Is Crypto as an asset class relevant today?

The world is undergoing a transformation in every sense right now. Tech and artificial intelligence have permeated every domain and what was once a support role has become the core wiring of businesses. The world order is changing too and the wars that are going on are giving this velocity. Along with the world order, the financial system and the way the world transacts itself may be in for a change.

We have in the past been quick to dismiss new trends. McKinsey had predicted a need for a total of 50000 mobiles, that too among truck drivers. IBM’s CEO Watson had predicted that there may be a market for maybe five computers in the world! There are a whole lot of such predictions which in hindsight are spectacular gaffes. Read about some of the predictions here –

https://www.pcworld.com/article/532605/worst_tech_predictions.html

Steam engines were denounced when it made its appearance. No one expected people would pay for water – yet bottled water is a very big business today. Sometimes we get ahead of ourselves… there have been predictions that we will colonise the solar system and interstellar travel will be happening in the early part of the 21st century. 

Hence, let us not be dismissive about Cryptos just because it is too radical for some of us and does not conform to the existing templates. The right approach is to be objective and examine taking into account all the facts instead of stuffing our feet into our mouth!. 

One of the problems with Crypto assets is its legitimacy, with governments denouncing them as they were outside their control. But slowly, Cryptos have started getting accepted by some governments, in some parts of the world. There was one event that lent legitimacy to Bitcoins and was seen as a watershed event for Cryptos and Bitcoin in particular. 

That was the approval of Spot Bitcoin ETFs in the USA. This would mean that institutional money will flow into Cryptos as also retail money of those who have been sitting on the sidelines waiting for an institutional manager to manage these volatile assets. That lends a lot of legitimacy and acceptance to Bitcoins and its ownership is expected to increase, which could send its prices soaring.

I have written about this in an article in Mint. Here it is –

https://www.livemint.com/money/personal-finance/has-the-time-come-for-governments-to-recognize-cryptocurrencies-11706202826726.html

The next question is whether Cryptos should then become a part of our portfolios. Cryptos are an emerging asset class. We need to be cautious about it and yet be willing to examine it and consider it for inclusion in our portfolios, if we are comfortable, to a small extent.

I have written about this in Moneycontrol. Here it is –

https://www.moneycontrol.com/news/business/personal-finance/is-now-the-time-to-add-crypto-to-your-portfolio-12228081.html

Let us examine the important accusation regarding Cryptos. Crypto currencies/ assets have been at the receiving flak for being created out of thin air, not having any underlying asset and hence is considered a lot of hot air! The value assumed is in the eyes of the beholder and price increases, though dictated by supply and demand, are primarily dependent on greater fool theory! These accusations should not be dismissed lightly.

While these accusations are right, Cryptos are being singled out for flogging when there are other assets which have been accepted widely, though they have no underlying basis or have any true intrinsic value.  The value attributed to Cryptos, it is alleged, is purely based on our own perception of their value. But this is true for many other widely accepted currencies/ assets too.

Our paper currency is one such where the value for the paper is coming from the government guarantee. But, there is no underlying asset (like Gold ) backing the currency, like it used to be before the Bretton Woods conference.

Government guarantee, while it appears solid, is not bulletproof. There have been several instances of the government defaulting on its liabilities and hence dooming the underlying currencies. Many times, the government may not default; they may issue more debt and pay the retiring debt and interest, with the new debt! This is a ponzi scheme that governments are playing with a real possibility of debasement of the paper currency. 

Even Gold has very little industrial use and is used in jewellery.  But, its price does not reflect the value of this usage. Gold is also held as a bullion as it is seen as a store of value. People attribute this to the rare nature of its presence on earth. Platinum is even rarer than Gold, is used in jewellery, has some industrial uses but is not very popular as a store of value. Hence, it is cheaper than Gold. 

Hence, it is not only about how rare a commodity may be. It is reflective of our trust and collective acceptance of its value and worth. 

Even the land and home is somewhat like that. It is certainly a factor of demand/ supply. But beyond that, perception of value plays a role here too. 

Any antiques, collectibles and art are valued based on the origins, pedigree of the creator, how rare they are, their vintage and other factors. The perception of value varies a lot, from person to person. 

This is true for many everyday products – like Apple products, high end cars/ bikes, which are way too expensive than they should be. The prices that such high end products command can hardly be justified if seen purely in utility terms. The perception of value comes from other factors like brand appeal, snob value, prosthetic support to one’s self-perception, the exclusive feeling it gives of being a part of a clan/ community and other reasons.

In case of Crypto currencies as well, there is a value perception due to the limited nature of Cryptocurrency generation that has been planned from the very beginning. Due to this very limitation, the expectation is that it will retain value and even appreciate as the acceptance increases. If we now see Cryptos in the light of how we value various assets, it does not come as a surprise.

There is a lot of unease due to the extra-governmental nature of cryptos, their lack of any underlying asset, being only digital, its novelty and its volatility. We need to keep an open mind on this futuristic asset class that may become mainstream at some point. 

If we feel uneasy about it, we need not invest in it. But that does not change the fact that we should be willing to subject it to proper examination before consigning it to our mental dustbins. That is the very least we can do. Let us keep an open mind. The seismic changes happening in the world may yet make this asset worth considering. At any rate, let us Never say never again – like 007!