Is Cryptocurrency the New Investment Pot of Gold?
Updated: Jun 18
There’s been a radical shift in the perception of cryptocurrency in 2021. However, crypto tokens have been around since 2009, with Bitcoin being the first company to issue them; but their unstable nature has kept cryptos on the sidelines of mainstream investment portfolios. With the backing of wealth management pundits and high-profile investors, this year, cryptocurrency has finally come out of the shadows and is taking its place in the investing world.
As it stands in late 2021, the market cap for cryptocurrency, reported by CoinMarketCap, is around 2.6 trillion dollars. There are over 6,800 cryptocurrencies, also known as crypto tokens currently available; a stunning jump from just 644 cryptocurrencies in 2016, and 66 in 2013. (Source)
Rise of Cryptocurrency
Crypto tokens can be used to purchase goods and services, and also be traded for profit. The security of cryptocurrency comes from a few aspects, that differentiate it from regular government-issued currency.
Transactions are managed using decentralized blockchain technology that spreads user records across many computer terminals.
Crypto tokens are digital transactions that are secured using an online ledger with cryptography (hence the name).
Unlike fiat money, which is basically, paper money and coins, that are issued by the government of a particular country, crypto tokens are issued by different companies as Initial Coin Offerings (ICO).
While there are a large number of cryptocurrencies in the market, the current market for cryptos is driven by approximately ten key players, and due to its instability, and changing investor confidence, we see daily ups and downs in market valuations. Bitcoin, which was the inventor of the cryptocurrency model, however, stays far ahead of the competition, valued at a market cap of over 821 billion dollars, followed by Ethereum at around 350 billion dollars. Other players like Solano, Tether, Cardano, and Binance Coin are still at a distance from the top two players.
Barriers Faced by Cryptocurrency
The crypto market faces three clear barriers to becoming part of regular investment portfolios, and the good news for enthusiasts, and active crypto speculators, is that these concerns are already being addressed in many countries.
While the technology behind cryptocurrency is more secure, it loses out due to the lack of financial oversight which keeps currencies on track. There is a shift in solving this issue using Stable Coins, which is a cryptocurrency that has been backed by, and over collateralized using reserve assets like currency, commodities, gold, etc; hence giving the buyer more confidence, investing in the cryptocurrency. Furthermore, Bitcoin ETFs (exchange-traded funds) have finally brought cryptocurrency into normal investing portfolios.
Any currency needs to be put into circulation for the tender to be widely accepted. And cryptos’ lack of usability by the global population, is one of the reasons why it has struggled to succeed. Crypto tokens have, thus far, been generally viewed as chips one buys at an arcade with real money. They are used as a tool for speculation, more than as a serious investment strategy. This barrier has finally been broken in 2021, where we have seen a common acceptance of crypto trading, with real-time tracking of market valuation.
Traditional central banks and a country’s government regulators play a significant behind-the-scenes role in maintaining the stability of the world’s currencies. While investors are willing to take on risks in investing, as they generally do when trading stocks and other commodities; they fear the same security is not present when they risk their money on cryptos. In recent years, we are seeing a growing reach of such regulations in cryptocurrency trading as well.
Will Cryptocurrency Sustain its Growth?
An evolving story that could still unfold in any direction, the sustained growth of cryptocurrency looks more certain in 2021 than it did in 2020. Certain factors will come into play to take this currency forward:
Many countries like India that play a relevant economic role on the global scene, have not stepped in to make any definite statement on recognizing cryptocurrency. In India, cryptos are neither legal nor prohibited.
In China, cryptocurrency has been banned since 2013. Although there have been talks of removing the ban with more government regulations, China’s stand remains unclear.
High-profile investors and the financial industry placing their trust in cryptocurrency, and making it part of their investments is important for the needle to move. For example, we have seen the slow rise of a relatively unknown crypto, Dogecoin, due to the backing of prominent investor Elon Musk, CEO of Tesla.
With the introduction of Stable Coin, which reduces the perils of buying cryptocurrency by giving it a known reference point; the trust of conventional investors can be gained.
Big companies issuing and accepting cryptocurrency will provide a much-needed boost to the industry, as will the introduction of cryptocurrency trading to their investment offerings by well-known brokerage firms.
The magnitude of the upheaval caused by cryptocurrency is the kind the global financial markets have not seen in a long time. Early adopters looking to take their investments in an exciting direction, while willing to risk their assets on a potential pot of gold are going to be key to building investor trust in cryptocurrency. For the rest of us, we will wait and watch as this story unfolds.