“What do you think about bitcoin?”
Over the past few months, I’ve gotten this question more than any other. In 2017, bitcoin, the world’s first , rose by almost 1,200%, prompting excitement and bafflement.
[timeless]
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
My answer: I’m enthusiastic about the blockchain technology that makes bitcoin possible. In fact, Vanguard is using such . As for bitcoin the currency? I see a decent probability that its price goes to zero.
Bitcoin price in U.S. dollars, January 1, 2017–January 22, 2018
Source: Bloomberg.
Are cryptocurrencies currencies?
Bitcoin’s creators introduced the cryptocurrency in the wake of the global financial crisis. The goal was to bypass governments and banks when two individuals want to transact. No country, company, or institution controls the currency. But are bitcoin and competing cryptocurrencies really currencies? Let’s think about what a currency is:
- A currency is a unit of account. Cryptocurrencies qualify, as they can measure the value of other goods and services.
- A currency is a medium of exchange. I’d give cryptocurrencies a qualified yes on this point. Currently, only a limited number of vendors globally accept cryptocurrencies, and recent volatility will only discourage increased adoption.
- A currency is a store of value. Bitcoin is not. Its price volatility undermines its adoption, as fewer vendors will accept a currency whose value can fluctuate so dramatically. The prices of newer currencies have been similarly volatile.
The existential dilemma
Let’s call the verdict on the currency question mixed. Even if cryptocurrencies qualify for niche purposes, their prospects seem dubious.
The greatest threat is central banks, which have begun to research blockchain-based currencies and impose regulations on exchanges. Given the additional control and policy effectiveness that digital currencies could provide, central banks have good reason to adopt digital currencies in the coming decades. Those currencies would be “legal tender,” legally recognized forms of payment for all debts and charges.
If the choice were between bitcoin or a blockchain-based dollar, which would you rather have in your digital wallet?
Read the full article here by Joe Davis of Vanguard, Advisor Perspectives
