In an interview with Bloomberg, Aswath Damodaran, professor of finance at the NYU Stern School of Business compared a speculative investment to a stable currency: “If you put the currency in pocket and you forget about it for a year, and then at the end of the year, if you put it out then it shouldn’t have lost half its value.” (See also, Bitcoin Price Bubble Could Last 100 Years, Says Yale Economist.)
Currency versus Investment
A currency is a convenient and trustworthy medium of exchange and a storage medium for value. Even the most popular bitcoin crypto tokens have not turned into mainstream currencies for easy exchange and transactions, and its valuation has seen large swings.
Similarly, valuations are a big concern. A look at the value of bitcoin, the most popular cryptocurrency, reveals that it hit its peak of around $20,000 in December of last year, only to lose, over the next two months, almost two-thirds to less than $7,000. Another popular cryptocurrency, ethereum, has met with the same fate. From its peak of around $1,180 in January, it has tanked by more than 60 percent to levels of $380 by March this year. (For more, see What 2018 Events Could Trigger A Bitcoin Bull Run?)
These levels of volatility over such short periods are not the characteristics of a stable currency, but of speculative investments and trading instruments like derivatives. Though similar volatility has been observed in the value of currencies of troubled economies like Zimbabwe and Venezuela, it's attributed to core issues of geopolitical and economic challenges.
Dalio: "Bitcoin is not a storehold of wealth"
Digital Currency in the Future
In the present day scenario, cryptocurrencies have become more of a tool for speculative investments, and less of a medium of value exchange. For a cryptocurrency like bitcoin to see widespread adaptability as a stable currency, the supporters must come to a consensus whether they wish to use it as a currency or wish to use it as an investment vehicle to generate high returns. “Those two objectives can’t co-exist in the same world,” adds Damodaran.
Damodaran is optimistic that there will be a digital currency in the future. However, in their present form, none of the popular cryptocurrencies of today appear to be qualified to take that place.
While such observations as well as the realistic advisory from industry stalwarts are correct, it is difficult to control the behavior of the diversified set of market participants who are playing around in the global cryptocurrency marketplace. The decentralized, unregulated nature of cryptocurrencies adds to the challenges of high volatility in cryptocurrency valuation, further fueling the wide swings.
Under such circumstances, even the proponents who want to establish cryptocurrencies as a secure and convenient medium of value exchange won’t be able to control or convince the participants to keep the valuations stable.
For cryptocurrencies, it will be a long road before they become the mainstream alternative to present-day dollar bills and banking-dependent payment systems. Whether a new digital currency is launched to take that place, or whether few of the present-day popular cryptocurrencies stabilize over the coming few years to grab the spot, remains to be seen. (For more, see Bitcoin Will Become World's 'Single Currency': Dorsey.)
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.