Cryptocurrency and its suitability for Long-Term Investment
MGT 5002 Corporate Finance
Dr. Mark Antonio
July 26, 2018
Cryptocurrencies have recently gained a lot of attention, however the the idea has been around for years, since 1983 to be more specific. David Chaum, and American cryptographer, had the idea for an anonymous currency called electronic cash. He believed in safe commerce, where we would need token money that would match paper money and coins CITATION Gri14 l 1033 (Griffith, 14). This would allow for a safer and private transaction. He invented the first form of digital money as Digi Cash in the Netherlands using the blinding formula invented by himself. This formula allowed a person to pass a number to another person, and that number be altered by the receiver. “When the receiver deposits her coin, as Chaum called it, into the bank, it bears the original signature of the mint, but it is not the same number as that which the mint signed. Chaum’s invention allowed the coin to be modified untraceably without breaking the signature of the mint, hence the mint or bank was ‘blind’ to the transaction” CITATION Gri14 l 1033 (Griffith, 14). In this paper, I will discuss brief history of investments, beginning of cryptocurrency, Bitcoin, and cryptocurrency as long term investment.
What is cryptocurrency one may ask? “Cryptocurrency is a digital form of money functions with the help of a technique called cryptography. Cryptography is a process that translates legible information into codes that cannot be broken at all. The main book of all crypto watch transactions is called blockchain. Blockchain records individual transactions and ownership of all cryptocurrencies that are in circulation, and this system is managed by “miners” who must update all transactions that have occurred and ensure the accuracy of the information. In this way, the security of the transaction is confirmed” (Milutinovi?, 2018).
Before I continue into cryptocurrencies as long-term investments, I would like to digress a little to discuss the history of investments. As written in Investment: A History, investing began as early as 3000-500 BC in ancient and premodern times, from Mesopotamian to Egypt, Greece, and Rome. However, investment was a privilege of the “power elite” CITATION Nor16 l 1033 (Downing, Norton Reamer and Jesse, 2016). As a result, only a small amount of the population could participate. As one could imagine only land and estates were used as the primary vehicle of wealth, income, and gains for investors during those times.CITATION Nor16 l 1033 (Downing, Norton Reamer and Jesse, 2016).
As time progressed, lending became a popular vehicle for investing during Roman times. As Roman territory expanded, estate management rose. Wealthy people were able to own multiple estates in various locations which was the driving factor of wealth during this time. However, because majority of the elite were absentee owners there became a need for management of their assets. This role was filled by financial and property managers, in which was often fulfilled by family members CITATION Nor16 l 1033 (Downing, Norton Reamer and Jesse, 2016). Later Egypt geography aided in it becoming the central point of international trade. As a result, the banking system was developed.
Time proceeded as we moved into the European Renaissance period, 1200-1500, where there was the rise of merchant banks, double-entry book keeping, and commercial fairs that would later develop into stock markets. Followed by the first joint-stock companies establishment between 1500-1600. The development of these companies was one key event in the development of the modern financial system. Followed by the development of the first public markets between 1600-1787, connecting investors to investment prospects and the first modern pension. During the 20th Century is when the Investment Theory, “including concepts in assets pricing, risk and portfolio management, and investment managers evaluation” came about CITATION Nor16 l 1033 (Downing, Norton Reamer and Jesse, 2016).
The second half of the 20th Century, is when new kind of investments came about such as hedge funds, REITS, private equity, venture capital, and ETFS. These investments where seen as innovated. I know I digressed, but this ties back into the early days of cryptocurrency, not a traditional investment vehicle but the start of a soon to be outside the box investment vehicle that would explode onto the investment scene.
As mentioned before, it was in the 1980s when the first attempt at cryptocurrency occurred. Although cryptocurrencies are not like your traditional investment vehicles, it too is pioneering. The development of Digi Cash was considered extraordinary and caused a great deal of attention. Unfortunately, David Chaum and his company made some vital missteps, by agreeing that Digi cash’s e-cash products would only be sold to banks, causing the company to go bankrupt in 1998. Unfortunately, David Chaum was not able to recover from this.
However, since we live in a digital era, it makes sense that there’s a digital form of money. Now David Chaum idea may not have had continuous success, but the idea of digital currency did not stop. As time progressed cryptocurrencies appeared on the market, such as bit gold, Bitcoin, Ethereum, and Ripple to name a few.
