Is there a role for cryptocurrencies in investment portfolios?
The following is a short summary of an article produced by Macquarie Research on whether cryptocurrencies can eventually replace the US dollar as store of value and medium of exchange. The article can be viewed here.
Cryptocurrencies divide opinion on whether it can be considered as a legitimate part of one’s investment portfolio, or just a passing fad that will eventually fade. Financial executives have described cryptocurrencies like Bitcoin as “fraud”.
Cryptocurrencies are seen to be outside of the state-controlled system, and as a “natural outgrowth of an over-financialized fiat-based monetary system”. This means that reduces costs while also threatening to disintermediate intermediaries like banks.
Macquarie Research gives us an overview of cryptocurrency in the world today, likening it to the tulip mania in 17th century Holland where there was a great inflation in the prices of tulips due to its novelty, but ultimate ended in a severe market crash.
While the speculation of the prices of cryptocurrencies can be likened to that of the tulip mania in the past, cryptocurrencies are built on much more legitimate technology that is likely to develop and become stronger. In quote:
“However, the big difference between today’s cryptocurrencies and (say tulips) is that even though Bitcoin price could be reflecting extreme speculation, it is built on a durable technology that is likely to continue to evolve and strengthen, and although governments might try to restrict and ban it, ultimately technology is going to win.”
A key question however: Could cryptocurrencies be able to replace the US Dollar as the main mode of global trade and finance? Research shows that it would be almost impossible to replace the US Dollar, due to its strong foothold in the global economy. The US Dollar is a part of the globally deepest pool of securities, and is universally accepted in foreign trade and financial transactions, aided with the US being global reserve currency providers — generating the necessary trade deficits.
While cryptocurrencies are not yet stores of value of proper mediums of exchange, they represent insurance policy against fiat currencies and proliferation of different transaction technologies. Expect cryptocurrencies to play a larger role in the global economy in the future.