We’ve all seen Bitcoin’s unprecedented rise in value and fame, but we’ve also heard about the danger of its speculative bubble. What then, should we make of it and cryptocurrencies in general?
Billionaire Warren Buffet most recently publicly expressed his doubts about Bitcoin during an annual QnA session held in Omaha. He criticized Bitcoin by saying that it is a “real bubble” and describes it as a “mirage basically”. Inevitably, the words of such a powerful global figure would invoke fear, especially when it comes to investments. But should they scare you?
We have all witnessed the surreal surge of the cryptocurrencies. No doubt, we cannot deny that such a behaviour in the market is characteristic of a bubble; and we have witnessed how volatile the unconventional assets can be. But it is precisely because of their unconventional nature, that we ought to take caution in placing traditional fundamentals on them. Let us look beyond the “mirage” to understanding the legitimacy of these assets, and why we should continue to invest in them.
Here are 3 reasons why:
1. The Increasing Acceptance of Cryptocurrencies as Legal Tender
One of the main reasons why the legitimacy of cryptocurrencies has been challenged, is because lawmakers and financial regulators have found it difficult to accept cryptocurrencies’ decentralised nature within centralized frameworks. But all these are changing as governments all over the world have begun legitimising cryptocurrencies.
In February this year, Philippines’ government announced the official acceptance of Bitcoin in its remittance system. In April, Japan officially announced its acceptance of Bitcoin as a legal payment method. In fact, Japanese banks are contemplating the creation of their very own cryptocurrency called the J-Coin, which would be spearheaded by Mizuho Financial Group. Moreover, countries such as Australia and Russia have also expressed their interest in accepting cryptocurrencies as an official medium of exchange; with Putin supporting the Russian banks to give cryptocurrencies a try, expressing that he does not want “unnecessary barriers” to impede them.
2. The Pool of Wealth Over the Cryptocurrency World is Only Growing
Indeed, the market size and valuation of cryptocurrencies have soared. Most people look in awe (or fear), blinded by the fact that it is just the beginning. Apart from the reality of cryptocurrencies’ growing legitimacy and integration into official frameworks, there is an endless pool of capital hanging over the market – the banks and hedge funds.
After J.P Morgan’s (JPM) CEO, Jamie Dimon, called Bitcoin a “fraud” and said that they would fire “a trader that trades Bitcoin”, guess which bank was observed to be trading Bitcoin for their clients? Of course, JPM, along with others like Morgan Stanley and Goldman. What is even more interesting is that the price of Bitcoin dropped after Dimon’s comments. Suspicious? Perhaps. But the point is, despite all the negative comments about cryptocurrencies, the actions of the world’s biggest financial institutions paint a different story.
The Interbank Information Network – compromising of JPM, Royal Bank of Canada (RBC) and Australia & New Zealand Bank Group (AZN) – amongst many other banks, is going big on investing in the blockchain technology behind Bitcoin, citing that it will be “useful in a lot of different things” like “[eliminating] the need for a third party intermediary”. Furthermore, many asset management firms and hedge funds have taken a keen interest in the market – Paul Brodsky, founder of Macro Allocation Inc., has partnered with Pantera Capital, a blockchain investment firm, to set up a new office in New York; Michael Novogratz, former hedge fund manager at Fortress Investment Group, is planning to launch a US$500 million fund dedicated to cryptocurrencies – and these are just a two of many such stories.
3. Cryptocurrencies Only Just Went Mainstream
It is reasonable to say that 2017 is the year that cryptocurrencies really came out of their shell and paraded around the world. While many have taken a step, or a dive, into the blockchain world, many others still remain sceptics due to a lack of understanding of what cryptocurrencies actually are. With the increasing legitimacy and institutionalising of cryptocurrencies, the investment demographic has begun to change and is bound to continue changing.
With the potential of billions, even trillions, of dollars from the banks, hedge funds and institutional investors waiting to be unleashed in the cryptocurrency world, I believe it is safe to assume that there is much to be gained in investing (smartly and professionally) in cryptocurrencies.