Cryptocurrency has been around for more than a decade now. In this blog we will try to answ3er the question, ‘is crypto an asset class?’
Investors are interested in Bitcoin due to its price surge. At the time of this writing bitcoin’s price is at $19,385 USD. Besides, bitcoin is not the only crypto with increasing prices. Altcoins are also following the suit and becoming a good catch for crypto day traders. Crypto marketers are finding ways to secure the position of crypto in traditional finance with the ever-growing popularity of crypto. The question arises here is crypto really an asset that needs protection and regulation?
Cryptocurrencies’ place in the financial arena is yet to be understood. Crypto as an asset class is different from traditional currencies. It is not issued by the government or central institutes. Such deregulation is both blessing and a curse. Moreover, supply and demand drive crypto’s value making it highly volatile.
The landscape of the crypto industry has significantly improved in comparison to what it looked like in 2009. At present, there are multiple trusted exchanges and platforms issuing crypto and facilitating its trade. The large crypto trading community has contributed to the high liquidity of the cryptocurrency. Furthermore, the usability factor is contributing to the wide-scale adoption of cryptocurrency.
Despite the benefits, there are certain risks attached to crypto. Many financial leaders question the legality of the currency. Governments especially look at crypto with suspicions. Many countries have banned the use of cryptocurrencies altogether. So, this question takes us back to square one, “Is Crypto an Asset Class?“.
In the subsequent paragraphs, we will discuss the nature of crypto, its place in traditional finance, and the benefits & risks attached to cryptocurrencies’ adoption.
Crypto: A Digital Currency:
Cryptocurrency is a digital currency that uses a complex method of cryptography for creation. It is nearly impossible to duplicate or counterfeit. A distributed public ledger, known as blockchain, is the basis for crypto’s operation. The word cryptocurrency is derived from the word ‘encryption’. It secures the network from intruders.
Cryptocurrencies allow users to buy stuff, make payments, and exchange value. The entries of transactions are safeguarded by the use of algorithms. Every block on blockchain is a piece of data containing the sender’s and recipient’s public keys and the number of tokens being transferred. Subsequent broadcasting of transactions makes them viewable to everyone.
There are hundreds of cryptocurrencies that serve their unique purposes.
Crypto miners have the most important job in the crypto industry. They work on powerful computers to solve complex cryptographic puzzles and confirm transactions. Once they have completed their job the info becomes part of the blockchain.
The complexity of the cryptographic puzzle requires heavy power to solve it. Some call crypto a ‘power-hungry sector‘ due to this particular reason. This is true for many reasons. The use of more and more power makes it easier for miners to solve the puzzle.
Miners are rewarded for their work in the form of a transaction fee. This fee is diminishing with passing time. In short, mining is becoming more difficult by requiring more accumulation of power whereas the reward is decreasing. For instance, now BTC miners get 6.25BTC as a reward for verifying each transaction instead of 12.5 following the halving event of 2020.
Is Crypto Legal?
The working and operations of crypto are hard to digest. Authorities are trying to wrap their head around the concept of mining. In this scenario, assessing the legality of cryptocurrency is a problematic question. There are overwhelming concerns of financial authorities.
The offshore crypto platforms do not come in the jurisdiction of local governments. Which makes it difficult for authorities to track down illegal activities of exchanges. In the past, many times exchanges ran off with people’s hard-earned money and nobody could do anything about it. Mt Gox. is a case in point.
The other thing about cryptocurrency is its semi-anonymity. Authorities cannot identify the person behind transactions. The record on a blockchain exists with a public key only. Usually, people use pseudo-name while executing orders on the blockchain. This makes it a good catch for stashing laundered money and paying for other illegitimate activities like drug dealing and hacking etc.
The application of the law of land on crypto is underway in many territories. The Internal Revenue Services in the USA decided to treat Crypto as an asset in 2014. People holding bitcoin were to pay tax for their property. However, only 802 people paid crypto tax in the subsequent year of 2015.
