Cryptocurrencies, are they built on empty promises, or do they have long-term value?

On Tuesday 7th and Wednesday 8th September 2021 cryptocurrencies lost their value across the board to the tune of USD300 billion. Bitcoin, true to its reputation for lack of stability, lost 17% on Tuesday 7th September. However, investors are piling back in with Bitcoin trading at USD44,344 but still well below its pre-Tuesday levels of USD52,000. 

Those who are worried suggest that Bitcoin has no intrinsic value except for the fact that coins are in short supply. Can these cryptocurrencies truly perform in the long-term for investors, or will they be a bubble that will eventually burst? Below are some arguments for and against cryptocurrency. 

Arguments In Favour of Cryptocurrencies 

Alternative to Fiat Currencies   

Nearly all cryptocurrency users/followers cite the global financial collapse of 2008 as the reason why cryptocurrencies are necessary. Can we trust bankers and the institutions they work for to not make the same mistakes again. Can we trust central banks to ensure these mistakes do not happen again?  

None of us have any say in the financial policies of the European Central Bank (ECB), the Bank of England (BOE) or US Federal Reserve. Perhaps it makes more sense to ignore the potential mistakes of bankers and put one’s faith in algorithms. 

Privacy and Obscurity  

The identities of the owners of digital coins are encrypted and therefore anonymous. All cryptocurrency wallets, (equivalent of bank account holders), are in the names of pseudonyms allowing the owners complete privacy. There is no supervision or control from third parties such as banks and government oversight bodies. 

Peer-to-peer payments can be made in complete privacy avoiding any bank charges or fees. Many critics of the system have pointed out that many criminals have been tracked by using bitcoin. There are however, other cryptocurrencies that offer stronger privacy controls such as Verge, Monero or DASH. 

One Reason to Invest  

Good news for cryptocurrency investors. Despite the recent decline across the board in the value of cryptocurrencies, one cryptocurrency stood out from the rest. Solana has seen an increase in value over the past one month of 420%. It is understood that the double digit increase in Solana’s value over the past year is due to the underlying technology containing exciting novel features.  

Arguments Against Cryptocurrencies 

Volatility  

One of the favourite arguments against cryptocurrencies is they are too volatile and lack transparency. Indeed, the CEO of HSBC Noel Quinn has advised that they will not be opening a cryptocurrency desk or offer digital coins as an investment for those very reasons. He cited similar reasons for not going into Stablecoins such as Tether. 

Regulation  

Cryptocurrency supporters are proud of the fact that their currencies are completely unregulated and decentralised. But how can you put your trust in something that has no rules and regulations. Many individuals from all over the world have lost billions to cryptocurrency scams. Two examples of this are One Coin and BitConnect where clients lost USD15 billion and USD2 billion respectively. If ever there were adverts for regulation in the cryptocurrency markets, then these two would be right at the top. 

One Reason not to Invest 

In the USA recently, Joe Biden’s USD1.2 trillion infrastructure bill has slowly been making its way through congress. Incongruously there is an important clause within this bill aimed at the American crypto economy. This clause will attempt to bring the crypto economy within the US tax system. If the crypto industry is forced to acquiesce, the result could be complete devastation, forcing investment and innovation to jurisdictions outside the USA. 

Conclusion 

There are obviously arguments on both sides of the cryptocurrency debate. However, cryptocurrency is here to stay, especially as some banks are now jumping on board. Institutions such as Goldman Sachs re-opened their cryptocurrency trading desk in March 2021, and UBS has announced it is looking for avenues where they can offer cryptocurrencies to their clients as an investment product. 

These financial institutions can only lend weight and credence to the crypto revolution. However, one thing is clear, some form of regulation will have to be introduced if the supporters of cryptocurrencies wish to see their influence grow and grow throughout the world.