How cryptocurrency has re-wired capitalism

As someone who advises investors, friends and family on building long-term wealth - watching the hugely irresponsible crypto ads during the (forgettable) India-Pakistan cricket match left a serious distaste. The financial investment industry is equally wrong with the countless mis-selling of insurance, IPOs and mutual fund products to customers across the industry. The only difference is that in the finance industry, it happens face to face as opposed to on TV/online with cryptocurrency.

But for now - let’s talk about cryptocurrency. Having deeply studied investment asset classes over a decade - cryptocurrency is the most interesting of the lot. Of course, I cannot conclude if that is good or bad, but overall, it is interesting. Why?

How is buying crypto different from buying stocks?

Investing in stocks is like buying a slice of capitalism. Shares of companies over the long-run track underlying fundamentals like sales, profitability, and growth. Sometimes prices may run away from fundamentals, but stock prices always reflect the correct state of companies over the long run. When a company posts poor earnings or gives a poor outlook on business - stock prices correct and vice versa when earnings and growth are strong.

For the cryptocurrency industry, it’s the prices of the currencies which drive capitalism in the industry. The higher the prices of currencies - the higher the demand for them, and it also leads to more companies and people building companies and applications in the crypto space. If the demand for crypto falls - we may not see as much activity in this space. The entire industry is depending on an indefinite increase in crypto prices to sustain and grow.

How to value crypto?

Investors and traders spend decades studying companies, business models and valuations to generate a list of good stocks to invest in. Investors like Warren Buffett have spent their entire waking lives dedicated to stocks.

In the crypto space - there is no need for valuation experts, or business model experts etc. - they would have nothing to do.

The biggest asked question I get for traditional asset classes is if the price is right. Is it too expensive or cheap? With the underlying value of stocks attached to fundamentals - there is a lot of room for discussion.

In cryptocurrency - there is no underlying value attached. Hence - any price is good, and any price can be bad. There are a lot of articles on how crypto is a bubble. The definition of a bubble is something that is valued beyond its true value. There is no true value attached to crypto - so arguing that it’s valued at $1 trillion or $100 trillion is a baseless exercise.

Is crypto a form of currency?

Cryptocurrency is also technically a currency and, by definition, is supposed to be a medium of exchange. But so far - it has been not accepted as one - primarily due to its high volatility. It’s currently an investment security wrapped in a currency form and is expected to stay one in the near future. The closest asset class to crypto is gold - which is not a bad comparison. Gold, also does not have any underlying value. Just like gold - cryptocurrency prides itself on scarcity (of supply) as its prominent feature.

Nervous capitalism?

The introduction of crypto currency has led to a rise in nervous capitalism. What does that mean? It means investors who buy crypto are always and always nervous about the ability to sell it at a higher price at some point in the future. With stocks - there’s a pretty good probability that a Nifty index fund or a stock of Infosys will go up in the future. For crypto - it’s not as clear. So far, I have yet to come across a calm crypto investor - the acronym I keep seeing is “HODL.”

In conclusion - the rise of cryptocurrency has introduced a new asset class that is wildly different from anything else out there. This article does not endorse or advise against owning cryptocurrency.

Check out DH's latest videos