When the first cryptocurrency, Bitcoin, was introduced, it was designed as a peer-to-peer currency that cut out the middleman, namely, banks. The idea was to give consumers control over their money and provide a means to allow the world’s unbanked population to gain access to financial instruments. The cryptocurrency ecosystem has morphed somewhat since then, but still holds a place as an alternative to fiat. Jason Simon, a FinTech and eCommerce expert who closely follows developments in the cryptocurrency space, discusses the different ways cryptocurrency is now being viewed by institutions.
In August of last year, business software and cloud-based services firm MicroStrategy announced that it had purchased $250 million in Bitcoin (BTC). While investments were not a main target of the company’s portfolio, the purchase was a strategic move to diversify the firm’s capital allocation. At the time, one BTC was worth around $12,000, which means MicroStrategy purchased somewhere in the vicinity of 21 BTC.
Today, that investment is worth approximately $1.16 billion.
Despite the substantial gains, the company isn’t going to cash out. MicroStrategy CEO Michael Saylor said late last year that the goal was to hold the BTC, possibly for as many as 100 years. He explained that the purchase wasn’t meant to be a hedge, but, rather, a “corporate strategy to adopt the Bitcoin Standard.” That was a reference to the stability digital currency is expected to offer the global financial system.
Explains Simon, “With gold or cash, there is a fear of dilution. However, this isn’t true of cryptocurrency. For example, if someone holds $10 million in cash, it will definitively lose 99% of its value in 100 years; for gold, that timeframe is reduced by 15 years. However, cryptocurrency can never lose its intrinsic value, regardless of how much time has passed.”
While certain cryptocurrencies, like BTC, are immune to the degradation in value, not all of them are. This is where there has been a great deal of confusion regarding the true value of cryptocurrency as a fiat alternative. Ethereum, for example, is more centralized than BTC and doesn’t have a functional architecture in place, which means that it is not yet developed enough to be considered a solid option in the digital currency space.
Additionally, fiat holdings, especially in large amounts, are subjected to more taxes and fees than cryptocurrency holdings. This is another reason why moving cash assets to digital currency makes sense. Adds Simon, “Cryptocurrency continues to get stronger and faster all the time, which says a lot about its growth and its potential.
It has only been around for approximately ten years, but has already made huge strides in its functionality because it is being developed by a global network of experts. It isn’t tied to a central organization that controls its movements; rather, the entire ecosystem plays a role in its development.”
When BTC saw its massive breakout in 2017, going from around $100 to as much as $20,000, cryptocurrency suddenly became a target for its investment potential. While the main idea of digital currency has always been the logical evolution of monetary systems, there was a metamorphosis of sorts that saw it shift to become an investment vehicle, not a form of currency. However, in spite of that, the attention the ecosystem has garnered has been substantial enough to bring cryptocurrency to the front lines and give it the attention it needed on a regulatory level to become a valid alternative to fiat.
Concludes Simon, “Cryptocurrency was never designed to be a replacement to the dollar or the euro. It was meant to work in tandem with existing fiat alternatives to expand the financial capabilities around the world. Digital currency has advanced more in the past ten years than the US dollar has in 100, and the reality is that cryptocurrency is now a legitimate and viable option that can be used in place of fiat, or as an investment opportunity. As an investment, cryptocurrencies like BTC are offering massively greater returns than any other investment vehicle.”