Crypto Currency Vs Traditional Asset Classes

Have been trying to draw parallels between crypto currency and traditional asset classes. For the sake of argument, would like to use Bitcoin as the proxy for whole crypto currency world.

How does a Bitcoin derive its value ? In my opinion the prime reasons are first that it is rare and second people are willing to store their wealth in it. Having said that, now lets compare it to traditional asset classes.

The way you see a bitcoin quote (BTC/USD, BTC/EUR etc..) urges you to consider bitcoin as a currency - a medium of exchange for goods and services. A primary requirement for a currency is its stability. So, unless bitcoin was a currency for a fiscally irresponsible sovereign, this would not be fair comparison.

Next owing to its rarity, it is fair to compare bitcoin to gold. Gold has a very special quality - it has stood the test of time in the 4000 year history of human civilisation. It has been a store of wealth for kings in the past to the central banks of present. If you own a bar of gold, after 100 years it would still continue to be rare and would remain exactly the same physically ! Though bitcoin satisfies the first condition of rarity, it doesn’t satisfy the second. Can we be sure that technological advancement in the next decade or two wouldn’t render bitcoin useless ?

It makes absolutely zero sense to compare bitcoin to an asset class like equities which derive their value from discounted future cash flows.

The most fair comparison in my opinion is to rare art and other collectible assets. The main characteristics used to define art market are: high-risk investments, opaque, unregulated, store of untaxed wealth, at mercy of erratic public taste and short-lived trends. At least in the present construct, these are the exact characteristics of crypto currency market. 

#investing #wealthmanagement #cryptocurrency #bitcoin