Important Information - please keep in mind that the value of investments can go down as well as up, so you may get back less than you invest.
UNDERSTANDING Bitcoin was hard enough. As the comedian John Oliver put it, the cryptocurrency represents “everything you don’t understand about money combined with everything you don’t understand about computers”.
Unfortunately, the story doesn’t end with Bitcoin. A raft of new cryptocurrencies are now vying for our attention. Earlier this week, established players lost valuable ground to Shiba Inu and Baby Floki Billionaire (yeh, me neither). As the names get weirder and the prices more volatile, perhaps now’s a good time to step back and ask what separates the various cryptocurrencies.
Cryptocurrencies are, in broad terms, forms of digital token or coin that exist on a decentralized ledger called a “blockchain”. Decentralisation is key - cryptocurrencies aren’t issued, backed or regulated by a bank. They’re often finite too, meaning producers cannot simply print more to pay for things and risk stoking inflation.
This all gives them an alternative allure. Bitcoin, the first cryptocurrency, was originally designed to destabilise existing currencies.
Is it this ambition that’s made crypto so wildly popular? Not exactly. For sure, there are reasons to believe a digital currency will one day replace paper currency. Ease of transaction and lower fees are plus points, while blockchains appear more secure than central banks.
But for any cryptocurrency to take up the mantle of mainstream currency, it will have to shed the wild price volatility that currently makes them so popular. A speculative asset makes for a terrible currency.
Some rivals to Bitcoin have other ambitions built on the same decentralised foundations. Whereas Bitcoin only uses its decentralised ledger, the blockchain, to build a digital currency, Ethereum uses it to facilitate various different applications via its own currency, Ether.
Others do none of these things. Dogecoin, for instance, was designed literally as a joke. It doesn’t offer any practical use - its value derives solely from the sum people are willing to pay for it.
For many investors, what their crypto of choice does (or proclaims to do) is of little importance. Their goal is to make lots of money quickly, meaning an asset’s fundamentals are less important than short-term price drivers. These can vary from network shutdowns, regulator clampdowns, or Twitter meltdowns.
Even if crypto were to shed the manic mantle, its path to the mainstream may not come via revolutionising finance.
Some investors, for instance, are finding value in Bitcoin as an inflationary hedge, akin to gold. ProShares, the company that launched the US’ first Bitcoin ETF last week, hopes it can appeal to more conservative investors who ordinarily wouldn’t go near crypto but may be convinced if it will diversify their portfolios. An Ethereum ETF may also be in the pipeline.
Still, for now at least, crypto’s wild price volatility remains the defining characteristic of this market. In most people’s eyes, that’s more important than what Bitcoin actually does.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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