Cryptocurrency standardisation process in progress - Currency or title?

These days, life runs dazzlingly for cryptocurrencies, namely Bitcoin, which has hit successive highs.

Known by various designations such as cryptocurrencies or cryptoassets, these digital instruments seem to benefit from the whole environment of negative real interest rates, digitization and the unprecedented liquidity flood that runs through the financial system. This is a great deal of faith, hope, trust, innovation, technology and speculation.

1. An alternative to gold or currency in full law?
2. An asset with intrinsic value or a pure expression of faith?
3. A purchase option about the future or a virtual casino?

 

 

First things first.

There are those who argue that the script is emerging, not as a currency, but as a bond, an alternative asset, as a commodity, and even as a class of assets. In the latter case, a class of digital assets that can aggregate not only means of payment, but also data.

In defense of this view, there are several arguments:

• There is already a significant group of cryptos on the market with similar characteristics;
• They are seen as an alternative to the inflation/deflation scenarios;
• Refuge or value reserve assets;
• An alternative source of return compared to traditional assets;
• Diversification of a portfolio;
• Speculation.

There are also factors intrinsic to the structure of cryptos itself, which include confidentiality, decentralization and the technology itself (blockchain).

To put this into context, I used Investopedia's help for some definitions.

Asset class:

An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace. 

For asset, the definition is:

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent.

This definition of an asset helps to explain some of the claims out there, that bitcoin is currently one of the most valuable assets in the world with a market capitalization close to companies like Tesla or Alibaba.

 

Market capitalization

In this FT article, Jemima Kelly highlights the impossibility of calculating the market capitalization of bitcoin in the same way that one calculates the market capitalization of a company.

According to the coinbase, there are 19 million coins in circulation, so it would be enough to multiply by the current quotation to obtain the such market value of bitcoin.

Among the reasons given by Jemima, I highlight the fact that bitcoin is not a company or even an asset. Here, the perception of what bitcoin is is neither unanimous nor peaceful. She also claims that the circulation of bitcoins, and their liquidity in the market, is very low and that around 3% control 95% of the money supply. These features make cryptocurrencies very volatile, totally unpredictable and a show of faith.

 

Cryptocurrencies como moeda digital e uma commodity

And in the case of commodity?

But once, on Investopedia:

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

This was determined by an American judge in 2017, as detailed in this CNBC article, where it is held that virtual currencies such as bitcoin can be regulated as commodities. The comparison with gold is not from now and is also based on this idea.

In 2009, bitcoin, as the biggest example in this industry, emerged as a virtual currency, an alternative peer-to-peer digital money system.

A currency, in its fiduciary definition, implies stability, security, acceptability, trust, circulation controlled by a government through a central bank. However, as has been verified, these instruments seem more like a form of speculating than an alternative system of payments. See the definition of Fiat Currency in Investopedia:

Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.

It seems difficult to consider that the scripts are, at this moment, coins.

But let's do one more exercise. I decided to look at the performance of the S&P500 index in bitcoin, as if it were a currency.

John Authers, on his return to his imaginary hedge fund Hindsight Capital LLC, writes about the analysis of indices in different currencies, noting that in 2020 the best currency was the Swedish krona (SEK) and the worst in the Brazilian real (BRL).

As a US index, the S&P500 appreciated by 15.4% in the USD, 49.1% in the BRL and 1.24% in the SEK.

Assuming that someone is bitcoin native, if they bought the S&P500 at the beginning of 2020 and kept the investment until the end of the year, they would have a loss of 68%.