Will Cryptocurrency Ever Become a True Alternative Investment?
For alternative investors, cryptocurrencies hold a mixed appeal.
On one hand, China, one of the largest markets in the world, recently did a major reversal after a Bitcoin crackdown, calling cryptocurrency an investment alternative. And there are signs of slow cryptocurrency adoption in the larger alternative investment market, not just in China. In May 2021, Goldman Sachs declared cryptocurrencies a separate alternative asset category.
On the other hand, for a lot of alternative investors, cryptocurrencies are still a mystery. They don’t know how cryptocurrency works, why it’s worth anything, and most importantly, why it’s worth their hard-earned money.
Here’s a look at the future of cryptocurrency as an alternative investment.
What are Alternative Investments?
First, it helps to recall what alternative investments are.
An alternative investment is any investment asset that does not fall into one of the three conventional asset categories:
In other words, anything that can’t be classified as stocks, bonds, or cash is an alternative investment. This means that alternative investments encompass a vast number of types of non-traditional investments. However, alternative investments have a few things in common: they’re more complex than conventional investments, they’re sold in smaller niche markets outside the stock exchange, they’re less liquid than conventional investments, and they’re less regulated than conventional investments.
What is Cryptocurrency?
This brings us to cryptocurrency.
Cryptocurrency is a broad group of digital assets—thousands, actually—but only a dozen have any real appreciable value. More specifically, cryptocurrency is digital currency secured by cryptography through blockchain, which makes it nearly impossible to counterfeit or double-spend.
However, despite what the name implies, it isn’t a nationally recognized currency. In fact, cryptocurrency is not issued by any national government or central bank, nor is it tied to any national currency (unless it’s a stablecoin currency, anyway). That’s actually a major appeal for many dedicated cryptocurrency investors, since it means cryptocurrency is theoretically immune to government interference.
How Does It Work?
Regardless of the type of coin, all cryptocurrency relies on technology called blockchain, which is a decentralized, distributed ledger connected to a network of disparate computers. All cryptocurrency transactions are recorded on blockchains.
Picture a mile-long CVS receipt, with one transaction right after the other. Blockchain is a database, but unlike other databases, it stores transactions in a list like your mile-long pharmacy receipt. Each transaction is called a block, and each block receives a hash and a timestamp linking it to the blocks before and after it (thus blockchain). Every block is verified by every node in the network, and every node can add new blocks.
Basically, in order to hack blockchain to change one transaction, you would have to hack the entire block—no mean feat, considering that new blocks are being added and verified all the time.
How Can You Use Cryptocurrency?
The name cryptocurrency implies that it’s a digital alternative to currency, and that’s what the inventors of cryptocurrency intended. In theory, that means you can use cryptocurrency to buy things, just like you would use fiat currency.
There are two problems with that.
The first is that cryptocurrency isn’t universally accepted as currency. A handful of online retailers accept cryptocurrency, but it’s far from the norm. At the moment, the best workaround is to exchange cryptocurrency for gift cards. You may be able to pre-load a debit card with cryptocurrency, assuming your bank accepts it.
The second is that a single unit of cryptocurrency isn’t equal to a single unit of a fiat currency. Currently, a single unit of Bitcoin goes for $49,840.79 USD, but because Bitcoin (and other cryptocurrencies like it) aren’t fixed to a fit currency, the exchange rate is highly volatile.
Why Cryptocurrency Isn’t an Alternative Investment
This brings us to cryptocurrency as an alternative investment. The short answer is that while it sort of counts as an alternative investment right now, it is not universally recognized as one.
On one hand, cryptocurrency has some features in common with other alternative investments. For example, cryptocurrency operates independent of equity markets, which makes it similar to other alternative investments like commodities. However, it is also hyperliquid, while most alternative investments are largely illiquid.
The bigger issue is cryptocurrency’s status as a currency.
On one hand, cash is considered an investment. It’s the most liquid of all investments. And while it doesn’t grow on its own, you can generally count on a dollar to be worth a dollar (regardless of how much inflation changes what that dollar can buy).
But cryptocurrency isn’t a currency, at least not yet. It’s popular, but it isn’t recognized as a currency, which means your ability to liquidate it in the future may be unreliable—and it may not have anything to do with inflation, the usual culprit in stripping fiat currency of its value.
Second, investing in currency is a tricky business. You don’t invest in currency, per se. You hold onto currency as a liquid asset which can help you purchase other assets. But cryptocurrency as an asset is treated more like a tangible asset than a currency, even though it aspires to be currency.
Alternative Investors, Cryptocurrencies, and the Future of Cryptocurrencies as Alternative Investments
In short, cryptocurrency isn’t an alternative investment yet. Whether it’s worth it depends on you.
Think about your investment goals and what you’re hoping to get from cryptocurrency. You should be realistic about what cryptocurrency can achieve and understand that not all advisors will take it seriously.
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