• Matt Rosen

Understanding Cryptocurrency as a Form of Payment and Investment - Part 2

The recent fluctuations in the “value” of cryptocurrencies provides the ideal backdrop into an analysis of the investment merit of bitcoin and its crypto-offspring. The most common objection I hear from individuals tangentially familiar with cryptocurrencies is that “…it is not real.” This is closely followed by either “…you don’t get anything for it”, or “…but what are you investing in?”

Suspend your incredulity and disbelief long enough to consider the following: select your favorite non-dividend paying growth equity investment. For those that don’t have a stock in mind we will consider Amazon, but the exercise works for all these as an asset class. Owning a few shares of Amazon does not pay a dividend. Your ownership doesn’t entitle you to enter their headquarters in Seattle and demand anything. Your ownership doesn’t entitle you to any seat on the board and by extension any direct influence or control on the company. You get the idea. Furthermore, in today’s digital investment world you likely never take possession of the physical security or pay physical dollars for the investment. The money is wired electronically, and the shares are held in a digital ledger in your name and reflected in your account statement.

The likely reason why you bought those shares of Amazon is that you believe at some future point the value of those shares will be higher and you will be able to, at that future date, sell your shares to someone else. This belief is founded upon your assessment of a myriad of inputs, chief amongst which are your belief that the company will continue to innovate and lead its industry and that there is an individual in the future marketplace who will attribute more value to those shares at a future date based upon this performance.

The share price acts as a proxy of public sentiment on the performance of the underlying company.

How is this any different from cryptocurrencies? There are utility tokens and those serve a different function. But most crypto-tokens introduced through initial coin offerings (ICO) are instruments of value that represent the public perception of their underlying companies. An investor acquires the token of a prospective company on speculation that the company will perform in such a way that someone will value the token at a greater price at a future date.

A short remark regarding conventional exchanges like the NYSE and the SEC, agencies that provide rules and regulations governing traditional stocks and by extension protecting investors. Yes, crypto markets are currently unregulated and are therefore more likely to attract unscrupulous characters. These markets are also highly speculative and incredibly volatile and are only suited for investors who understand such risks.

The goal of this exercise is not to encourage or discourage investment in cryptocurrencies, but rather to illustrate that as an alternate asset class they stand on their own merits and share many similarities to other more conventional investment vehicles. 

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