Cryptocurrencies versus fiat: 3 key comparisons
There are still a lot of pros and cons you need to know EXPERT VIEW
You cannot dream of something better than living in the digital era as today you can reach every bit of information easier and faster than ever before. But having such enormous amount of information at your disposal can also be tricky. The digital era has one main disadvantage and it is called ‘the fear of missing out’; FOMO is a term that defines one’s desire to be a part of the mass and to not get left behind.
Nowadays, the FOMO phenomenon is what accelerates the hype around the new trendy topic around the block — cryptocurrencies. Many people decide to include some type of cryptocurrency in their portfolio in order to not miss out the potential big pie of profits. But whether they really understand the idea behind this new technology and its main pros and cons still remains unknown. If you are considering whether it is reasonable to jump in and put your savings into cryptocurrencies, make sure to get informed and do your homework first. One of the best ways to judge whether an investment opportunity is worth it, is to use a benchmark. With the course of time, one asset has proved itself as the ultimate benchmark and its name is gold. Here are three factors that will help us compare it with cryptocurrencies. Gold has been around for centuries and has proved itself as the ultimate safe-haven investment, resistant to exogenous (external) risks. Cryptocurrencies, on the other hand, are a slightly new phenomenon. They are yet to prove themselves as a useful medium of exchange and to earn the trust of the investment masses. It remains to be seen how long will some of them be around and whether they can penetrate the economy in a way that will make them popular among customers and merchants. On the account of its physicality, history and real value, gold has proved itself as a transparent investible asset. When it comes to cryptocurrencies, things are quite different. Many countries, such as Russia, Nigeria, Colombia and Taiwan, have banned Bitcoin or made transactions illegal. Others such as
There is no definite answer how cryptocurrencies will perform in a declining market China, Japan and Singapore are issuing constant warnings or are planning to ban cryptocurrencies. All this speaks volumes when it comes to cryptocurrencies transparency and their chances to become a renowned medium of exchange in the short term.
Another main problem, related to digital currencies, that concerns investors and makes them react in some way are the security breaches and hacks. Leading cryptocurrencies are based on open-source platforms that provide everyone with the ability to copy a part of the source code for free, to examine and modify it. That is a good way to report bugs or security concerns but when such problems are announced, the level of confidence in the system drops and that affects the current price of the cryptocurrency. All this leads to significant price fluctuations. On the other hand, gold does not have any of these problems as it is stored in vaults all over the world. Thus, the price of physical gold is immune to yet another vulnerability of cryptocurrencies. Gold has proven itself as one of the safest investible assets as it has passed the numerous tests of time and has established itself as the world’s reserve currency. On the other hand, there is no definite answer how Bitcoin (or any other cryptocurrency) will perform in a declining market. Bitcoin investors consider it as a safe haven that will act as some kind of shelter when things go wrong, but if it is so, why is it acting like a high-risk asset in today’s bull markets? Whether cryptocurrencies are good investment prospects remains to be explored.
When it comes to investments, the risk/reward ratio is the first thing people usually consider. Cryptocurrencies, as they have proved recently, can be very profitable investment solutions. But on the other hand, if not analysed properly on a day-to-day basis, they can wipe out all of your gains in a matter of seconds, just because of a technological glitch, security breach or other types of event. Gold, on the other hand, is an asset that has paved its name as a synonym for a safe-haven type of investment in times of market turmoil.
Cryptocurrencies are intended to combine the advantages of gold and fiat money by being an effective medium of exchange and, at the same time, a good wealth preservation tool. That is why the fact that part of the most popular cryptocurrencies tries mimicking the characteristics of gold should not surprise you. The one and the only difference is that the uncertainty around these digital assets remain, while gold has proven itself for centuries already. Once again, it is you who will decide which way to go gold or cryptocurrencies. The writer is associate director at SMC Comex International DMCC. Views expressed are his own and do not reflect the newspaper’s policy.