Cryptocurrencies like Bitcoin are the dish du jour. Everyone from seasoned investment managers to teen-aged kids wants a taste of the crypto. There’s a good reason too, Bitcoin is up almost 300% in the past year alone. But price swings are extreme, enough to make even veteran traders squirm (both in pain and delight). The question we get asked repeatedly is can the price keep going higher?
Of course, it can. With markets, anything can happen, especially when it comes to something as novel and unregulated as Bitcoin. But in order for price gains to be sustained, cryptocurrencies must gain legitimacy. For a currency that means when enough counterparties are willing to recognize it as legitimate payment for goods, services, and other things of value.
Besides illicit trade on the dark web, Bitcoin simply isn’t widely accepted as a substitute for existing currencies. That begs the question, who really wants to own something that can only be bartered for illegal guns and drugs? Some may, but unless that changes in a big way cryptocurrencies look better for short-term trading than long-term investing.
For long-term investors, the more promising opportunity may be in blockchain, or the technology underlying cryptocurrencies. A blockchain is basically a digital ledger that records transactions between parties. Each transaction is recorded as a block of code linked to previous blocks in a chronological chain visible to all parties involved. The technology is secure, efficient, and has many practical applications.
Examples include the transfer of assets like securities or real estate. Currently, the sale and purchase of such things require layers of middlemen (brokers, clearing houses, title companies, etc). Each layer adds time, cost, and complexity to the process, but they’re necessary because there’s no standardized, automated, and secure way to simultaneously record a transaction for all parties involved. Blockchain is potentially all that and a bag of chips!
The application doesn’t stop at asset transfers either, blockchain could disrupt everything from medical records to inventory management as its development is still in infancy. Ironically, one of blockchain’s most practical applications is for modernizing the payment systems for existing currencies. Applied successfully it could actually weaken the case for cryptocurrencies. It’s much simpler to upgrade existing currencies than to replace them.
The bottom line is despite the surging interest in Bitcoin the currency, the real long-term opportunity may actually be in blockchain the technology. The price to buy Bitcoin at was $100. While that’s long gone, companies small and large are still scrambling with how to capitalize on blockchain’s huge potential. As with any emerging opportunity, new ventures are proliferating rapidly in this space. Some look attractive, but most are unprofitable and totally financially unstable. So beware, do your diligence, and don’t bite off more than you can stomach.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice of any kind. Investing is inherently risky and involves the risk of potential loss.