencies are still very young and it is unclear how digital assets will evolve as central banks develop their own digital currencies (CBDCs). At present, some investors believe that when implemented, CDBCs will hinder the privacy of purchasers and displace the crypto market entirely. Ultimately, this remains to be seen. However, given that many central banks including the Federal Reserve and the Bank of England are actively discussing CDBCs, this does signal the fact that crypto may one day be used as a currency and not just as an investment instrument.
Worth the investment?
Of course, there are some potential benefits to investing in crypto, too. It is worth noting the speed, cost, security and convenience of transactions here – as this is all done digitally, users can benefit from near-instant transfers at a much-reduced rate. Likewise, funds will be secure in an investor’s crypto wallet, so long as this is properly protected. This key, along with the blockchain system, ensures that individuals can benefit from pseudonymity and enhanced security (which entails other risks though).
Likewise, traders and investors can potentially put cryptocurrencies to good use when it comes to diversifying their portfolio. Some people may be interested in exploring these assets as a hedge against inflation, although it is important to note that it is still unclear whether crypto’s really are a hedge against inflation or not. As a new asset there are many uncertainties and how it interacts with inflationary pressures is still one of them. That said, given that Governments have been printing unprecedented amounts of money since 2008 – a prospect which is beginning to impact the wider economy – it is not unreasonable to consider that bitcoin may be an interesting solution to this problem, given that there is a cap on the amount of currency that can be mined. Likewise, where more traditional hedges against inflation (for example, gold and property) can be inaccessible to many people, cryptocurrency may be a more realistic option for some investors to pursue in a potential inflationary hedge mix.
Undoubtedly, there is plenty to consider when weighing up bitcoin as a potential investment – let alone the possibility to use digital assets as legal tender in the future. I, for one, will be watching on with interest to see how the likes of bitcoin and NFTs develop over time. I would wager that the markets might look quite a lot different – so it’s vital to have a clear strategy in place before investing.
Note: Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and HYCM Capital Markets (UK) Limited.
[Main image: vikas-makwana-Qx6CvJlTMys-unsplash]
