The rapid appreciation of crypto assets, the informational barrage of new currencies, and the opposing views of businessmen and academics have confused many players in the financial markets. The question is whether bitcoin is a legitimate asset class and therefore deserves to play a significant role in an investment portfolio. With this I want to start the information.
José Miguel Farías and Miguel Ángel Pérez / August 30, 2021
Bitcoin has experienced exponential growth since its invention in 2008. Currently, its market value reaches 921,000 million dollars and in January 2021 it was estimated that there were more than 70 million owners of this cryptoasset (Crypto.com, 2021).
It is too early to predict the future of bitcoin. But, due to the attention it arouses, it is important to know its characteristics and identify the intrinsic risks of an asset that are increasingly being adopted by different actors in the economic sphere.
Bitcoin was created with the function of serving as electronic money; Only 21 million Bitcoins can be produced and the rate of return on mining contracts is fifty percent every four years. Among the arguments outlined by proponents of bitcoin as a substitute for government money is the failure of authorities to deliver on their promises over time. But there are questions about the applicability of bitcoin.
That is why countries with responsible governments have more stable currencies. That confidence is transmitted to the economy and means quality of life for citizens. Bitcoin is based, in addition to its technology, on the belief that it will become the next medium of exchange. However, to make this belief, it is necessary that reliable institutions support the initiative and there is currently no institutional consensus on the viability of bitcoin (Krugman, 2018).
The energy consumption of bitcoin mining and whether that energy comes from sources harmful to the environment has also been criticized. So far it is estimated that the annual electricity consumption of bitcoin mining is equivalent to that of Sweden. However, it has become particularly difficult to determine whether that energy comes from non-renewable sources (Carter, 2021).
Although bitcoin can revolutionize the entire future monetary system, that does not imply that it should be part of an investment portfolio today (Goldman Sachs, 2021b).
How bitcoin would work in an investment portfolio. Among the causes of the price increase are the reductions in mining rewards (halvings) that occur every four years, the acceptance of the "stock-to-flow" model, whose underlying idea is that if the scarcity of bitcoins increases, so will its price.
How bitcoin would work in an investment portfolio. Among the causes of the price increase are the reductions in mining rewards (halvings) that occur every four years, the acceptance of the "stock-to-flow" model, whose underlying idea is that if the scarcity of bitcoins increases, so will its price. . An asset is considered invertible when it meets at least three (more than half) of these five criteria:
1.-Produce a stable cash flow on a contractual basis, such as bonds.
2.-Report earnings through exposure to economic growth, such as stocks.
3.-Provide consistent diversification benefits to a portfolio.
4.-Cushions the pernicious effect of volatility.
Just being an asset doesn't make you an asset yet. It is necessary to consider some specifications:
Constant cash flow: Bitcoin does not contractually generate constant cash flow
like a lasso.
Earnings: Unlike stocks, bitcoin does not generate benefits linked to economic growth.
Diversification benefits: Regardless of the data series used, there is currently no diversification benefit to adding crypto assets to a portfolio.
Regardless of the number of network users and how advanced the equipment used for its production is, there can only be 21 million bitcoins. There is no technical possibility of increasing supply to cope with increased demand. If there are more people interested in bitcoin, the only way to respond to the demand is to appreciate the existing supply.
Michael Novogratz, president of Galaxy Digital Holdings, says that bitcoin is a very convenient way to store value (Goldman Sachs, 2021b). For Novogratz, one of the main reasons people have been excited about Bitcoin is concern that the unsustainable imbalance in monetary and fiscal policy will eventually trigger an inflationary spiral.
Last week, Elon Musk tweeted that Tesla had suspended the purchase of cars using that crypto concerned about the intensive use of fossil fuel combustion energy.
He explained that this new technology seems like a very good idea to him and added that they are looking for other projects that use less than 1% of the energy per transaction that Bitcoin uses.
The reaction was immediate. The price of the major cryptocurrency collapsed from a value of $ 54,700 when he wrote the tweet (May 12) to $ 43,900 at the time of writing. It is a loss close to 20% that erased almost US $ 200,000 million in value at a stroke.
Elon Musk suspends Tesla purchases with Bitcoin for fear of environmental disaster
May 13, 2021
So we ask ourselves the following question, how an Elon Musk interpretation makes noise and trembles in the added value that a Cryptocurrency can have and has a huge drop in seconds.
What do you put to the decrease in the cost of energy profitability, having a nice balance between BTC miners and caring for the environment as the main engine of life?
Can it be said that we are facing a tightrope, given the great complexities that BTC has to contribute to the environment and the ecosystem so that it can be more profitable and sustainable in the eyes of large investors?
Source:
Ajiboye, T., Buenaventura, L., Gladstein, A., Liu, L., Lloyd, A., Machado, A., Song, J. and Vranova, A. (2019). The Little Bitcoin Book: Why Bitcoin Matters for Your Freedom, Your Finances, and Your Future . Independent publication.
Carter, N. (2021, May 5). How much energy does bitcoin actually consume? Harvard Business Review . https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume
Crypto.com (2021). Crypto User Measurement: A Study to Measure Market Size Using On-Chain Metrics. https://assets.ctfassets.net/hfgyig42jimx/5u8QqK4lqjEgL506mOx4m3/d44d8e204aecfc75a839e2a9d505f5d1/Crypto.com_Data_Report_-_On-chain_Market_Sizing.pdf
Goldman Sachs (2021b). Crypto: A New Asset Class? Top of Mind . 98. https://www.goldmansachs.com/insights/pages/crypto-a-new-asset-class-f/report.pdf
Krugman, P. (November 2018). The skeptical view of cryptocurrencies (from the point of view of the monetary economy). Versus by KIO Networks. https://www.youtube.com/watch?v=Y_IYGeZLLhI