|The recent spike in the value of Bitcoin has sparked a renewed interest in cryptocurrency. But what exactly is it and what should we make of it?|
At its simplest a unit or ‘coin’ of cryptocurrency is a unique piece of computer code that can be transferred between individuals and institutions in exchange for goods and services.
So far so currency. Unlike so-called ‘fiat’ currencies, a cryptocurrency is not issued by a national government. The value of a fiat currency is in large part determined by demand for the goods and services offered by organisations based in that state, and underpinned by the ability of the state to raise taxes and vary interest rates. None of this pertains to cryptocurrency.
Rather the value of a cryptocurrency is driven purely by the level of supply and demand for that currency: it has no ‘underpin’. In many ways, therefore, it’s more like gold than a fiat currency. Gold too is of little ‘use’, unless you define this to include putting it on your finger or wrist, or through your earlobe. Its value lies in its perceived scarcity, and in people’s belief they will be able to exchange it for more useful things in the future.
|Gold therefore has a reputation of being a ‘safe haven’. Something extraneous to nation states and with a value independent of any real usefulness. This perhaps explains part of the recent rise in cryptocurrencies such as Bitcoin, as the world has worried about coronavirus and the US election. But as with gold, this brings volatility, and this is accentuated by cryptocurrencies being a lot less widely accepted than the yellow metal, and completely intangible.|
For now, there is nothing that can only be bought for cryptocurrency so there’s no need to own it for this purpose. This means its attraction lies purely in the possibility to make money speculating on its rise and fall.
The dramatic rally in the price of Bitcoin over the last month shows the potential for cryptocurrency to make some brave souls very rich but in my opinion this is not an investment, it’s a punt.