The hype around bitcoin is gaining extra momentum now that Trump is supporting the crypto sector. Nice for all crypto speculators, but it has nothing to do with investing.
Big news last week, the world’s largest and best-known cryptocurrency, bitcoin, passed the magical barrier of $100,000. People who bought bitcoins five years ago are now looking at a return of more than 1,200 percent. All other asset classes pale in comparison.
With the important difference that Bitcoin is not an investment, whatever convinced crypto enthusiasts may say about that. An essential part of an investment is that it generates cash flows, preferably now but certainly in the future, which you then transfer to today to give an approximate value. The value of a piece of real estate lies in the (potential) rental income, the value of a bond lies in the coupon and the value of a share lies in the profit distribution and the current or future free cash flow.
None of that with crypto coins. The price of bitcoin, not its value, is determined by millions of fortune seekers who speculate on it. In that respect, crypto markets are most similar to commodity and precious metals markets. These are also run by speculators and are a lot more volatile than bond or stock markets, with the difference that trading in raw materials and precious metals has existed for centuries.
An economy based on bitcoin is an economy doomed to a complete standstill.
Speaking of markets, the total market value of Bitcoin and other cryptocurrencies worldwide is virtually negligible compared to the value of other financial markets. That immediately explains the extreme volatility on crypto markets. It concerns a lot more people in a very small market. Where trading in commodities is a game between a select group of experts and experienced traders, crypto trading is the playground of the first adventurer with a smartphone, from my hairdresser to my teenage boy next door.
And I cannot believe that Bitcoin can be the basis for the global monetary system, a dream that rabid crypto enthusiasts dream of. Ultimately, it is a digital currency of which only a maximum of 21 million will exist. How can that be the backbone of a monetary system? How will people ever feel the incentive to spend their bitcoins if they know that their supply will remain limited and that the bitcoins they have today will probably be worth more tomorrow because of that limited supply? It was not without reason that former American President Richard Nixon took the American monetary system, and in his wake that of the rest of the world, off the gold standard. An economy based on bitcoin is an economy doomed to a complete standstill.
Illegal activities
That’s it for crypto bashing. That sector is sometimes unfairly overloaded with sins that it does not commit. Such as the absolute fallacy of skeptics that only criminals benefit from crypto. This just shows that they don’t understand it. The blockchain technology underlying crypto makes it possible to trace all crypto flows and identify those that can be linked to illegal activities.
Of the total volume of crypto transactions in 2023, 0.34 percent can be linked to criminal activities. In the regular financial system, an estimated 5 to 15 percent of all financial transactions can be linked to matters that should not see the light of day.
The most value in the entire crypto story lies in the underlying blockchain technology. In certain sectors and contexts, such as logistics, data management and financial transactions, this offers an attractive alternative to the way things are currently done. The value of crypto coins will therefore depend more on which type of blockchain will be most used for all those situations and how large the network effect will be.