BitLicence was another regulation put forth in New York State according to which Bitcoin operating companies had to buy a license for serving their NY based customers. Resultantly, many exchanges closed down their operations in New York.
The above-mentioned regulatory measures in the USA are clearly not fruitful from the looks of it. Nonetheless, there are more than 15 countries where bitcoin is legal with regulations. Some of these countries are China, Japan, Germany, France, and Canada. Notwithstanding, in some countries like Belgium, Denmark, and India bitcoin is not under any regulation. Likewise, there are other countries where crypto operations are completely banned.
In order to legalize crypto, the right kind of regulations are necessary. Applying the traditional law on virtual currencies won’t work very well. Therefore, authorities need to understand the working and nature of crypto before putting any new regulations in place.
Is Crypto Traditional Finance?
Financial Institutions have long adopted the technology to speed up their operations and increase convenience. By estimation, the fintech market will reach $460 billion by 2025. This means an annual growth of 11.67%. Fintech’s consistent evolution requires the incorporation of tech innovations. That’s where the bitcoin and cryptocurrencies come in.
Blockchain system, the decentralized ledger on which bitcoin operates, is already part of financial institutions and businesses. Its unique features of providing transparency, verification, and decentralization are lucrative for everyone dealing in contracts. Crypto banks are already on the horizon. Whereas, many traditional banks have also taken crypto into custody.
Crypto’s edge over other assets:
Cryptocurrency provides a programmable payment system to businesses. The record of order execution and compensation is always present on an open, public ledger. Everyone can go through the details and make an audit whenever necessary. A popular saying in the crypto industry is ‘don’t trust, verify“. Hence, you can verify every piece of information in an open-source system. The central power becomes irrelevant as everyone has a duplicate copy of the same data.
Crypto transactions are speedy and convenient. The record is verified instantly and is impossible to temper with. The transaction fee is as low as 70% in comparison to traditional methods of value transfer.
Crypto has a digital nature without my physical form. The new generation prefers money that has no physical form. Mobile Cash and ATMs are an example of this trend. Therefore, crypto has more appeal in the current financial landscape.
Lastly, crypto as an asset will give rise to a cashless society. Hence it is a part of traditional finance for this century.
Is Crypto an Asset Class?
Crypto can fall under the asset class once it meets the following requirements:
- The Crypto market should show some level of stability. The surging volatility and constant rebalancing make an asset fall out of the asset class.
- Individuals should be able to directly invest in cryptocurrency.
- There should be an internal homogeneity. Essentially, all the constituents of the crypto class should have similar characteristics.
- One asset class has to be different from other asset classes. Therefore, external dissimilarity is another requirement for crypto to be considered an asset class.
- Crypto should have utility for investors. By utility, we mean that it should be an effective addition to a person’s portfolio.
Potential Benefit of Crypto Assets:
As discussed earlier, crypto will give rise to a cashless society. Your value will be safe in virtual space. All transactions will happen online, swiftly, and instantaneously with a minimum fee. Additionally, the government cannot take over crypto. It is money of the people.
Another benefit of crypto is that businesses will no longer need contract-signing. The price of legal matters will cut down as the verification process on the blockchain will keep a record of everything.
Potential Risks of Crypto Assets:
The biggest risk attached with crypto is anonymity. With a semi-anonymous identity, bad actors can use crypto assets for their illicit activities. Drug traffickers, hackers, and other criminals have already used crypto in the past to safely execute their transactions. Such exploitation of crypto is earning it a bad name.
The ICO (Initial Coin Offerings) before any new venture of Cryptocurrency is also considered a fishy practice. Numerous ventures have taken a nosedive soon after their ICO. Resultantly, the general public is suspicious of crypto-asset itself.
Crypto’s position as an asset class is justifiable. It has proven its muscle over the decade. The investments in cryptocurrencies are rising by now. Many traditional financial advisors concede that it is time we start believing in cryptocurrencies.
Some characteristics of cryptocurrency still make one wonder, Is crypto an asset for traditional finance? It will take us a few more years to finally get to the answer. Until then trade crypto to make money and keep following the new changes in crypto market.