It wasn’t far-fetched to be amazed about digital currency. Technology is always rapidly advancing. Therefore, the idea of cryptocurrency was brilliant yet very problematic for the government. You see, cryptocurrency represents digital money that you can’t feel or touch. It cannot be control by government entities, servers, or any authority in any way. Cryptocurrency belongs to no one, strictly peer-to-peer network CITATION Mil18 l 1033 (Milutinovi?, 2018). Thus, one can see why adopting cryptocurrencies would be a big challenge for the government. They would be unable to collect any data on economic activity or steer the country’s economy. There’s many questions of the legality of cryptocurrencies and some have even been banned in some countries but that doesn’t stop the idea that the monetary system could change because of the crypto industry CITATION Mil18 l 1033 (Milutinovi?, 2018).
Bitcoin, the most well-known cryptocurrency, supposedly founded by Satoshi Nakamoto came about in 2008 but no one really knew about it at the time. Satoshi Nakamoto aka Nick Szabo invented bit gold but denied inventing Bitcoin. Nonetheless, Bitcoin became so popular that people all over the world started to buy it, hoping to someday wake up rich. And many did, waking up the next morning with dramatically changed lives. In July 2010 bitcoin was valued at 8 cents, $8,100 Nov 20, 2017, and 17,900 Dec 15, 2017.
People have even started taking lessons and lectures about investments in Bitcoin and other cryptocurrencies. Some have sold their homes and valuable possession to purchase Bitcoins. For example, in 2017 a thirty-eight-year-old man in Holland sold his house for some cash and the rest of it for Bitcoins. The man and his family lives on a campsite in anticipation of 2020 when they expect to be rich, awaiting the big growth of Bitcoin CITATION Chu15 l 1033 (Chu, J., Nadarajah, S., Chan, S, 2015). However, the concern is will there be another big growth of Bitcoin. As of July 25, 2018, bitcoin was priced at $8,140.79. More than half less than $17,900 on Dec 15, 2017. Furthermore, “There is evidence showing a spillover from Ripple to Bitcoin that affected the decrease in Bitcoin prices. And other cryptocurrencies inspired by Bitcoin, like Ethereum, Ripple, Litecoin, and Nem surged several thousand percent in price in 2017 alone”CITATION Eli18 l 1033 (Elie Bouri, Syed Jawad Hussain Shahzad, David Roubaud, 2018).
Thus, there is no doubt that big profits can be made by investing in cryptocurrencies but is it a long-term investment? Cryptocurrencies overall are still in the early stages. C. Baek and M. Elbeck proposed the question “should Bitcoins be considered and investment or speculative vehicle” CITATION Elb14 l 1033 (Elbeck, C. Baek and M., 2014)? And according to MSN, Vitalkin Buterin founder of Ethereum stated, “Cryptocurrencies are still a new and hyper-volatile asset class and could drop to near-zero at any time”. “Don’t put in more money than you can afford to lose. If you’re trying to figure out where to store your life savings, traditional assets are still your safest bet” CITATION Rya18 l 1033 (Browne, 2018). An additional key factor that lends to idea that it may be just a bubble is that the cryptocurrency market appears to be driven by crypto exchange participants only, external factors do not appear to have any significant impact CITATION Ste18 l 1033 (Goldberg, 2018). So, what is the value? Is this just a craze or will this take over the traditional way we invest? One may not know but I’m sure it can be agreed upon to not consider cryptocurrencies as long-term investment. There are too many unknowns in the crypto industry along with the immaturity of it.
In conclusion, a cryptocurrency is a form of digital currency created with the idea of using a decentralized peer to peer cash system. There is no server, and no one owns it. It uses the blockchain technology and cryptography to protect the information about transactions and exchange made on the digital market. There are other cryptocurrencies but the most common is Bitcoin. There’s a lot of discussions about how it affects the economy and the uncertainty of cryptocurrencies replacing traditional currency, but there’s no clear answer to that as the crypto market is still in its early stages. And who knows it may be just a scam. However, because so many have become rich from crypto investment it’s here to stay for a while. Yet, due to its volatility long term investing is not advisable for life savings.
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