So far this year the price of Bitcoin has fluctuated between a high of $16,597 and a low of $5,904. Clearly buying, selling, or holding a cryptocurrency such as Bitcoin isn’t for the faint of heart.As this article is being written Bitcoin is priced at $7,547 – representing a gain of about 28% if you bought at the low or a loss of more than 50% if you were unfortunate enough to buy at the high.
It’s hard to think of another investment – excepting for some penny stocks trading on the pink sheets – that has shown so much up and down movement in such a short period of time.
Which begs the question – are Bitcoin and other popular cryptocurrencies like Bitcoin Gold, Bitcoin Cash, Litecoin, and Ethereum – here to stay?
What Are Cryptocurrencies?
Before we discuss the pros and cons of cryptos, let’s look at three characteristics that all cryptocurrencies have in common:
- Digitized assets with no government backing
- Bought and sold on decentralized peer-to-peer networks with no centralized authority such as a Central Bank
- Fiat currencies such as the US Dollar, Chinese Yuan, and Euro can be used to purchase digital currencies, ostensibly swapping a ‘real currency’ for a digital one
Are Cryptocurrencies Just Another Mania?
People seeing a short lifespan for cryptocurrencies argue that:
- Difficult to Use – Bitcoin and other cryptos aren’t suitable or convenient for payments because they’re not widely used and never will be
- Bitcoin benefits criminals, terrorists, and other underworld figures because they can launder money with untraceable digital currency
- Tulip Market – Bitcoin and the entire cryptocurrency market is one big speculative bubble that’s ready to burst at any time, similar to the Dutch Tulip Mania in 1637
Or Will Cryptocurrency Values Keep Rising for Good Reason?
It’s hard to believe that one morning we’ll wake up to find that cryptocurrencies have completely vanished into the rarified air of the Internet.
A recent Wall Street Journal article notes that the value of the entire crypto market stands at a little over $290 billion. While that pales by comparison to the $3 trillion market cap of the FAANG stocks – Facebook, Amazon, Apple, Netflix, and Alphabet (aka Google) – hundreds of billions of dollars is nothing to laugh at.
Advocates of electronic digital currencies such as Bitcoin and Ethereum believe cryptocurrency as a medium of exchange will keep growing for several reasons:
- Instant Settlement – Buying and selling, sending and receiving a crypto happens in almost real-time with a transaction cost of only a few cents
- Accessible – By some estimates there are nearly 2 billion people around the world that don’t have access to the traditional banking system, representing a tremendous number of potential crypto users
- No Middle Man – Cryptos are directly held by the investor in their own offline or online wallet, similar to keeping money under a mattress
Do ETFs and Government Regulation Help or Hurt Cryptos?
There are two recent occurrences in the cryptocurrency market suggesting that cryptos are here to stay:
Government Interest – When governments seek to control or tax a new asset or product the unintended consequence is that more people become interested. Prohibition in the 1920s and early 1930s is a good example of this.
Investment Banking – Although the SEC has yet to approve a Bitcoin ETF, asset managers continue to seek permission for exchange-traded cryptocurrency funds.
According to the WSJ, firms that have recently asked the Securities and Exchange Commission to approved regulated Bitcoin funds include Eck Associates Corporation, SolidX Management LLC, and Bitwise Asset Management Inc.